Supreme Court Clarifies Clearing Members’ Duties on a Trading Member’s Default

The Hon’ble Supreme Court in Edelweiss Custodial Services Limited v. NSE Clearing Limited & Anr. and connected appeals (2026 INSC 941; Civil Appeal No.31 of 2024), decided on September 2, 2026, examined whether Professional Clearing Members (PCMs) were required to verify the individual debit/credit positions of clients of a defaulting Trading Member (TM) before liquidating securities furnished as collateral.

The Court held that, under the regulatory framework applicable at the relevant time, PCMs had no statutory obligation to undertake such client-level verification before liquidating the TM’s collateral. It further held that the Member and Core Settlement Guarantee Fund Committee (MCSGFC) of NSE Clearing Limited (NCL) lacked statutory authority to order restitution involving payment of money.

Background

The appeals arose after TMs defaulted on their obligations and PCMs liquidated securities furnished as collateral. Investors contended that securities belonging to clients with no debit balances were also liquidated. The PCMs maintained that their constituent was the TM, rather than the TM’s individual clients, and that the regulatory framework then in force did not require PCMs to verify individual client debit/credit positions before liquidation.

The MCSGFC directed restitution of the securities, including monetary consequences where restoration was not possible. The Securities Appellate Tribunal (SAT) upheld these directions.

Regulatory Framework Governing PCMs

The Court examined the NCL F&O Regulations, SEBI circulars and the CM-TM Agreement. Regulation 1.7 treated the TM as the “client/constituent” of a PCM, while Regulation 4.5.4 prohibited utilisation of one constituent’s margin towards another’s obligations. The Court found no violation by the PCMs of the applicable regulatory requirements or the CM-TM Agreement.

The Court also considered NCL’s May 20, 2019, circular. Although it introduced weekly reporting of TM-wise and client-wise collateral, the reporting format did not require individual client debit/credit positions to be disclosed. The framework subsequently progressed from monthly reporting in 2016 to weekly reporting in 2019 and daily reporting in 2021.

The SEBI Circular dated February 25, 2020 introduced the pledge/re-pledge mechanism, creating a complete trail of securities through the depository system. The Court noted that this complete pledge/re-pledge trail became effective from June 30, 2020, after the disputed liquidations.

Restitution Must Have Statutory Basis

The Court held that Section 9(3)(b) of the Securities Contracts (Regulation) Act, 1956 permitted stock-exchange bye-laws to prescribe penalties but excluded penalties involving payment of money. In contrast, Sections 11B of the SEBI Act, 1992 and 12A of the Securities Contracts (Regulation) Act specifically recognised disgorgement powers in relation to wrongful gains or losses avoided. The MCSGFC could not therefore derive an equivalent power through bye-laws or equitable principles.

Relying on SEBI v. S. Kumars Nationwide Ltd., (Civil Appeal No.2049 of 2010), the Court further held that SAT could not assume powers greater than those conferred by statute; its procedural powers under Rule 21 of the SAT (Procedure) Rules, 2000 could not create a substantive restitutionary jurisdiction.

The Supreme Court accordingly allowed the four PCM appeals, set aside the orders of the MCSGFC and SAT, and dismissed the connected investor appeal as not maintainable.