Shyam Divan continues arguments over ₹900 crore stock liquidation crisis before the Supreme Court

Senior Advocate Shyam Divan while continuing his arguments systematically detailed the operational landscape and systemic limitations that governed the Futures & Options (F&O) segment during the high-pressure pandemic period between January and June 2020. Addressing the Bench, Divan presented crucial contemporaneous communications to demonstrate that the appellant, a Professional Clearing Member (PCM), acted strictly within its regulatory mandate when handling the massive market default triggered by trading member Anugrah. He pointed the Bench to specific records within the civil appeal to establish that the appellant did not act unilaterally or arbitrarily, but in direct response to skyrocketing risk metrics and explicit broker instructions, such as an email from March 3, 2020, warning Anugrah of a significant increase in its Net Option Value (NOV) and an outstanding party ledger debit. Anugrah was explicitly instructed to infuse fresh cash collateral, failing which the appellant would be constrained to liquidate collaterals at the broker's peril to regularize the account. The defense highlighted a critical reply from Anugrah dated April 15, 2020, where the broker attached a formal list of client securities, explicitly confirming that they belonged to clients having debit margin obligations and required liquidation to clear those respective obligations. When the Bench questioned whether the end-investors were aware of these liquidations, Divan clarified a foundational aspect of the fraud, stating that Anugrah was generating false statements for its own clients showing their securities were perfectly intact, effectively keeping them in the dark while instructing the PCM to liquidate those very shares. A central theme of Divan's defense was the total lack of real-time visibility available to a Clearing Member over a third-party broker's internal ledger under the prevailing statutory regime in early 2020, where client-wise data was only uploaded to the PCM on a weekly basis, meaning the appellant could only monitor and set risk limits at the aggregate trading member level since neither the National Stock Exchange (NSE) nor the NSE Clearing Limited (NCL) provided a digital mechanism to track individual end-clients. Divan pointed out that the exchange itself was fully aware of the liquidations and never alleged a single regulatory violation against the appellant at the time, reading a letter from the Chief Manager of the NSE dated April 2, 2020, which simply advised the appellant to perform adequate due diligence using the weekly database. To decisively prove that the pre-June 2020 system was inherently flawed and lacked safeguards, Divan introduced a landmark SEBI circular dated February 25, 2020, which was explicitly designed to overhaul the entire market architecture and eliminate the risk of brokers misusing one client's shares to fund another's margins by introducing a prospective pledge and re-pledge mechanism effective June 1, 2020. Under Clause 12 of this circular, all clearing and trading members were strictly ordered to close existing pooled Demat accounts tagged as client collateral by June 30, 2020, and return the shares directly to the respective clients' individual accounts, establishing that the systemic vulnerabilities were only fixed after this specific crisis exposed flaws in the framework. The argument concluded with a sharp dialogue regarding the severe legal nature of the Securities Appellate Tribunal's (SAT) restitution order, with Divan emphasizing that a private clearing corporation's disciplinary guidelines explicitly limit actions to structural penalties—such as suspension, expulsion, censure, or standard monetary fines—and arguing that interpreting a disciplinary penalty to encompass a retroactive, sweeping ₹900 crore market restitution order stretches the regulatory framework completely out of shape, effectively transforming a contractual default into an unlegislated financial punishment.