Highlighting the speculative nature of the Futures and Options (F&O) segment and the substantial losses suffered by investors despite the inherent risks involved, the Supreme Court on Wednesday (September 2) held that F&O investors cannot seek reimbursement of their financial losses from Professional Clearing Members (PCMs), whose role is just to facilitate the clearing and settlement of trades.

A bench of Justice J.B. Pardiwala and Justice K. Vinod Chandran observed that in the F&O segment, the investor has a direct relationship with the Trading Member (TM), which deals with the investor and executes trades, while furnishing collateral or securities to the Professional Clearing Member (PCM) to secure its own obligations. Therefore, in the absence of any privity of contract between the PCM and the individual investors, the PCM cannot be held liable towards the investors for their losses.

“…there can be no claim laid against the PCM for the default committed by the TM, especially in the context of the TM having indulged in illegal schemes and the investors having participated with open eyes in such schemes on the assurance of an assured return, which, in the F&O Segment, is downright impossible.”, the Court observed.

The dispute arose after certain Trading Members, defaulted on their obligations after allegedly operating illegal schemes, including unauthorised Portfolio Management Services promising assured returns to the F&O investors.

The TMs had furnished securities belonging to their clients as collateral to the PCMs. When the TMs failed to meet their clearing obligations, the PCMs liquidated the securities and utilised the proceeds towards the TMs' outstanding obligations.

The investors subsequently alleged that the PCMs had wrongly liquidated their securities without verifying whether the individual clients had debit or credit balances with the respective TMs.

The Member and Core Settlement Guarantee Fund Committee (MCSGFC) of the National Stock Exchange directed restitution of securities worth approximately ₹460 Crore. The Securities Appellate Tribunal upheld the decision of restitution, following which the PCMs approached the Supreme Court.

The PCMs appeal was opposed by the investors contenting that the PCMs were required to verify the individual positions of the TMs' clients before liquidating the collateral securities.

Setting aside the impugned decision, the judgment authored by Justice Chandran rejected the investors contention stating that under the applicable regulatory framework, the TM was the client of the PCM, whereas the individual investor was the client of the TM. Therefore, there was no statutory requirement requiring the PCM to ascertain the individual debit or credit position of every client of a defaulting TM.

Moreover, the Court said that since the investors have entered into the scheme with full knowledge of the risk involved in the segment, extending the liability upon the PCMs to make good the loss caused to the investors due to the fault of the TMs would be illogical.

“…the TM was carrying on trading on its own account using the securities of its individual clients/constituents and on losses being incurred, the default occurred and the PCM in turn was constrained to liquidate the securities so offered. Neither can the TM absolve itself from its liabilities nor can the investors cry foul, since they entered into the scheme with full knowledge of their securities being offered as collaterals for a fixed return. The responsibility of the assured return is only on the TM and not even indemnified by the NSE; being an outright illegal activity…we are of the definite opinion that there was no statutory violation committed by the PCM and their plea of having no privity of contract with the constituents of the TM as also no statutory obligation to verify the debit/credit positions of the individual clients of the TM is perfectly in order. More onerous is the fact that the TM was indulging in a Ponzi scheme wherein the investors willingly enrolled themselves, executing affidavits of undertakings and furnishing securities to the TM in his status as a DP & DAS, which was out right illegal, the illegality being known, both to the TM and its constituents.”, the Court said.

As a result, the appeal was allowed, thereby setting aside the restitution of securities order passed by the committee and SAT.

Cause Title: Edelweiss Custodial Services Limited v. NSE Clearing Ltd. & Anr. (with connected appeals)

Citation : 2026 LiveLaw (SC) 891

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Appearance:

For Appellant(s) : Mr. Shyam Divan, Sr. Adv. Mr. Niranjan Reddy, Sr. Adv. Sanjivani Pattjoshi, Adv. Mr. Anshuman Srivastava, Adv. Mr. Naresh Jain, Adv. Ms. Arti Agrawal, Adv. Mr. Mahaveer Jain, Adv. Mr. Rishabh Jain, Adv. Ms. Neha Anchlia, Adv. Mr. Alok Kumar, Adv. Mr. Rameshwar Prasad Goyal, AOR Mr. Mahesh Agarwal, Adv. Mr. Anshuman Srivastava, Adv. Mr. Rishi Agrawala, Adv. Ms. Sanjivani Pattjoshi, Adv. Mr. Abhinabh Garg, Adv. Ms. Sanjivani Pattjosh, Adv. Mr. Yashvardhan Singh, Adv. Mr. E. C. Agrawala, AOR Mr. Divyam Agarwal, AOR Mr. Pulkit Sukhramani, Adv. Ms. Pallavi Kumar, Adv. Mr. Aniket Aggarwal, Adv. Ms. Priya Chauhan, Adv. Mr. Sahil Dhawan, Adv. Mr. Yashvardhan Singh, Adv.

C.A.No.2187/24 Ms. Pallavi Kumar, Adv. Mr. Juan D Souza, Adv. Ms Priya Chauhan, Adv.

C.A.No.2187/24 Mr. Niranjan Reddy, Sr.Adv. Ms. Charu Bansal, Adv. Mr. Juan D. Souza, Adv. Mr. Pulkit Sukhramani, Adv. Mr. Amar Nath Saini, Sr. Adv. Ms. Preeti Saini, Adv. Mr. Manish Gupta, Adv. Mr. Shreyas Jain, Adv. Mr. Manish Kumar, AOR

For Respondent(s) : Mr. Arvind P. Dattar, Sr. Adv. Mr. Neeraj Malhotra, Sr. Adv. Dr. Yusuf Iqbal Yusuf, Adv. Mr. Bhavya Sethi, Adv. Mr. Sameer Singh, Adv. Mr. Zubin Sheth, Adv. Mr. Kailash Uday Kapoor, Adv. Ms. Neelam Singh, AOR Ms. Apurva Ambasth, Adv. Mr. Shiven Khurana, Adv. Mr. P. V. Yogeswaran, AOR Ms. Amrita Panda , AOR Mr. Mudit Gupta , AOR Mr. Ashish Prasad, Adv. Mr. Mahfooz Ahsan Nazki, AOR Mr. Ashish Prasad, Adv. Mr. Pruthui Dhinoja, Adv. Ms. Siddhi Jain, Adv. Mr. Vivek Rajan D.B., Adv. Ms. Mukta Dutta, Adv. Mr. Pruthvi Dhinoja, Adv. Mr. Vivek Rajan D.b, Adv. Ms. Siddhi Jain, Adv. Mr. Vivek Rajan D.B, Adv. Ms. Siddhi Jain, Adv. Mr. Abhishek, Adv. Mr. Pranjal Kishore, AOR Mr. Ishan Agrawal, Adv. Mr. Anshit Aggarwal, Adv. Mr. Ashutosh Mishra, Adv. Mr. Nagarjun Sahu, Adv. Mr. Shreya Kak, Adv. Ms. Sonali Jaitley Bakhshi, Adv. Mr. Jaiyesh Bakhshi, Adv. Mr. Ravi Tyagi, AOR Mr. Mayank Mishra, Adv. Mr. Gaurav Mishra, Adv. Ms. Manmilan Sidhu, Adv. Mr. Daman Popli, Adv. Ms. Sudiksha Saini, Adv. Mr. Abhijay Basu, Adv. Mr. Abhishek Rathi, Adv. Mr. Anuj Kumar, Adv. Mr. Nimish Kumar, Adv. Mr. Sudhanshu Prakash, AOR Mr. Kausik Chatterjee, Adv. Mr. Soumya Dutta, AOR Ms. Samriddhi, Adv. Mr. Siddhant Upmanyu, Adv.

For Intervenors Ms. Meenakshi Arora, Sr. Adv. Dr. Dinesh Rattan Bhardwaj, AOR Mr. Mahesh Singh, Adv. Mr. Ravichandra Hegde, Adv. Ms. Mitravinda Chunduru, Adv. Mr. Kandarp Trivedi, Adv. Ms. Parinaz Bharucha, Adv. Mr. Rudra Pratap Dhananjay, Adv. Mr. Pankaj Kumar Sharma, Adv. Mr. Sameer Rawal, Adv. Mr. Sujeet Swami, Adv.

For Intervenor(s) Mr. R. Vardrajan, Sr. Adv. Mr. Anupam Kumar, Adv. Mr. Hitesh Kumar Sharma, Adv. Mr. Akhileshwar Jha, Adv. Mr. Satvik Sharma, Adv.