Method of calculating 'G Value' cannot be applied retrospectively to transactions pre-dating the relevant regulatory circular.

The Appellant, a stockbroker and member of the National Stock Exchange (NSE), underwent inspection in March 2020 following its voluntary disablement of terminals due to financial distress.

On February 11, 2022, the NSE Committee passed an order alleging the Appellant misused client funds for settlement and margin obligations and improperly sold client securities worth ₹40.39 Crores.

The NSE calculated a negative "G Value" (funds available vs. credit balance) by including a ₹95.79 Crore ledger balance owed by the Appellant to its clearing member, Edelweiss Custodial Services Ltd. (ECSL).

The Appellant challenged the penalty of ₹1 Crore and the six-month suspension, arguing the "G Value" was incorrectly calculated using a retrospective circular.

1. Whether the Respondent was correct in taking into account the ledger balance (owed to the clearing member) while calculating the ‘G’ value for a period prior to the relevant circular.

2. Whether the ‘J’ value (utilisation of client funds for margin obligations) calculated by the Respondent was correct.

3. Whether the sale of client securities worth ₹40.39 Crores constituted a violation of exchange regulations.

The court primarily applied Regulation 4.5.3(e) of the NSEIL Regulations (CM & F&O Segment), which prohibits the improper use of a constituent’s securities or funds.

It further relied on the principles of the NSE Enhanced Supervision Circular No. NSE/INSP/3327 dated September 27, 2016, regarding the calculation of "G Value" and "J Value" to monitor client fund protection.

Additionally, the court applied the legal principle that retrospective application of new procedural norms—specifically the NSE Circular dated May 26, 2020—to past transactions is impermissible.

The Tribunal found that the NSE’s calculation of a negative "G Value" (indicating misuse of funds) was flawed because it included a ₹95.79 Crore liability owed to ECSL based on a circular issued in May 2020, whereas the transactions occurred in March 2020.

The Tribunal reasoned that a procedure or norm cannot be applied to transactions occurring before its existence; excluding that debt resulted in a positive "G Value."

Consequently, applying the standard formula to the corrected "G Value" resulted in a negative "J Value," proving that credit balance clients’ funds were not misused for margin obligations.

However, regarding the third issue, the Tribunal found the Appellant liable for the sale of ₹40.39 Crores of client securities by ECSL to settle the Appellant's own obligations, as this directly violated Regulation 4.5.3(e) regardless of whether clients complained or were related parties.

It set aside the first two components of the penalty related to the misuse of funds for settlement and margin obligations, as the "G" and "J" values were incorrectly calculated.

However, it upheld the violation regarding the improper sale of client securities and modified the total penalty to ₹40.39 Lakhs (calculated as 1% of the value of securities sold).

The suspension and the remainder of the ₹1 Crore penalty were set aside.