In this Finsec Case Digest, we analyse the Supreme Court’s judgment dated September 02, 2026 in Edelweiss Custodial Services Limited v. NSE Clearing Ltd. (“Judgment”), setting aside directions requiring professional clearing members (“PCMs”) to restore securities liquidated following defaults by their constituent trading members (“TMs”). The Court held that the framework applicable to the disputed transactions did not oblige the PCMs to verify the debit/credit positions of the TMs’ individual clients before liquidation. It also held that NSE Clearing Limited (“NCL”) and its committee lacked the power to order restitution of the kind directed in these proceedings.
I. Facts
The dispute arose from the clearing and settlement arrangements in the futures and options (“F&O”) segment of National Stock Exchange (“NSE”). Following defaults by certain TMs, the appellant PCMs liquidated the collateral furnished to them.1 Individual investors complained that their securities had been sold notwithstanding the absence of debit balances in their accounts.
In the lead appeal, Edelweiss Custodial Services Limited (“Edelweiss”) acted as PCM for Anugrah Stock & Broking Private Limited (“Anugrah”). NCL’s Member and Core Settlement Guarantee Fund Committee (“Committee”) found that Edelweiss had liquidated securities worth Rs. 460.32 crores without adequate due diligence or ascertaining the respective clients’ balances. The Committee directed reinstatement within fifteen days. In case of a default, collateral equivalent to the securities’ value on the sixteenth day, together with an additional 5%, was to be blocked. An additional penalty of Rs. 1 lakh was imposed.
The Securities Appellate Tribunal (“SAT”) upheld the Committee’s orders. It also reasoned that, even if the Committee lacked restitution powers, SAT could itself grant that relief under Rule 21 of the Securities Appellate Tribunal (Procedure) Rules, 2000.2
The PCMs appealed to the Supreme Court. Another appeal was made by client of Anugrah seeking restoration of his cash margin.
II. Questions of Law
The Court framed three questions of law:
a) Whether the PCM had a statutory obligation to verify individual client credit/debit positions before liquidating collateral proffered by the TM, and whether the regulatory mechanism provided visibility of such positions to the PCM.
b) Whether the Committee had the power to order restitution of securities, and if so, whether failure to notify invocation of such power vitiated the order on grounds of natural justice.
c) Whether individual clients could claim against the PCM for defaults committed by the TM, particularly where the TM had operated illegal schemes in which the clients had voluntarily participated.
III. Arguments on Behalf of the PCMs
The PCMs contended that they had no privity of contract with the individual investors. Hence, their clients were the TMs and not the individual investors. The reporting arrangements in force then did not provide real-time visibility of the investors’ debit/credit positions, nor did the applicable regulations require verification of those positions before liquidating collateral upon a TM’s default.
PCMs further submitted that the restitution directions were effectively orders of disgorgement, a power expressly conferred on the Securities and Exchange Board of India (“SEBI”) and not on the Committee. They challenged the directions as beyond the permissible sanctions under Section 9(3)(b) of the Securities Contracts (Regulation) Act, 1956 (“SCRA”). Another objection was raised by the PCMs that restitution had not been proposed in the show-cause notice and that the resulting liability was disproportionate.
IV. Arguments on Behalf of NCL and the Investors
NCL and the intervening investors argued that the applicable regulations, circulars and clearing agreements required client-level segregation and due diligence. According to them, the PCMs could obtain constituent information and verify TM records, and contented that PCMs ought to have acted upon persistent defaults rather than liquidating securities indiscriminately.
NCL also contended that the larger disciplinary power of expulsion encompassed the lesser remedy of restitution. The investors relied on principles of unjust enrichment. On the PCMs’ objection that restitution had not been proposed in the show-cause notice, NCL submitted that it was discussed during the hearings and addressed by the PCMs in their written submissions.
V. Reasoning of the Supreme Court
A. Client-level obligations under the applicable framework
The Court read NCL’s F&O Regulations in the context of the respective clearing relationships. Although the F&O Regulations defined ‘client/constituent’ to include registered constituents of TMs, the Court held that a PCM’s constituent was its TM, while the TM’s constituent was the individual investor. Accordingly, the F&O Regulations prohibited a PCM from using one TM’s collateral to meet another TM’s dues. The corresponding obligation to segregate individual investors’ collateral rested with the TM.
The Court further distinguished information about collateral holdings from visibility of individual clients’ debit/credit positions. The monthly and weekly reporting requirements relied upon did not provide the visibility needed at liquidation. Although the CM-TM agreement entitled a clearing member to obtain client and margin information, the Court did not find a statutory obligation to ascertain each underlying client’s position before liquidating the TM’s collateral. On its reading of the relevant circulars, regulations and agreement, it found no violation by the PCMs.
The Court contrasted the applicable framework with SEBI’s Circular dated 20.07.2021 on Segregation and Monitoring of Collateral at Client Level. That circular introduced daily disaggregated client-level reporting and defined procedures for verification and settlement of claims on default, including identification of non-defaulting clients and return of their collateral. The progression from monthly reporting (2016) to weekly (2019) to daily (2021) confirmed the absence of real-time visibility during the relevant period. The Court treated the 2021 circular as confirmatory of the position that the obligations now imposed on PCMs did not exist under the earlier framework.
B. Restitution required a statutory source of power
Section 9(3)(b) of the SCRA permits bye-laws providing for fines, expulsion, suspension and other penalties not involving the payment of money. The Court contrasted this provision with the express disgorgement powers conferred on SEBI under Section 11B of the SEBI Act, 1992 and Section 12A of the SCRA. It held that the Committee could not derive a comparable restitutionary power from its bye-laws or general considerations of equity, justice and good conscience.
The Court treated the requirement to restore the liquidated securities, backed by blocking collateral of equivalent value plus 5%, as involving a monetary liability outside the Committee’s powers. It also rejected the submission that restitution was subsumed within expulsion. Here, the Court found neither unlawful liquidation nor unjust enrichment by the PCMs. The collateral furnished by the TMs existed to cover precisely this situation. The Court held that the PCMs’ liquidation of that collateral to meet the TMs’ obligations was permissible under the framework then applicable, and did not amount to unjust enrichment..
C. SAT’s procedural powers could not cure the deficiency
The Court rejected SAT’s reliance on Rule 21 of the Securities Appellate Tribunal (Procedure) Rules, 2000, holding that a provision in the procedural rules could not be interpreted as a substantive power to direct restitution. A provision enabling SAT to regulate its procedure could not authorise relief beyond the statute. While an appeal continues the original proceeding, SAT may not assume a greater power than the statutory framework permitted.
D. The later framework and the investors’ claims
The Court also held that the investors could not claim against the PCMs for defaults committed by the TMs. Anugrah had operated unauthorised derivatives advisory arrangements promising fixed returns, and investors had furnished securities pursuant to those arrangements. In those circumstances, the Court declined to transfer liability for the TM’s default onto the PCMs. It preserved the constituents’ liberty to pursue remedies against their respective TMs, subject to just exceptions.
VI. Decision
The Supreme Court allowed Civil Appeal and set aside the impugned Committee and SAT orders. Civil Appeal seeking restoration of an individual investor’s cash margin, was rejected as not maintainable because it sought the benefit of the orders that had been set aside.
VII. Our View
The Judgment is significant in reaffirming that an investor-protection objective cannot, by itself, supply a missing statutory power. In particular, a restitution direction cannot be sustained merely by describing it as less severe than expulsion, or by invoking SAT’s procedural powers. Further, the express availability of a fine under Section 9(3)(b) of the SCRA should not be confused with an unrestricted power to impose compensatory or restitutionary liabilities.
The ruling on the PCMs’ obligations is tied to the regulatory period examined. Now, under the 2021 collateral framework, PCMs receive daily client-level data and operate under defined liquidation protocols. A PCM that liquidates client securities without following those procedures would face a materially different standard of scrutiny.
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[1] PCMs clear and settle transactions for their constituent TMs, without undertaking proprietary trades or having direct individual clients. TMs, in turn, furnish their own or their clients’ securities as collateral to the PCMs.
[2] Rule 21 of the Securities AppellateTribunal (Procedure) Rules, 2000 reads :
“The Appellate Tribunal may make, such orders orgive such directions as may be necessary or expedient to give effect to itsorders or to prevent abuse of its process or to secure the ends ofjustice.”
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