Bangalore District Court
The Authorized Signatory And vs Mr. C. Vijai Kumar Reddi on 29 February, 2020
IN THE COURT OF THE LXXXIII ADDITIONAL CITY CIVIL
AND SESSIONS JUDGE AT BENGALURU CITY[CCH-84]
PRESENT: Sri S.A. HIDAYATHULLA SHARIFF,
B.A., LL.M.,
LXXXIII Additional City Civil and
Sessions Judge
Dated this the 29th day of February 2020
COM.A.S.No.93/2016
Petitioner: The Authorized Signatory And
PA Holder,
M/s. Karvy Stock Broking Limited,
No. 51/2, TKN Complex,
Vanivilasa Road, Basavanagudi,
Bengaluru 560 004
Represented by its Authorized
Signatory G.N. Sridhar,
(Trading Member)
[By Sri.S.S Advocate]
/v e r s u s/
Respondent: Mr. C. Vijai Kumar reddi,
No. 13, 1st Main Road, Defense
Colony, Indiranagar,
Bengaluru560 038
[By Sri.Y.H, Advocate]
Date of institution of the : 21/06/2016
suit
Nature of the suit : Arbitration suit
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Date of commencement of :
recording of the evidence
Date on which the : 27/02/2020
Judgment was
pronounced.
: Year/s Month/s Day/s
Total duration
03 08 06
(S.A. Hidayathulla Shariff)
LXXXIII ACC & SJ: Bengaluru
The plaintiff M/s. Karvy Stock Broking Limited, a
trading member has filed this petition u/s. 34 of
Arbitration & Conciliation Act 1996 against the defendant
constituent to setaside the impugned award dated
01/12/2015, passed by the Arbitral Tribunal in
Arbitration matter No. CM/B0009/2015 and the award
dated 13/04/2016, passed by the Appellate authority in
proceeding of Appellate Arbitration matter No. CM/B
0009/2015.
2. A perusal of the materials on record discloses
that initially this suit was filed before V ACC & SJ,
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Bengaluru and through office Notification No. CCC(P2)
15/2018 dated 20/07/2018, the case was transferred to
XXXVIII ACC & SJ, Bengaluru. Thereafter, as per
Notification No. ADM1A 21/2019 dated 10/01/2019,
the case was withdrawn from XXXVIII ACC & SJ,
Bengaluru and made over to LXXXII ACC & SJ,
Bengaluru, which is designated commercial court.
Subsequently through office Notification No. ADM
1A/846/2019 dated 26/11/2019, the case was
transferred to this court on 06/01/2020.
3. A perusal of the materials on record discloses
that on the complaint lodged by Sri. C. Vijay Kumar
Reddy, the respondent in the present suit to the National
Stock Exchange of India Ltd., (NSEIL) alleging that the
present plaintiff, trading member had done unauthorized
trading on the account of the complainant/respondent,
thereby he had lost shares approximately valued of Rs.
1,13,85,141/, the SEBI has constituted Investors
Grievances Redressal Panel (IGRP) to look into the
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complaint of the respondent. The IGRP meeting was held
on 17/04/2015. After hearing the complaint of the
respondent and the defence taken by the plaintiff of the
present suit, the IGRP has given finding to the effect that
since the plaintiff trading member is not willing to settle
the issue as claimed by the complainant/defendant, it
has advised the complainant/defendant to seek remedy
through arbitration for further course of action as
contemplated under the NSEIL Regulations. Thereafter,
the National Stock Exchange of India (NSEIL) vide letter
No. NSE/BRO/ARBN/18082015AB dated 18/08/2015
appointed the Panel of the Arbitrator and forwarded the
arbitration application and documents connected
therewith. Before the Panel of Arbitrators, the present
respondent who was the applicant before the Arbitral
Tribunal has filed an application in Form No. 1 on
23/07/2015, claiming a total amount of Rs.
1,38,73,311/ being the value of his missing/loss shares
caused due to unauthorized trade made by the present
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plaintiff trading member, who was the respondent before
the Panel of Arbitrators.
4. The case of the applicant who is the
respondent in the present suit before the Panel of
Arbitrators in brief is that he became the client of the
respondent trading member in the year 2001. The trading
member had assigned one Sri. J. Venkatesh,
Relationship Manager to the applicant to deal on all
matters relating to investments. The applicant was a long
term investor and never believed in trading in equity. The
applicant opened DEMAT account with the respondent
trading member and got the holding of shares including
Blue Chips like BOSCH, Hindalco, Siemens, ING Vysya
Bank etc., held in physical form, dematerialized and
credited in his DEMAT account. That the trading
member used to obtain transactions slips signed by the
applicant for executing trade and thereafter sent contract
notes to him and on few occasions the employees of the
trading member visited the residence of the applicant to
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collect the transactions slips. The applicant has
specifically instructed the trading member not to sell his
holding in MICO [later become BOSCH], Siemens and
Hindalco. The applicant paid various amounts
commencing from 07/12/2007 to 01/12/2008 totaling
Rs. 6,48,178/ to the trading member for purchase of
additional shares of BOSCH, Hindalco, Larson & Turbo,
Axis Bank. The applicant did not receive the contract
notes for purchase of these shares, though he repeatedly
contacted Sri. J. Venkatesh for contract notes, the
applicant was assured that transaction had been carried
out. The applicant contacted Sri. J.Venkatesh by
telephone on 05/10/2011 to provide him statement of
holding in order to raise bank loan by using his shares as
collateral. On 05/11/2011, Sri. J. Venkatesh sent
statement of holding to the applicant over Fax from a Fax
machine belonging to "Way 2 Wealth" company who was
a competitor of the trading member. On findings gross
discrepancies in the statement of holding, the applicant
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spoke to Sri. J.Venkatesh who assured that the mistakes
would be rectified and correct holding would be reflected
in the next statement. As Mr. J. Venkatesh was evasive
and did not provide the statement and information, the
applicant approached the head office of the trading
member at Hyderabad and met the Chairman and CEO of
the trading member. In the meeting with the CEO, the
Zonal head of the Bengaluru office also took part and
applicant was assured that a detailed inquiry would be
conducted and the missing shares would be restored. As
per the advise of the trading member, the applicant gave
a formal complaint to the trading member on
25/07/2012 to enable the trading member to initiate
investigation against Sri. J. Venkatesh, Relationship
Manager. The trading member later lodged a complaint
against the Sri. J. Venkatesh with Basavanagudi Police
on 05/09/2012. In the complaint to the police, the
trading member had admitted that Sri. J. Venkatesh was
single point of contract with their client and was
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responsible for advising the applicant on investments,
executing the orders of the applicant, sending contract
notes and statement of account and holding to the
applicant periodically and get his confirmation. The
trading member in the police complaint has also
admitted that Sri. J. Venkatesh had carried out trade
including in F & O, on behalf of the applicant without
applicant's authorization and had suppressed
information on trades and provided fraudulent
statements of account to the applicant and prevented the
applicant from knowing the actual status of his account.
The trading member also admitted that Sri. J. Venkatesh
has committed breach of trust and cheating causing loss
to the applicant and also to the trading member. Since
the trading member did not follow up the police
complaint, the Investigating Officer conducted the
investigation in hasty manner and filed 'B' report, which
was rejected by the court of Chief Metropolitan
Magistrate, Bengaluru and the investigating officer was
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directed to investigate the matter and submit his report.
That the investigation is not completed and was pending.
5. The main defence of the trading member before
the Panel of Arbitrator was that the applicant ought to
have approached NSE for arbitration before 04/11/2014
as per law of limitation as the cause of action arose on
05/11/2011 when Sri. J.Venkatesh furnished over Fax
statement of holding with gross discrepancies and
omission of few scripts altogether. The trading member
further contended that since the applicant has alleged
serious frauds, misrepresentation against the trading
member and its employee Sri. J. Venkatesh, the dispute
can only be settled in a court and cannot be adjudicated
by arbitral tribunal. The trading member has also denied
its vicarious liability for the criminal acts of its employee
and stated that it became vicariously liable only if Sri. J.
Venkatesh has acted in his official capacity on its
instructions.
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6. A perusal of the materials on record discloses
that the panel of Arbitrators have conducted arbitration
proceedings, wherein, the parties put their appearance
through their respective counsels and after conducting
hearing and considering the rival submissions and also
the SEBI guidelines issued with regard to arbitration
mechanism to be followed by stock exchange and the
consolidated circular of arbitration mechanism of the
exchange, the arbitral tribunal has came to the
conclusion that the claim of the applicant is not barred
by limitation and the Panel of Arbitrators had jurisdiction
to adjudicate the matter and further held that the trading
member is vicariously liable for the act of its employee
who had conducted unauthorized trading on the account
of the applicant resulting into loss of shares and
quantified the total claim of the applicant amounting to
Rs. 1,35,22,961/, which includes a sum of Rs.
1,25,25,920/ towards monitory value of the loss of
shares suffered by the applicant and a sum of Rs.
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3,48,863/ towards the loss suffered by the applicant
towards payment of dividends on the shares and a sum
of Rs. 6,48,178/ which was the amount for refund of
money to be paid to the applicant for purchase of shares
which he had paid to the trading member.
7. Aggrieved by the award dated 01/12/2015
passed by the Arbitral Tribunal in Arbitration matter No.
CM/B/0009/2015, the trading member who is the
plaintiff in the present suit has filed appeal before the
Appellate Arbitral Tribunal appointed by the National
Stock Exchange of India, Bengaluru vide letter dated
09/02/2016.
8. A perusal of the materials on record discloses
that before the Appellate Arbitral Tribunal, the trading
member who is the plaintiff of the present suit has
challenged the award mainly on the ground of limitation
and lack of jurisdiction of the arbitral tribunal to
arbitrate the matter and also taken a defense that it is
not vicariously liable for the criminal acts done by its
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employee and also taken a contention that the
complainant was equally liable for the alleged loss caused
to the complainant on the principles of contributory
negligence, as the applicant chose not to raise any
objections for three years after his last remittance of the
amount on 01/12/2008 to purchase shares despite
receiving regular statements.
9. After constitution of the Appellate Arbitral
Tribunal by National Stock Exchange of India, the
defendant of the present suit who was the respondent
before the Appellate Arbitral Tribunal has filed his
statement of objections by resisting the appeal filed by
the appellant before the Appellate Arbitral Tribunal.
10. The Appellate Arbitral Tribunal after hearing
the counsel for the appellant and respondent and after
conducting the proceedings has came to the conclusion
that the claim of the applicant/respondent is not barred
by limitation and the arbitral tribunal had jurisdiction to
conduct the arbitral proceedings and also came to the
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conclusion that the appellant trading member is
vicariously liable for the fraudulent acts committed by its
employee and given a finding that there is no merit in the
appeal filed by the appellant and uphold the award
passed by the Arbitral Tribunal on 01/12/2015.
Aggrieved by the award dated 01/12/2015 passed by the
Arbitral Tribunal and the award dated 13/04/2016
passed by the Appellate Arbitral Tribunal upholding the
award passed by the Arbitral Tribunal dated
01/12/2015, the plaintiff has filed the present petition
u/s. 34 of Arbitration & Conciliation Act 1996.
11. A perusal of the petition filed by the petitioner
discloses that he has challenged the impugned awards
mainly on the following grounds.
(1) The appellate authorities have blindly passed the
award without fully going through the merits of the case.
(2) The appellate authorities have failed to consider
the claim of the defendant which is hopelessly barred by
limitation.
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12. It is further contended that the Arbitral
Tribunals have erred in relying on the alleged Fax
message dated 07/10/2011 alleged to have been faxed by
the plaintiff to the defendant through the Fax message of
another company and not through the Fax message of
the plaintiff company. It is further alleged that the
arbitrators have not considered the fact that the
quarterly statement of holdings and transactions sent by
the plaintiff head office to the defendant through post,
the defendant has not raised any objections.
13. It is further contended that the arbitrators
have not considered the decisions of the Apex Court of
the Land in several decisions where in it has given
findings to the effect that when there are allegations of
fraud made by the parties to an arbitration agreement,
such disputes falls beyond the purview of arbitration and
such disputes can only be decided by the courts of law. It
is further contended that the arbitrators have failed to
take into consideration the written complaint dated
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18/03/2013 addressed by the defendant to the Police
Inspector, Basanavagudi Police Station, Bengaluru
complaining misdeed of Sri. J. Venkatesh resulting into
loss of Rs. 20,00,000/ to the defendant and inspite of
the specific contention of the defendant in his police
complaint with regard to alleged loss of Rs. 20,00,000/
only suffered by him have erred in awarding a sum of Rs.
1,35,22,961/in favour of the defendant.
14. It is further contended that assuming without
admitting even if plaintiff were to be vicariously liable, on
the contributory negligence, the liability of the plaintiff
will be restricted only to a portion of loss of Rs.
20,00,000/ alleged to have been suffered by the
defendant as stated in his police complaint dated
18/03/2013.
15. It is further contended that the Panel of
Arbitrator has erroneously came to the conclusion that
Sri. J. Venkatesh an employee of the plaintiff was
absconding and paper advertisement should have been
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given by the plaintiff disowning the liability for the act of
Sri. J. Venkatesh without considering the fact that Sri.
J.Venkatesh was not absconding and he was granted
anticipatory bail by the Fast Track Court. It is further
contended that the arbitrators have failed to appreciate
the fact that the trades were done by Sri. J. Venkatesh
with whom the defendant was interacting regularly for
his trading requirements and ignoring the fact of sending
quarterly statements through post by the plaintiff and no
objection for the said quarterly statements was raised by
the defendant and inspite of it, the arbitral tribunal has
erred in awarding a sum of Rs. 1,35,22,961/ in favour of
the defendant.
16. It is further contended that the Panel
arbitrator has failed to note that police complaint dated
05/09/2012 is still pending, 'B' report is being
challenged.
17. It is further contended that Panel of Arbitrator
has failed to appreciate the fact that the plaintiff will be
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liable vicariously only when they have instructed Sri.
J.Venkatesh to carry out the trades in the account of the
defendant, which act becomes an official work. In the
instant case since Sri. J.Venkatesh has done the
transactions on his own on the instructions of the
defendant, plaintiff was not aware of the said
transactions. It is further stated that the arbitrators have
not pass any orders on the application filed by the
plaintiff U/s. 16 of Arbitration & Conciliation Act 1996.
The arbitrators have not considered the well established
principle that if any application is filed with regard to
jurisdiction and maintainability of the plaint an order has
to be passed before dealing with the merits of the case.
18. After filing of the petition, in response to court
notice, the defendant appeared before the court and
resisted the petition.
19. Based on the contents of the petition, the
points that arise for consideration of this court are:
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(1) Whether the petitioner proves that the subject
matter of the dispute was not capable of settlement by
arbitration under law for the time being in force and
hence the impugned award passed by the Panel of
Arbitrators which was upheld by Arbitral Appellate
Tribunal required to be setaside u/s. 34(2)(b)(i) of
Arbitration & Conciliation Act 1996?
(2) Whether the petitioner proves that the impugned
award passed by the arbitral tribunal and upheld by
Appellate Arbitral Tribunal is in conflict with the Public
Policy of India and hence same required to be setaside
u/s. 34(2)(b)(ii) of Arbitration & Conciliation Act 1996?
(3) What order?
20. Heard counsel for petitioner and respondent.
Written arguments also filed for petitioner and
respondent. Perused materials placed on record.
21. My findings on the above points are as under:
Point No. 1 : In the negative.
Point No. 2 : In the negative.
Point No. 3 : As per final order for the following;
REASONS
22. POINTS NO.1 & 2: Since these two points are
interconnected with each other, to avoid repetition of
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facts and findings, these two points are taken up together
for consideration.
23. A perusal of the materials on record discloses
that the complainant Sri. C. Vijai Kumar reddi, who is
the defendant in the present case has lodged a complaint
against M/s. Karvy Stock Broking Limited, a trading
member who is the plaintiff in the present petition before
the National Stock Exchange of India Ltd., alleging
unauthorized trading on the account of the complainant
by the trading member, as a result of which he had lost
shares approximately valued of Rs. 1,13,85,141/ and
sought for restoration of the shares. After receiving the
complaint the National Stock Exchange of India Limited
has referred the complaint to Investor Grievance
Redressal Panel (IGRP) for redressal. IGRP proceedings
held on 17/04/2015 and an order was passed with an
observation that since the trading member is not willing
to settle the issue as claimed by the complainant, the
complainant was advised to seek the remedy through an
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arbitration for further course of action as contemplated
under NSEIL Regulations. Thereafter, the National Stock
Exchange of India (NSEIL) has appointed Panel of
Arbitrators and forwarded the arbitration application of
the complainant for arbitration. The trading member who
is the plaintiff of the present petition has filed his
objections statement to the arbitration application. After
conducting arbitration proceedings, the Arbitral Tribunal
has passed an award on 01/12/2015, directing the
trading member to pay the applicant, aggregate monitory
value of shares along with other claims computed by the
tribunal amounting to Rs. 1,35,22,961/. Aggrieved by
the impugned award dated 01/12/2015 passed by the
Arbitral Tribunal, the trading member who is the plaintiff
of the present petition has filed an appeal before the
Appellate Panel of Arbitrators appointed by the National
Stock Exchange of India limited. The Appellate Arbitral
Tribunal has conducted proceedings and by its order
dated 13/04/2016 has dismissed the appeal by
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upholding the award dated 01/12/2015 passed by the
Arbitral Tribunal. Aggrieved by the award dated
01/12/2015 passed by the Arbitral Tribunal which was
uphold by the Appellate Arbitral Tribunal by its order
dated 13/04/2016, the plaintiff has filed the present
petition.
24. It is pertinent to note that an arbitral award
may be set aside by the court only on the grounds
mentioned U/S.34 of the Arbitration & Conciliation Act
1996. U/S.34(2) of the Act an arbitral award may be set
aside by the court only if
a) the party making the application furnishes proof
that
i) a party was under some incapacity; or
ii) the arbitration agreement is not valid under the
law to which the parties have subjected it or, failing any
indication thereon, under the law for the time being in
force; or
iii) the party making the application was not given
proper notice of the appointment of an arbitrator or of the
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arbitral proceedings or was otherwise unable to present
his case; or
iv) the arbitral award deals with a dispute not
contemplated by or not falling within the terms of the
submission to arbitration, or it contains decisions on
matters beyond the scope of the submission to
arbitration;
Provided that, if the decisions on matters submitted
to arbitration can be separated from those not so
submitted, only that part of the arbitral award which
contains decisions on matters not submitted to
arbitration may be set aside; or
v) the composition of the arbitral tribunal or the
arbitral procedure was not in accordance with the
agreement of the parties, unless such agreement was in
conflict with a provision of this part from which the
parties cannot derogate, or, failing such agreement, was
not in accordance with this part; or
b) the Court finds that
I) the subject matter of the dispute is not capable of
settlement by arbitration under the law for the time being
in force, or
ii) the arbitral award is in conflict with the public
policy of India.
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2A) An arbitral award arising out of arbitrations
other than international commecial arbitrations, may
also be set aside by the court, if the court finds that the
award is vitiated by patent illegality appearing on the face
of the award;
25. A perusal of the present petition discloses that
the petitioner has challenged the impugned awards
mainly U/S. 34(2)(b)(i) of the Act on the ground that the
subject matter of dispute was not capable of settlement
by arbitrator under the law for time being in force and
also U/s. 34(2) (b)(ii) of the Act on the ground that the
arbitral awards are in conflict with Public Policy of India.
26. At this stage, it is relevant to go through the
decision of Apex Court of the land on the aspect of
considering the legality and validity of the arbitral award
U/S.34 of the Arbitration & Conciliation Act 1996. In the
decision reported between Puri Constructions Private
Limited v. Union of India reported in (1989) 1 Supreme
Court Cases 411, wherein, the Apex Court of the Land
has held that when a court is called upon to decide the
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objection raised by a party against an arbitration award,
the jurisdiction of the court is limited as expressly
indicated in the arbitration act and it has no jurisdiction
to sit in appeal and examine the correctness of the award
on merits with reference to the materials produced before
the arbitrator. The court cannot sit in appeal over the
view of the arbitrator by reexamining and reassessing
materials.
27. In the present petition, the first main ground
on which the impugned Arbitral awards are challenged is
that the subject matter of dispute was not capable of
settlement by arbitration under the law for the time being
in force.
28. With regard to this ground, the contention of
the plaintiff is that the Arbitral Tribunal and the
Appellate Arbitral Tribunal have not considered the
findings of the Apex Court of the Land regarding conduct
of trial by courts of law in cases involving criminal
charges. The Apex Court of the Land has held that when
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there are allegations of fraud made by the parties to an
arbitration agreement, then such dispute fall beyond the
purview of the arbitration, as such, those disputes can
only be decided by court on the basis of detailed evidence
by both the parties and those disputes cannot be
adjudicated by means of arbitration.
29. In support of his arguments, the petitioner
has relied on the decision of the Apex Court of Land
reported in Rashid Raza v. Sadaf Akhtar reported in
(2019)8 SCC 710, wherein, the Apex Court of the Land
has held that where allegations of the fraud leveled
against the party seeking appointment are "simple
allegations" not falling within the relevance of public
domain arbitrator can be appointed. The Apex Court has
laid down two tests for distinguishing a "simple
allegation" from a "serious allegation" of fraud to consider
the arbitrability of the dispute namely 1) does the plea of
fraud permeate the entire contract and above all, the
agreement of arbitration, rendering it void, or (2) whether
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the allegations of fraud touch upon the internal affairs of
the parties inter se having no implication in the public
domain.
30. A perusal of the materials on record discloses
that the present petitioner who was the respondent
before the Arbitral Tribunal has taken a similar defence
contending that since the applicant has made serious
allegations of fraud and misrepresentation against it and
its employee Sri. J. Venkatesh, such dispute can only be
settled in the court by detailed evidence of the parties
and such dispute cannot be adjudicated by an Arbitral
Tribunal. It was further contended that in view of the
settled position of law laid down by the Apex Court of the
Land in view of the criminal investigation pending, in
dispute involving serious allegations of fraud has to be
tried in court and Arbitral Tribunal has no jurisdiction to
entertain the same.
31. A perusal of the impugned award discloses
that the arbitral tribunal has considered the present
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defence of the plaintiff who was the respondent before it,
in light of the guidelines issued by the SEBI with regard
to Arbitration Mechanism to be followed by Stock
Exchanges which provides that all claims, difference or
disputes between the trading members, constituents, sub
brokers, clearing members and issuers arising out of or
in relation to transactions made subject to the byelaws,
rules and regulations of the exchange shall be submitted
to arbitration in accordance with the provisions of the
byelaws and regulations of the exchange and the
circulars issued there under. The Arbitral Tribunal has
held that the arbitration mechanism is the legitimate,
Independent Grievance Redressal Forum with regard to
the complaint filed by the complainant against the
trading member with regard to unauthorized trading in
his account. The Arbitral Tribunal has also held that the
ratio of the ruling the Apex Court cited by the counsel for
the respondent before it, is not applicable to the scheme
of arbitration prescribed by SEBI which is inconformity
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with the scope and rules and byelaws clearly prescribed
by SEBI. The Arbitral Tribunal has also came to be the
conclusion that since the trading member of the stock
exchange has explicitly agreed to abide by the rules and
regulations stated by SEBI and since the trading member
has not challenged the authority of SEBI or the
regulations and the rules prescribed by the SEBI, the
Arbitral Tribunal has jurisdiction to deal with the petition
before it. This approach of the Arbitral Tribunal which is
constituted in accordance with the directions of SEBI the
statutory body created by an act of Parliament to came to
the conclusion that it had the jurisdiction to deal with
the arbitral dispute pertaining to the complaint of the
constituent with regard to the unauthorized trading on
his account by the trading member is neither arbitrary
nor capricious.
32. Further, a perusal of the award dated
13/04/2016 passed by the Appellate Arbitral Tribunal
discloses that even before the the Appellate Arbitral
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Tribunal, the present plaintiff who was the appellant in
the said appeal has taken a contention that the claim of
the respondent lacks jurisdiction, as respondent has
made serious allegations of fraud, misrepresentation,
fabrication/manipulation of documents against the
appellant and their exemployee. It is further contended
that as per the law laid down by Hon'ble Supreme Court,
such disputes involving allegations of fraud can be
settled only in court and cannot be adjudicated by an
Arbitral Tribunal.
33. However, a perusal of the finding given by the
Appellate Tribunal on the point of jurisdiction of Arbitral
Tribunal to adjudicate the matter discloses that
considering the fact that in the police complaint dated
05/09/2012 filed by the appellant before the police, the
appellant has admitted that its employee Sri. J.
Venkatesh committed frauds on the respondent providing
fraudulent statements carrying out huge trades in the F
& O segment without authorization of the respondent
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and also admitting the commission of act of breach of
trust and cheating committed by its employee to both the
appellant and respondent, the Appellate Arbitral Tribunal
considered the fact that the appellant has failed to point
out any collusion between the respondent and its
employee Sri. J. Venkatesh and further considered the
fact the appellant has not made any allegations of fraud
or forgery against the respondent, considering the fact
that the appellant has admitted commission of fraud by
its employee and has not accused the other party of any
fraud, the arbitral appellate tribunal had came to the
conclusion that the dispute falls within the jurisdiction of
Arbitral Tribunal. This finding of the Appellate Arbitral
Tribunal based on its appreciation of the materials placed
before it cannot be considered as perverse and
capricious.
34. A perusal of the materials on record discloses
that the defendant of the present petition approached the
National Stock Exchange of India Limited with a
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grievance that the plaintiff trading member had done
unauthorized fraudulent trading on the account of the
defendant resulting into a loss of Rs. 1,13,85,141/
based on the complaint on the defendant, the National
Stock Exchange of India Limited has referred for IGRP
Redressal. Thereafter, the National Stock Exchange of
India Limited has appointed Panel of Arbitrators to
adjudicate the dispute. The appointment of panel of
arbitrators to adjudicate the dispute is not on the basis of
any specific agreement between the parties, but as a
result of the arbitration mechanism provided by SEBI
guidelines to solve the dispute between trading member
and a constituent arising out of transactions made with
respect to the trading. A perusal of the materials on
record discloses that the plaintiff trading member in its
complaint lodged against its exemployee before the
police on 05/09/2012 has admitted the fraud committed
by its employee Sri. J. Venkatesh providing fraudulent
statements and carrying out huge trade without
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authorization of the respondent. In view of the admission
of commission of fraud by its ex employee by the plaintiff
trading member a strict and meticulous inquiry into the
allegations of fraud committed by the employee of the
plaintiff trading member by the court is not required, as
rightly held by the Arbitral Tribunal and also the
Appellate Arbitral Tribunal. When the plaintiff trading
member has admitted the fraud and unauthorized
transaction committed by its employee, then it cannot
wriggle out of the arbitration proceedings by stating that
the constituent has made allegations of fraud, hence the
dispute required to be tried by the court. Hence, the
arguments of the learned counsel for the plaintiff that
since the allegations of fraud are made by one of the
parties to the arbitration, the dispute falls beyond the
purview of arbitration and only required to be
adjudicated by the court cannot be accepted.
35. Considering the fact that the allegations of
fraud made by the respondent against the employee of
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the plaintiff trading member in the nature of
unauthorized and fraudulent transactions in the account
of the respondent are categorically admitted by the
plaintiff in its written complaint filed before the police
against its employee and further considering the fact that
the arbitration proceedings were initiated not as a result
of any agreement between the parties, but as a result of
the guidelines issued by SEBI, the ratio of the decision
reported in Rashid Raza v. Sadaf Akhtar reported in
(2019)8 SCC 710 is not helpful for the plaintiff to claim
that the dispute between the plaintiff and the defendant
was not arbitrable dispute and the Arbitral Tribunal had
erred in entering into arbitration and hence the
impugned award required to be setaside u/s. 34(2)(b)(i)
of the Arbitration & Conciliation Act 1996.
36. The second major ground on which the
impugned award challenged is that the claim of the
defendant is barred by limitation. On this ground, the
plaintiff in memorandum of petition has stated that the
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transaction between the plaintiff and defendant belongs
to the year 200809 and the defendant has given
complaint to the plaintiff only on 25/07/2012, which is
beyond the period of limitation. The defendant has
approached the Investor Grievance Forum of the stock
exchange only in the month of February 2015 and hence
claim of the defendant is hopelessly barred by limitation.
37. A perusal of the impugned award dated
01/12/2015 passed by the Arbitral Tribunal discloses
that before the Arbitral Tribunal the plaintiff has taken
similar defence as stated in the present petition.
38. On the other hand, the defendant who is the
claimant before the Arbitral Tribunal has taken a
contention that the cause of action for the arbitration
arose to him only on 11/04/2015, when the trading
member filed their letter denying the claims made by the
claimant and the claim petition was filed within the
period of limitation thereafter.
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39. A perusal of the finding given by the Arbitral
Tribunal on the point of limitation of the claim of
claimant discloses that the Arbitral Tribunal considered
the fact that the first formal complaint filed by the
applicant with the trading member regarding its missing
share was on July 2012 and further considering the
subsequent police complainant lodged by trading
member against its employee on 05/09/2012
acknowledging the fact that the applicant had
approached the trading member with its complaint in the
month of July 2012, the Arbitral Tribunal has came to
the conclusion that cause of action for the claimant to file
the claim petition arose on July 2012 and since the
arbitration application has been filed on 23/07/2015, it
was well within the period of three years from the date of
cause of action after excluding the period between the
date of filing of the first complaint with SEBI on
13/02/2015 and the date of IGRP order dated
17/04/2015. The Arbitral Tribunal has held that the
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limitation period of arbitration reference is governed by
the provisions of Limitation Act 1963 and the Arbitration
application is filed well within the period of limitation as
per sec. 14 of the Limitation Act, after excluding the
period of petition with IGRP. This finding of the Arbitral
Tribunal based on its appreciation of the materials placed
on record to came to the conclusion that the petition is
not barred by limitation cannot be considered as perverse
and capricious.
40. A perusal of the award dated 13/04/2016
passed by the Appellate Arbitral Tribunal discloses that
even before the Appellate Arbitral Tribunal, the present
plaintiff who was the appellant has taken a similar
contention to the effect that claim of the claimant is
barred by Law of Limitation, on the ground that cause of
action for filing arbitration claim arose to the claimant on
05/11/2011, when he noticed discrepancies in the
statement of holding sent by employee of the appellant
and hence the claimant ought to have approached the
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Arbitration Forum before 04/11/2014, but the claimant
filed Arbitration claim with NSE only on 11/02/2015,
which is barred by limitation.
41. On the other hand, the present defendant who
was the respondent before the Appellate Arbitral Tribunal
has taken a specific defence that for morethan three
years the trading member did not sent proper statement
of account and statement of holding despite giving
assurance that the missing shares would be restored.
Only on 15/04/2015 he received account statement from
the trading member which contains shocking
discrepancies in his holdings besides the trading member
flatly denying all the liabilities for the missing shares.
Only on 15/04/2015 he came to know extent of fraud
committed by the employee of the trading member which
has given cause of action to file the claim petition and
thereafter the claim petition was filed within the period of
limitation.
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42. A perusal of the impugned award passed by
the Appellate Arbitral Tribunal discloses that by
considering the materials produced on record, the
Appellate Arbitral Tribunal has came to the conclusion
that when the claimant sent a letter dated 25/07/2012
to the trading member indicating frauds committed by
the employee of the trading member and the losses
suffered by the claimant, the dispute cannot be said to
have been arisen as the trading member did not send any
communication denying its liability. The dispute said to
have arisen only when the trading member sent a letter
dated 11/04/2015 denying liability for missing shares
and hence the cause of action aroses only on
15/04/2015 when the letter of the trading member was
received by the claimant. Hence, the claim of the
claimant is not barred by limitation. The approach of the
Appellate Arbitral Tribunal to come to the conclusion that
claim is not barred by limitation based on its
appreciation of the materials produced cannot be
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considered as perverse and capricious approach. Hence,
the arguments of the learned counsel for the plaintiff that
the claim of the claimant/defendant was barred by
limitation and the Arbitral Tribunal and the Appellate
Arbitral Tribunal have not considered the aspect of
limitation in proper perspective cannot be accepted.
43. Another ground on which the impugned award
was challenged by the plaintiff is that the Fax dated
07/10/2011 showing the holdings of the share by the
defendant which is subject matter of the dispute was not
sent by the plaintiff, but the same was sent by the Fax of
another company by name Sri. J.Venkatesh, the
employee of the plaintiff. Therefore, the genuineness of
such statement is questionable. The learned Panel of
Arbitrator should not have relied upon such document
for passing award against the plaintiff.
44. However, a perusal of the impugned award
discloses that before the Arbitral Tribunal, the plaintiff
has not disputed the correctness of the alleged Fax dated
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07/10/2011 sent by its employee to the defendant
showing the holdings of share. Hence, the contention of
the plaintiff that the Arbitral Tribunal ought not to have
relied upon the fax in question cannot be accepted.
45. Another ground on which the impugned award
was challenged by the plaintiff is that quarterly
statements of holdings and transactions sent by the
plaintiff head office through post to the defendant was
received by the defendant without any objections and the
Arbitral Tribunal has not considered the said aspect in
determining the alleged unauthorized transactions
pertaining to the account of the defendant.
46. However, a perusal of the impugned award
passed by the Appellate Arbitral Tribunal discloses that it
had considered the fact that during the hearing the
respondent has given an affidavit denying the receipt of
statements of account claimed to have been sent by the
plaintiff and the plaintiff could not produce copies of the
statement of account actually sent to the defendant. The
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impugned award passed by the Appellate Arbitral
Tribunal discloses that the defendant has not admitted
the receipt of quarterly statements of holding and
transaction alleged to have been sent by the plaintiff, but
has disputed the same. On the other hand, the plaintiff
has failed to produce copy of the statements of account
alleged to have been sent to the defendant. Hence the
contention of the plaintiff that the Arbitral Tribunal has
erred in not considering the contents of acceptance of
quarterly statements of account of holding and
transaction by the defendant without any objection
cannot be accepted.
47. The next ground on which the impugned
award was challenged is that the arbitrators have failed
to observe that when the defendant has given complaint
dated 18/03/2013 to the Basavanagudi PS with regard
to alleged misdeed of Sri. J. Venkatesh, the employee of
the plaintiff, he has alleged that he had suffered a loss of
Rs. 20,00,000/. The defendant even in the complaint
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given to the plaintiff has alleged that he has suffered loss
of Rs. 20,00,000/, but when he has approached the
National Stock Exchange he has valued the loss to an
extent of Rs. 1.34 crores. It is further alleged that the
Arbitral Tribunal has failed to consider that the
claimant/defendant had made totally inconsistent claim
of different values before different forums and tried to
somehow wriggle out of his trading loss.
48. However, a perusal of the materials on record
discloses that according to the defendant, when he has
lodged Police complaint and complaint before the plaintiff
trading member, he was not aware of the actual loss
suffered by him. Only on 15/04/2015 he received the
accounts of statement from the plaintiff which contains
details of holdings, he came to know about the actual
loss suffered by him. In view of the specific pleading of
the defendant that at the time of filing of the police
complaint and complaint before the plaintiff trading
member, he was not aware of the actual extent of loss
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and only subsequently he came to know about the actual
extent of loss, the contention of the plaintiff that the
claimant/defendant has made inconsistent claim of
different values before different forums and Arbitral
Tribunal has not properly considered the same cannot
be accepted.
49. Another ground on which the impugned award
is challenged is that the plaintiff is not vicariously liable
to the acts of its employee. It if further contended that
the Panel of Arbitrators have failed to appreciate the fact
that the plaintiff will be vicariously liable only when it
has instructed its employee Sri. J. Venkatesh to carryout
the trade in the account of defendant, which act becomes
an official work. Since Sri. J. Venkatesh has conducted
trading on his own or on the instructions of the
defendant without the knowledge of the plaintiff, the
plaintiff is not vicariously liable to the act of its employee.
50. However, the Arbitral Tribunal and the
Appellate Arbitral Tribunal relying on the admission of
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the plaintiff in the police complaint dated 05/12/2012,
wherein, they have admitted that their employee by name
Sri. J. Venkatesh has committed fraud on the respondent
by providing fraudulent statements carrying out huge
trade in F & O segment without authorization of the
respondent causing criminal breach of trust, cheating
and loss to the respondent have came to the conclusion
that the plaintiff is vicariously liable to the acts of its
employee. This approach of the Arbitral Tribunal and the
Appellate Arbitral Tribunal based on which it has came to
the conclusion that the plaintiff trading member is
vicariously liable to the act of its employee cannot be
considered as perverse and capricious.
51. On the aspect of vicarious liability of employer
for the loss caused to the customer, the Apex court of
Land in a decision between State Bank of India v. Smt.
Shyamadevi reported in 1978 (3) SCC 399 has held that
the master is liable for his servant's fraud perpetrated in
the course of his master's business whether the fraud
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was for the master's benefit or not if it was committed by
the servant in the course of his employment. Apex Court
has further held that there is no difference in the liability
of a master for wrongs whether for fraud or any other
wrong committed by a servant in the course of his
employment.
52. A perusal of the materials on record discloses
that in the police complaint dated 05/09/2012 filed by
the plaintiff company at Basavangudi Police station
against its employee the plaintiff has admitted that its
employee Sri. J. Venkatesh has traded in defendant's
account for the disputed period and the trading was done
by Sri. J. Venkatesh in his official capacity as a
Relationship Manager and not in his personal capacity.
Since the plaintiff has admitted that its employee Sri. J.
Venkatesh, the Relationship Manager in his official
capacity has traded in defendant's account
unauthorizedly, the contention of the plaintiff that for the
alleged fraudulent act of its employee it cannot be made
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vicariously liable cannot be accepted. Since the
unauthorized fraudulent trading was done by the
employee of the plaintiff in the course of his employment,
the plaintiff is vicariously liable for the fraudulent acts of
its employee.
53. A perusal of the impugned award passed by the
Arbitral Tribunal which was uphold by the Appellate
Arbitral Tribunal discloses that both the tribunals have
considered the correct settled legal position to come to
the conclusion that the plaintiff is vicariously liable for
the fraudulent unauthorized transaction conducted by its
employee.
54. By going through the contents of the petition
filed by the plaintiff U/S.34 of the Act challenging the
impugned awards, this court is of the opinion that none
of the grounds mentioned in Section 34 of Arbitration &
Conciliation Act 1996 have been made out by the
petitioner to set aside the impugned awards. All the
grounds agitated by the petitioner are the grounds
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warranting reappreciation of materials submitted before
and relied upon by the Panel of Arbitrator and Appellate
Arbitral Tribunal. This court is not empower to re
examine the evidence or to interfere in the findings of the
fact arrived by the Arbitral Tribunal or Appellate Arbitral
Tribunal.
55. By perusing the materials produced on record,
this court is of the opinion that the plaintiff has not
shown any grounds U/S.34 of the Arbitration &
Conciliation Act 1996 to interfere with the impugned
award passed by the arbitral tribunal. With these
observations, I answer points No.1 & 2 in the negative.
56. POINT No.3 : In view of my findings on points
No.1 & 2 and for the reasons assigned thereon, I proceed
to pass the following:
ORDER
The petition filed by the plaintiff u/s. 34 of the Arbitration & Conciliation Act 1996, challenging the award dated 01/12/2015 passed by the Arbitral Tribunal 48 CT 1390_Com.A.S.932016_Judgment .doc in Arbitration matter No. CM/B0009/2015 and the award dated 13/04/2016, passed by the Appellate Arbitral Tribunal in Appellate Arbitration matter No. CM/B0009/2015 dated 13/04/2016 is dismissed.
Parties are directed to bear their own costs. [Dictated to the Judgment Writer; transcript thereof corrected, initialed and then pronounced by me, in the Open Court on this the 29th day of February, 2020] [S.A.Hidayathulla Shariff] LXXXIII Additional City Civil Judge.
BENGALURU.