B.C. Gupta ORDER
1. The complainant, the Bombay Stock Exchange Limited (hereinafter referred to as 'BSE') is a company duly incorporated under the Companies Act, 1956 and is a recognized Stock Exchange under the provisions of Securities Contract (Regulation) Act, 1956. The complainant obtained a Default Insurance Policy form the opposite party (hereinafter referred as 'OP'), the New India Assurance Company Limited, with purpose to provide indemnity cover against losses incurred/caused due to settlement at stock exchanges for defaults, committed by the members of the complainant. The said policy provided insurance cover for the Trade Guarantee Fund (TGF) of the BSE for the period 25.01.2001 to 24.01.2002, and a sum of 1,39,12,500/- was paid as premium by the complainant to the OP for obtaining the same, vide cheque No. 022189 dated 24.01.2001, drawn on the Bank of India, Stock Exchange Branch, Mumbai. The Policy covered members of the BSE, as on 31.01.2001, and a list of such members has been attached to the Policy.
2. The main issue involved in the present case is that two members of the BSE, namely, Orient Shares and Stock Brokers (hereinafter referred to as "Orient"), and Share-Deal Financial Consultants Private Limited (hereinafter referred to as "Share-Deal"), whose names appear at serial No. 162 and 665 respectively of the list of members attached with the Policy, and whose membership numbers are 180 and 794 respectively, made certain defaults in making payment of their settlement obligations during settlement No. 50 & 51. The complainant utilized funds from the Trade Guarantee Fund (TGF) for a sum of 14,22,56,540.80/- to meet the settlement obligations of these members, which was further enhanced to 14,66,83,742.68/- for two subsequent payouts. These funds were utilized from the TGF, without formally declaring the two brokers as defaulters. The erring brokers were also given an opportunity for clearing their outstanding liability within a period of three months. However, on their failure to do so within the period allowed, they were formerly declared as defaulters and the process to dispose of their assets/securities etc. was undertaken. It is stated that by that time, the value of those assets/securities diminished in the market and hence, the complainant was put to loss for which they filed claim with the OP under the Policy. The OP Insurance Company have raised the contention that the complainant should have first declared the two brokers as defaulters in accordance with their own byelaws in force at that time, and only then, the payment could have been made from the TGF. Moreover, if the process of disposal of assets/liabilities of these brokers had been undertaken at that very time, it would have fetched a better amount than that was realized later, and hence, the liability of the insurance company would have been offset by that amount.
3. The case of the complainant is that the Securities & Exchange Board of India (hereinafter referred to as SEBI) addressed a letter to the complainant on 07.03.2001, on the subject "amendment to various byelaws of your exchange relating to TGF. " This letter was sent after considering the proposal made by the complainant BSE in their letter dated 19.02.2001 addressed to SEBI, according to which they had proposed that instead of declaring member as defaulter, and then providing funds to complete the settlement, timely assistance by way of temporary refundable advances from the TGF may be given to the members, who were facing temporary mismatch and were unable to meet their commitments, obligations and liabilities to the clearing house of the exchange. The SEBI stated in their letter dated 07.03.2001 as follows:--
"The proposed amendment to provide for the temporary refundable advances from the TGF is not considered favourably by SEBI. However, as a investor-friendly measure, it has been considered that TGF may be utilized for meeting the commitments, obligations and liabilities to the clearing house of the Exchange without declaring the member a defaulter in the same manner as in the case of NSCCL. Towards this end, the Bye-laws may be amended on the following lines:
In the event a member fails to meet obligations to the Clearing House of the Exchange arising out of clearing and settlement operations of such deals as provided in the Bye-laws and Regulations, the relevant authority may utilize the Trade Guarantee Fund and other monies to the extent necessary to fulfill the obligation under such terms and conditions as the relevant authority may specify from time to time."
The SEBI, therefore, partly accepted the proposal of the BSE, saying that the funds from the TGF could be utilized for meeting the commitments, obligations and liabilities to the clearing house, without declaring a member as a defaulter, and asked the BSE to amend their bye-laws on these lines.
4. The complainant sent a letter dated 02.04.2001 to the OP informing them about the said payments from the TGF and also enclosed a copy of the amended guidelines dated 07.03.2001 from the SEBI, according to which there was no requirement of formally declaring the brokers as defaulters, before utilizing funds from the TGF. The Opposite Party vide its letter dated 04.04.2001, appointed a surveyor, Mehta & Padamsey Private Limited (hereinafter referred as "MPPL") for conducting a preliminary survey to assess the loss. Subsequently, the OP sent the said insurance policy to the complainant on 05.04.2001, effective from 25.01.2001 to 24.01.2002. Thereafter, the OPs appointed M/s. CP Mehta & Co., also a surveyor alongwith MPPL.
5. Further, the complainants vide their letter dated 09.04.2001, addressed to the OP, referred to clause 2.2 of the Insurance Policy, which reads as follows:--
"The insured will notify the insurers of any material changes, amendments and/or modifications to the Rules, Regulations and Bylaws of within 60 days from effect of such changes amendments and/or modifications. The insurers shall be entitled to amend the terms and conditions of the policy, with effect from the effective date of any such changes, amendments and/or modifications if such changes, amendments and/or modifications materially increase the risk of the insurers under this policy."
The above clause, therefore, casts an obligation upon the complainant to notify the OP any material changes, amendments and modifications that increase the risk of the insurers under the Policy. Referring to the guidelines dated 07.03.2001 received from SEBI, the complainants requested the OP to make necessary changes in the said policy.
6. The complainants have further mentioned in their complaint that the two defaulting brokers in question had been given a time of 3 months to repay the amounts utilized from the TGF. However, since they were unable to do so, the Governing Board of the complainant, at its meeting held on 04.08.2001, declared the two brokers as defaulters under the rules, bye-laws and regulations. Thereafter, there was correspondence between the complainants and the joint surveyors regarding the steps to be taken to recover the amounts involved by adjusting the security deposits, shares, bonds etc. held by the defaulting members with them and by auctioning their membership cards. The details of such correspondence between the complainant, the OP and the joint surveyors have been given in the consumer complaint. It is stated that as many as four survey reports were submitted after long intervals. The complainant has also stated that the OP sent another letter to them as recently as 19.07.2010, seeking more clarifications and documents. Since the OP had failed to settle the claim since a long time, they filed the present consumer complaint, seeking directions to the OP to pay a sum of 2,03,77,314/- alongwith interest @18% p.a. for the deficiency in service, rendered by the OP to them. It has been indicated in the complaint that the claim as on 4 April 2001 in respect of "Share-deal" was 9,62,54,843.13/- and in respect of "Orient", it was 5,04,28,899.56/-. However, after affecting subsequent recoveries, the net claim as on 14.02.2010 was 5,91,11,143.38/- in respect of "Share-Deal" and 1,12,65,990.60/- in respect of "Orient", making a total of 7,03,77,133.98/-. In accordance with the Policy, a sum of 5,00,00,000/- was deducted from this figure as the Annual Aggregate sum and hence, the net claim was 2,03,77,133.98/-. They also demanded a sum of 20 lakh as compensation for hardship and suffering caused to them by the OP and a sum of 5 lakh as litigation cost.
7. The complaint has been resisted by the OP by filing their written version in which they took the following main pleas:--
"(i) The complaint had not been filed within the limitation period as prescribed under section 24(A) of the Consumer Protection Act, 1986 and hence, was not maintainable on this ground alone.
(ii) The Default Insurance Policy which was a binding contract between the complainant and the OP Insurance Company provided that the Trade Guarantee Fund (TGF) could be utilized to fulfil the settlement commitments of the members, only after declaring the members as defaulters and initiating the default proceedings against the defaulting members in accordance with the byelaws of the BSE. The OP has referred to byelaws, 390(iii), 391, 397 and 402 of the BSE in this regard.
(iii) Under section 9(1) of the Securities Contracts (Regulation) Act, 1956, the recognized stock exchanges are empowered to make byelaws subject to the previous approval of the SEBI. It is also laid down that such byelaws, after being approved by the SEBI, shall be published in the Gazette of India and in the official Gazette of the State, in which the principal office of the recognized stock exchange is situated, and these byelaws shall have effect form the date of its publication in the Gazette of India. The powers to make bye-laws are also enjoyed by the SEBI under section 10 of the said Act. However, in the present case, it was clear from the letter dated 07.03.2001 from the SEBI that they gave an option to the complainant to proceed under section 9 of the said Act. The amendments in the byelaws were approved by the SEBI on 22.05.2001 and hence, they could not have come into effect before that date.
(iv) The complainant BSE admittedly made amendments to its byelaws by inserting byelaw 389-A through a resolution passed by their governing body in its meeting on 31.03.2001, and the same was approved by SEBI on 22.05.2001. As per this new byelaw, the defaulters committee could utilize the TGF to the extent necessary to fulfil the obligations of the members, before declaring the said member as a defaulter and could lay down terms and conditions as to interest, repayment, suspension of trading rights etc.
(v) The letter dated 07.03.2001 from SEBI reached the complainant on 09.03.2001. However, in their note dated 26.03.2001, for the Governing Board, the BSE wrongly stated that the Governing Board in its meeting held on 08.03.2001 had made amendments to the byelaws. The action of the complainant BSE to withdraw the amount in question from the TGF was in violation of statutory provisions and in utter disregard to its binding legal obligations under the contract of insurance.
(vi) The market value of the securities of the erring brokers available as security deposit of the erring brokers as on 21.03.2001 was 6,03,83,389/- as per the report of the surveyor dated 06.03.2003. Had the brokers been declared as defaulters under clause 1.1 of the Default Insurance Policy, the assets worth more than 6 crores would have been available to the insurer to offset the amount of default, prior to invoking the insurer liability.
(vii) As per the survey report dated 06.03.2006, the value of shares of the defaulting brokers had shrunk to 4,47,22,868.10ps on 03.08.2001. After the actual disposal of shares, the proceeds realized were 3,81,45,800/-, meaning thereby that the value of such shares had shrunk by 2,22,37,589/- (6,03,83,389/- minus 3,81,45,800/-). The value, therefore, diminished by more than the amount of damages claimed by the complainant and hence, the insurer was not liable to pay any amount to the complainant.
(viii) In contravention of byelaw 316, BSE did not suspend the membership rights of the erring brokers in settlement No. 50 itself which related to the trading cycle from 05.03.2001 (Monday) to 09.03.2001 (Friday). As per report of the surveyor dated 06.03.2006, there was default committed by 'Orient' as well as 'Share-deal' during the said trading cycle 05.03.2001 to 09.03.2001 (settlement No. 50) as well. These facts have been mentioned in the note for the Governing Board dated 26.03.2001 by the complainant. Had the BSE suspended the membership rights of these two brokers, no default would have taken place during settlement No. 51, relating to trading done on 12.03.2001 and 13.03.2001 and till the time, the terminals were deactivated on 04.03.2001. The default committed by the brokers came to about 17.81 crores, as the complainant illegally allowed them to continue with the trading.
(ix) The BSE had done material violation of clause 2.2 of the Default Insurance Policy which absolved the insurer of any liability under the Policy. The BSE had not communicated effective date of the amendments made and hence violated clause 2.2 of the policy. The letters/circulars dated 07.03.2001 and 09.03.2001 from the SEBI could not have been given effect to without carrying necessary amendments/modifications in section 2.2 of the Policy."
8. The OP Insurance Company stated that since there had been violation of the terms and conditions of the policy on the part of the complainant, the OP was under no obligation to pay the claim made by them and hence the complaint should be dismissed.
9. In their rejoinder to the reply filed by the OP Insurance Company, the complainant stated that the OP had asked for various documents from them from time to time and did not take any decision on their claim. Another letter was received from OP in July 2010 by which some further documents and clarifications were asked for. The cause of action could arise only if the OP had taken a final decision regarding the payment of their claim. Even if the cause of action is presumed to have arisen in July 2010 when the said letter from the OP was received, the present complaint was within limitation, having been filed in September 2001.
10. Both the parties filed their evidence affidavits as well as written submissions. The evidence affidavits by the surveyors have also been filed. Detailed arguments were advanced by the learned counsels for both the parties and the same have been given due consideration.
11. The first point that arises for our consideration is whether the consumer complaint in question is not maintainable, being barred by limitation u/s. 24(A) of the Consumer Protection Act as per the plea taken by the OP Insurance Company. The OP has stated that the cause of action in the case arose on 22.03.2001 or 02.04.2001, whereas the complaint had been filed on 02.11.2010, i.e., more than 9 1/2 years after the cause of action arose and hence, the same was barred by limitation imposed by section 24(A) of the Act. The OP has placed reliance on the orders passed by the Hon'ble Apex Court in this regard in "Kandimalla Raghavaiah and Company v. National Insurance Company and Anr." [MANU/SC/1165/2009 : 2009 (7) SCC 768] and "State Bank of India v. B.S. Agriculture Industries" [MANU/SC/0420/2009 : 2009(5) SCC 121]. In this regard, an examination of the events in the case reveals that there has been long protracted correspondence between the complainant, the surveyors and the OP, spanning over a number of years. The details of such correspondence have been given in the complaint, as well as in the documents filed by the surveyors and the OP. It has been stated by the complainant that they received a letter from OP as recently as 19.07.2010, seeking more clarifications and documents. It is clear, however, that the claim was never repudiated by the Insurance Company. It is a sound logical proposition that the cause of action should start from the date the insurance company have taken the final decision about the settlement of the claim. The contention of the OP, therefore, that the complaint is barred by limitation u/s. 24(A) of the Act, does not hold any ground. It is held, therefore, that the complaint cannot be held to be not-maintainable on grounds of limitation.
12. An important point that arises for our consideration is whether the action of the complainant BSE in utilising the money from the TGF to meet the obligations of two defaulting members, without declaring them as defaulters, as laid down in their own byelaws, was valid or not, and whether this factor has any bearing on the final outcome of the case. It is evident from the letters sent by the SEBI that the BSE themselves sent a proposal to the SEBI vide letter dated 19.02.2001, seeking their approval for amendment to various byelaws of their exchange relating to the TGF. The SEBI, vide aforesaid letter dated 07.03.2001, conveyed the approval, saying that the TGF may be utilised for meeting the liabilities to the clearing house of the exchange, without declaring the member a defaulter. They specifically asked BSE to make amendments as reproduced in para 2 above of this order. The BSE have taken the plea that their Governing Board, in its meeting held on 08.03.2001, made certain amendments to the proposed byelaws relating to the TGF which were sent to the SEBI for its approval. Further, the BSE, vide their letter dated 02.04.2001 addressed to the OP, informed them that they had utilised the TGF for a sum of 14,22,56,540.80 to meet the shortfall of non-payment of settlement obligations by two of their members during the pay-outs of settlement No. 51/00-01. They also enclosed a copy of letter dated 07.03.2001 from the SEBI as mentioned above. Later on, the complainants sent another letter dated 09.04.2001 to the OP, requesting them to make necessary amendments in clause 2.2 of the Insurance Policy in accordance with the amended guidelines of the SEBI. However, it is a fact admitted by the parties that approval of the SEBI for amendment to the byelaws of the BSE was granted only on 22.05.2001. It is not clear from the material on record whether such amendments were notified in the official Gazette of the Government of India or the concerned State Government, but obviously, such publication in the gazette could have been done after 22.05.2001 only. However, even if the date of approval of the SEBI for amendment to the byelaws is taken as the date of such amendment, it becomes evident that the complainant utilised funds from the TGF, without declaring the two members as defaulters, even when formal amendment to the byelaws had not taken place. To that extent, therefore, the action of the BSE in utilising the funds from the TGF to meet the obligations of the defaulting members to the clearing house was not regular, as they could not have done so as per their own unamended byelaws.
13. The next point for consideration is whether the complainant BSE should have declared the two brokers as defaulters immediately after the said default came to their notice, or any reasonable time was required to be given to them to clear their outstanding obligations. The case of the BSE as narrated in their note dated 26.03.2001, for the meeting of the Governing Board is that on the respective pay-in dates pertaining to settlement No. 50/00-01 (trading cycle 5.3.2001 to 9.3.2001) and subsequent ruling settlement, the assets of the members with the exchange were in excess of their liabilities and, therefore, as per their byelaw 316, it was decided not to declare them as defaulters. It was further decided that their settlement obligations may be fulfilled by using funds of the exchange initially, and subsequently by liquidating their assets available with the exchange. It was informed to the clearing house to retain the securities and funds if any receivable by these members with effect from Friday, 16.03.2001 onwards. The clearing house reported on 22.03.2001 that the two brokers 'Orient' and 'Share Deal' had also failed to meet their settlement obligations pertaining to weekly settlement No. 51/00-01. The settlement obligation for 'Orient' was 6,65,97,124/- and that of 'Share Deal' was 11,15,24,780/-. The defaulters' committee of the BSE considered the matter in their meeting held on 23.03.2001 and decided to utilise the corpus of the TGF for meeting the liabilities of these members to the clearing house of the exchange without declaring them as defaulters, based on the SEBI circular dated 07.03.2001 and pending approval of SEBI to the proposed amendments. They also decided that the trading facilities of these members may continue to remain suspended and the process of invoking bank guarantees by the members towards their margin and settlement obligations and releasing the proceeds by sale of securities and other assets, may be initiated. It was also decided that a period of three months should be allowed to these members to repay the amounts utilised from the TGF after charging penal interest, and in case, they failed to repay the amounts within that period, the Committee would consider taking suitable action against them, including declaring them as defaulters. All these facts were placed before the Governing Board of the BSE for their information in the shape of note, a copy of which has been placed on record.
14. From the above, it is made out that complainant took a conscious decision to utilise the funds from the TGF without declaring two brokers as defaulters and also gave them a time of three months for repayment of the said amounts. In this regard, it shall be worthwhile to have a look at the provisions of the Insurance Policy as well. It has been stated in condition 2.3 of the said policy as follows:--
"2.3 The insured will immediately notify the insurers in writing of a prospective loss upon first becoming aware of a Clearing Member(s) appearing to be unable, or likely to be unable, to meet its obligations and liabilities to the insured. But in any event, such notification shall be made to the insurers within 60 days from the date the insured first becomes aware of such prospective loss. It is clearly agreed that this contingency will be deemed to arise only if the relevant authority of the insured is satisfied that a member may be unable to meet the obligations considering the amount involved and the general standing of the member concerned.
It is further agreed that declaration of a clearing member as defaulter or expulsion from membership is effected by the relevant authority of the insured, who may extend reasonable indulgence to its member(s) to comply with its obligations prior to taking steps for declaring the member as defaulter or expelling him from the membership."
In accordance with the above condition 2.3, it is an admitted fact that the insured/complainant notified to the OP Insurance Company in writing, of prospective loss on becoming aware of two members being unable to meet their obligations and liabilities within the time prescribed. (A letter in this regard was issued to the OP on 2.04.2001). In the second para of the above condition, it is stated that the relevant authority of the insured has to be satisfied that a member shall be unable to meet its obligations. It is also stated that declaration of member as defaulter or expulsion from membership, shall be affected by the relevant authority and such authority may extend reasonable indulgence to the member to comply with the obligation prior to taking steps for taking such action.
15. In the instant case, the action of the BSE, therefore, in allowing reasonable time to the defaulting members to meet their obligations to the clearing house, seems to be in order and also, in accordance with the conditions laid down in the insurance policy itself. It shall not be justified, therefore, on the part of the OP Insurance Company to take the stand that the BSE should have declared the members as defaulters immediately. The concerned authority of the BSE had to be satisfied that the members were unable to repay their obligations within a reasonable time. When the complainant BSE discovered that the members were not able to discharge their obligations within the period prescribed, they declared them as defaulters on 04.08.2001 and such action, in our opinion, is justified as per the facts on record and the conditions in the policy itself.
16. This brings us to the most crucial issue in the present case whether the action of the BSE in utilising the funds from TGF without declaring the members as defaulters would have led to any change in the overall scenario, in so far as the liability of the OP Insurance Company is concerned. The OP have taken the stand that the value of the assets belonging to the defaulting members diminished with the passage of time. As per the report of the surveyor, the security deposit of the erring brokers as on 21.03.2001 was 6,03,83,389/- which shrunk to 4,47,22,868.10 as on 03.08.2001. After the actual disposal of shares, the proceeds realised were 3,81,45,800/-. Had the complainant disposed of the assets at the time of default, the liability of the OP towards them would have reduced to that extent. This contention of the OP, however, does not hold good in view of the finding in the preceding paragraph that the complainant was justified in allowing a reasonable time to the brokers to discharge their obligations. It is true that the value of the securities came down with the passage of time, but it can be stated that such value could have increased also with time, resulting in reducing the liability of the OP.
17. Having come to the conclusion that the action of the BSE in giving certain time to the erring brokers for liquidation of their outstanding obligations to the clearing house was in order, it is imperative that the liability of the insurance company towards the complainant has to be considered after these brokers were formally declared as defaulters and their assets/securities etc. were disposed of. Even if the complainant had not utilised the funds from the TGF without declaring the brokers as defaulters, the position would have remained the same in so far as the liability of the OP towards the insured is concerned. The contention of the OP Insurance Company, therefore, that the complainant should not have made payments from the TGF without declaring the brokers as defaulters in accordance with their unamended byelaws, does not absolve them from their overall liability under the Policy towards the complainant.
18. Based on the discussion above, it is made out that the claim lodged by the BSE with the OP Insurance Company deserves to be allowed and we order accordingly. The OP Insurance Company has made the prayer that sum of 2,03,77,134/- alongwith interest of 18% p.a. on the said amount should be paid to them from 02.04.2001, the date on which the intimation about the loss was given to the OP Insurance Company. We, however, feel that since the process of disposal of assets/liabilities of the erring brokers was done from 19.09.2001 to 01.11.2001 and after that, the computation of final amount of claim was made, the Insurance Company should pay interest @ 9% p.a. with effect from 01.05.2002, i.e. six months after final computation of the claim was made. The total amount computed in terms of this order shall be payable by the OP Insurance Company to the complainant BSE within a period of six weeks from today. There shall be no order as to costs.
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