SEBI | Professional Clearing Members Have No Statutory Obligation To Verify Credit/Debit Positions Of Individual Clients Of Trading Members: Supreme Court

"The absence of privity of contract, with the constituents of the TM, has also to be reckoned in favour of the PCMs; which even if not available as of now, by the Circular of 2021 of the SEBI, there is an obligation cast on the PCM to segregate client collaterals" Supreme Court, in a latest judgment, held that a Professional Clearing Member (PCM) is under no statutory obligation to verify the credit or debit positions of individual clients of a Trading Member (TM) before liquidating collaterals upon the TM’s default.

A bench comprising Justice J.B. Pardiwala and Justice K. Vinod Chandran observed that in the absence of a direct contractual link and specific regulatory requirements at the material time, a PCM cannot be held liable for the losses suffered by the TM’s clients due to the latter’s misconduct.

Lack Of Statutory Mandate For Verification

The court emphasized that the hierarchy of operations within the National Stock Exchange (NSE) and the Clearing Corporation (NCL) places distinct responsibilities on each entity. The bench noted that the regulatory framework existing at the time of the liquidation did not contemplate the PCM acting as an auditor or overseer of the internal account status of a Trading Member’s individual retail investors.

Court Rejects Claims Of Fiduciary Duty

The court found that the attempts by the intervenors to establish a fiduciary duty or an implicit obligation on the PCM to "look through" the Trading Member to the individual clients were legally untenable. It was observed that the PCMs had no visibility of individual client-wise debit or credit positions, and such visibility was a structural feature introduced only through subsequent SEBI circulars, such as the one issued in 2021.

"No Privity Of Contract Between PCM And TM’s Clients"

The judgment clarified that the legal relationship is strictly tiered. The PCM transacts with the Trading Member, and the Trading Member is responsible for its constituents. The court stated that the PCM cannot be made a guarantor for the TM’s performance or its illegal deviations, especially when the latter has defaulted on its settlement obligations to the Clearing Corporation.

Illegal Schemes By Trading Member

A critical factor in the court's reasoning was the finding that the Trading Member in question had indulged in unauthorized "Derivatives Advisory Services" and Ponzi-like schemes. The investors had willingly participated in these schemes, executing affidavits of undertakings to receive fixed returns, which the court observed were inherently impossible in the speculative Futures & Options segment.

"Investors Acted With Eyes Open In Speculative Segment"

The court remarked that the investors could not claim "innocence" when they dived into a highly volatile and fragile market vortex with the expectation of easy money. The bench pointed out that the Trading Member’s illegal use of securities for these prohibited schemes was the proximate cause of the loss, not any regulatory failure on the part of the PCM in executing the liquidation of collaterals upon default.

Disgorgement Power Is Limited To SEBI

Addressing the power of the Committee constituted by the NCL to order restitution, the court held that such a power is not inherent in the byelaws of a stock exchange. The power of disgorgement is exclusively conferred upon the SEBI under Section 11B of the SEBI Act, 1992, and Section 12A of the Securities Act, 1956. The court affirmed that Section 9(3)(b) of the Securities Act prohibits any penalty involving the payment of money, thus rendering the Committee's order for restitution of securities illegal and without jurisdiction.

"Restitution Penalty Lacks Statutory Backing"

The bench further noted that the principles of equity and natural justice could not be used as a tool to override explicit statutory bars. The court held that the Committee could not expand its punitive powers beyond what was explicitly permitted by the statute and the governing byelaws, and consequently, the orders of the Committee and the Securities Appellate Tribunal (SAT) were set aside.

In its final decision, the Supreme Court allowed the four appeals filed by the Professional Clearing Members, setting aside the orders of the MCSGF Committee and the SAT. A related appeal filed by a client-investor seeking restitution of cash margins was rejected as not maintainable, given that the underlying orders forming the basis of the claim had been quashed. The court concluded that investors are at liberty to pursue their respective remedies against the defaulting Trading Members, subject to legal constraints.

Date of Decision: 02 September 2026