Case at a Glance
When trading member Anugrah Stock & Broking defaulted in 2020, its Professional Clearing Member, Edelweiss, sold collateral securities worth about Rs 460.32 crore to cover the losses. NSE Clearing’s Member and Core Settlement Guarantee Fund Committee ordered the PCM to restore the securities to investors, and the Securities Appellate Tribunal agreed. The Supreme Court set aside those orders. It held that the PCM had no statutory duty or means then to check client-level positions, that an exchange committee cannot order restitution, and that investors who knowingly joined an assured-return scheme must pursue the defaulting broker.
F&O trades on the National Stock Exchange are cleared through NSE Clearing Ltd. (NCL). Professional Clearing Members (PCMs) deal only with Trading Members (TMs) and have no proprietary trades or clients of their own. Anugrah Stock & Broking Pvt. Ltd., a TM, also acted as Depository Participant and ran a Derivatives Advisory Service offering schemes with assured 12% annual returns. The Court treated these as Ponzi-type and illegal. SEBI orders found misuse of client securities. When Anugrah defaulted, Edelweiss, as PCM, sold collateral securities worth about Rs 460.32 crore in tranches in 2020.
Other PCMs faced similar orders after defaults by TMs such as VRISE Securities, Action Financial Services and Yuvraj Securities. The NCL’s MCSGF Committee ordered restitution of the securities within 15 days. In default, an amount equal to their value plus 5% was to be blocked from the PCM’s collateral with NCL, and a penalty was imposed. The Securities Appellate Tribunal upheld the order. The PCMs appealed to the Supreme Court.
The Key Question Before the Court
Can a clearing member be made to restore securities to the clients of a defaulting trading member, and does a stock exchange or clearing corporation committee have power to order such restitution?
No Duty, No Visibility, No Power to Order Restitution
The Court found no breach by the PCM of the NCL regulations, SEBI circulars or the CM–TM agreement: “we do not find any violation having been committed by the PCM”. The agreement gave the CM rights over the collateral but imposed no statutory duty to protect the TM’s constituents. As the Court put it, “there is no statutory obligation cast on the CM to carry out liquidation of the collaterals” client by client. Before 2021, weekly reporting gave no real-time client-level picture. Daily client-level reporting, and the rule that only collateral of clients with debit positions may be liquidated, came only with a 2021 SEBI circular, after these sales. This was “not an open and shut case where on mere failure to carry out due diligence, a restitution can be ordered”.
On power, the Court held that Section 9(3)(b) of the Securities Contracts (Regulation) Act, 1956 limits exchange byelaws to the penalties listed there, which do not include payment of money. “The power of disgorgement, hence, was specifically conferred on the SEBI” under Section 11B of the SEBI Act and Section 12A of the SCRA, and Parliament “consciously omitted it from being conferred under the byelaws of a stock exchange”. The restitution order was therefore without jurisdiction. Selling the collateral to avoid the PCM’s own loss was not unjust enrichment either. The Court distinguished South Eastern Coalfields Ltd. v. State of M.P., (2003) 10 SC CK 0021, Kavita Trehan v. Balsara Hygiene Products Ltd., (1994) 07 SC CK 0064 and Indian Council for Enviro-Legal Action v. Union of India, (2011) 07 SC CK 0142. It also observed that investors who knowingly entered an illegal assured-return scheme in speculative F&O trading cannot be called innocent: “Exponential profits hence is a chimera and debilitating losses is the stark reality.”
What the Court Actually Held
- A Professional Clearing Member had no statutory duty, and before the 2021 SEBI circular no means, to verify individual clients’ positions before liquidating a defaulting TM’s collateral.
- The MCSGF Committee of NSE Clearing had no power to order restitution; Section 9(3)(b) SCRA excludes money payments, and disgorgement is reserved to SEBI.
- Clients of a defaulting TM, especially those who knowingly joined an illegal assured-return scheme, have no claim against the PCM; they keep their remedies against the TMs.
- Four appeals were allowed and the Committee and SAT orders set aside; Civil Appeal No. 4238 of 2026 was rejected as not maintainable since its impugned orders were already set aside.
Why This Judgment Matters
- It clarifies where the risk falls in a broker default: on the defaulting trading member, not the clearing member that lawfully liquidates collateral.
- It limits stock exchange and clearing corporation committees to the penalties the SCRA allows, leaving disgorgement to SEBI.
- It is a warning to retail investors who chase ‘assured return’ F&O schemes run by brokers.
What Should Advocates Take Away From the Judgment?
For Investors
- Schemes promising assured returns from F&O trading are illegal, and losses may not be recoverable from the market infrastructure.
- Your remedy for a broker’s misuse of securities lies against that broker, through SEBI and court processes.
- Check that your broker is not also running advisory or ‘assured return’ products.
For Counsel
- Challenge exchange or clearing corporation orders requiring payment of money as beyond Section 9(3)(b) SCRA.
- Point to the date of the 2021 SEBI circular when assessing a clearing member’s duty to check client-level positions.
- Rely on SEBI v. S. Kumars Nationwide Ltd. on the limits of SAT’s powers where relevant.
Key Takeaways
- A clearing member is not liable to the clients of a defaulting trading member for lawful collateral liquidation.
- Exchange committees cannot order restitution or disgorgement; that power lies with SEBI.
- Investors in assured-return schemes are not treated as innocent parties.
- Investors keep their remedies against the defaulting trading members.
Frequently Asked Questions
Can investors recover from Edelweiss for Anugrah’s default?
No. The Supreme Court held that the clearing member had no statutory duty to protect the trading member’s clients, and left investors to pursue their remedies against the trading members.
Why was the NSE Clearing committee’s order set aside?
Section 9(3)(b) of the Securities Contracts (Regulation) Act allows exchange byelaws to impose only listed penalties, not payment of money. Disgorgement is a power given to SEBI, so the restitution order was without jurisdiction.
Does the 2021 SEBI circular change things?
The 2021 circular introduced daily client-level reporting and allowed liquidation only of collateral of clients in debit. The Court noted it was not in force when these 2020 sales took place.
Conclusion
Edelweiss Custodial Services v. NSE Clearing, (2026) 09 SC CK 0102 decides who bears the loss when a broker that promised assured returns collapses. It is not the clearing member that sold collateral under the rules then in force. An exchange committee also cannot create a restitution remedy the statute did not give it.
Practical takeaway: Investors hit by a broker default should pursue the broker through SEBI and civil remedies, not the clearing member. Counsel for market intermediaries should check any exchange order directing payment of money against Section 9(3)(b) of the SCRA.
Read the full judgment on CourtKutchehry: View judgment →
For more judgments, legal opinions and case analysis, visit courtkutchehry.com