Gujarat High Court
Marwadi Shares And Finance Limited vs State Of Gujarat on 13 July, 2018
Author: A.Y. Kogje
Bench: A.Y. Kogje
R/CR.MA/2861/2008 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/CRIMINAL MISC.APPLICATION NO. 2861 of 2008
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE A.Y. KOGJE Sd/-
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1 Whether Reporters of Local Papers may be allowed to No
see the judgment ?
2 To be referred to the Reporter or not ? No
3 Whether their Lordships wish to see the fair copy of the No
judgment ?
4 Whether this case involves a substantial question of law No
as to the interpretation of the Constitution of India or any
order made thereunder ?
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MARWADI SHARES AND FINANCE LIMITED
Versus
STATE OF GUJARAT
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Appearance:
MR NIKUNT K RAVAL(5558) for the PETITIONER(s) No. 1,2,3,4,5
MS DHARMISHTA RAVAL(707) for the PETITIONER(s) No. 1,2,3,4,5
MR ASHOK H TRIVEDI(3665) for the RESPONDENT(s) No. 2
MR K.P.RAVAL, APP(2) for the RESPONDENT(s) No. 1
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CORAM: HONOURABLE MR.JUSTICE A.Y. KOGJE
Date : 13/07/2018
ORAL JUDGMENT
1. This petition under Section 482 of Code of Criminal Procedure ('the Cr.P.C.' for short) is filed for quashing of Criminal Case No.16 of 2008 pending in the Court of Chief Judicial Magistrate, Page 1 of 16 R/CR.MA/2861/2008 JUDGMENT Jamnagar. The criminal case is filed for an offence under Sections 406, 408, 420, 468, 471, 114, 120(B) of the Indian Penal Code and Section 29 of Securities and Exchanged Board of India Act 1992(SEBI). The petition is filed by five applicants, which include a Company incorporated under the Company's Act, and the Directors of such company and for Directors of such company.
2. The brief facts are as under:
2.1. complainant no.2 has filed Private Complaint with the Chief Judicial Magistrate Court at Jamnagar, alleging that, the complainant was holding a demat account with a trade account code number with the Applicant no.1 Company. From the said account the complainant no.2 was undertaking trading activity of "Futures & Options" F&O. It is alleged that on 02.01.2008 under the F&O the complainant transacted one lot of RPL shares and thereafter on 07.01.2008 transacted one lot of Reliance Communication. It is alleged that the applicants had informed complainant that as per SEBI Rules for confirming the transaction margin money is required to maintain as per the rules. Accordingly on 10.01.2006 against the Page 2 of 16 R/CR.MA/2861/2008 JUDGMENT transaction (purchase of RPL and RCOM shares) towards the margin money, the complainant instructed to transfer to the pool account, the money equivalent to the several shares which were lying in the demat account of the complainant, upon such instructions which was given at 11:30 in the morning, the complainant received instructions from the applicants office at around 03:00 p.m. that towards the margin money for the share transactions of Reliance etc. an amount of Rs.3,00,000/ will have to be deposited with the pool account and as there was no further shares in the demat account of the complainant, she instructed the newly acquired shares to be sold and accordingly after the sale of such shares she had incurred loss of Rs.9,000/.
2.2. It is further alleged that on 10.01.2008, when complainant visited the office of the applicants, they were informed by the staff that in the F&O account of 09.01.2008 several transactions as per the instructions of the complainant are still pending to be confirmed. The value of this transactions was to the tune of Rs.19,00,000/ and for that purpose 45% margin money which comes to Rs.8,00,000/ or Page 3 of 16 R/CR.MA/2861/2008 JUDGMENT equivalent shares were required to be deposited with the company. According to the complainant she had not issued any such instructions for purchase of any shares of ESSAR OIL on 09.01.2008. Similarly, on 11.01.2008 transactions of 100 shares of GTL Infra Limited in the account of the complainant for which the complainant was called upon to pay a deposit of Rs.86,000/. Accordingly the complainant had issued cheques of Rs.9,000, 50,000 and 45,0000, on various dates in the month of January, 2008. 2.3. On 23.01.2008, when the complainant inquired about her status of the demat account, she came to know that the shares of GTL Infra Limited were not at all deposited in her account and therefore, the company had misappropriated the shares worth Rs.86,000/. Similarly on 24.01.2008, even her shares of Sujata Metals were sold and the bill in that connection were received by her though she had not given any instructions for sale of such shares. At that time the complainant realized that instead of purchase of GTL Infra Limited shares worth Rs.95,000/ shares of ESSAR Company were purchased.
The complainant therefore, represented in detail to Page 4 of 16 R/CR.MA/2861/2008 JUDGMENT the office and called upon the company to do the needful by retransferring the shares in her account so that no loss is caused to her. It is alleged that instant answering to the communication of the complainant the company gave a vague reply. It is alleged that infact the company called upon the complainant to make payment of Rs.4,40,000/ and amount against the claim of the complainant that she is entitled to receive an amount of Rs.1,34,550. It is with this allegation, the private complaint came to be filed on 22.02.2008 and on the same day Chief Judicial Magistrate, Jamnagar issued directions under Section 156(3) of Cr.P.C.
3. The present application for quashing is moved on several grounds raised in the petition and interalia it was argued on behalf of the applicant that the criminal case deserves to be quashed on the ground that the dispute raised in the F.I.R. is essentially a civil dispute. It is filed as an afterthought to overcome the complainant's own liability and that though the applicant has conducted the transaction in due course of business as per the agreement entered Page 5 of 16 R/CR.MA/2861/2008 JUDGMENT into between the parties, still the criminal case is filed with an oblique motive, which is an abuse of process of law.
4. Heard Ms. Dharmishta Raval, learned advocate for the petitioner, learned APP for the State. Non represents the respondent no.2. The Court has already recorded on previous occasion, learned advocate for the respondent no.2 was given last opportunity to represent its case. The previous orders also recorded the persistence absence of learned advocate, hence now the matter is taken up in his absence.
5. Learned advocate for the applicant submits, the applicant is a 5th largest Stock Broking company with branches spread all over India and is having more than one lakh demat accounts and sixty five thousand trading clients. It is submitted that the applicant company is functioning under the strict rules and regulations framed under the provisions of SEBI Act and is strictly monitored by Securities and Exchange Board of India constituted under SEBI Act.
6. It is submitted that the respondent no.2 had entered into client broker agreement with the Page 6 of 16 R/CR.MA/2861/2008 JUDGMENT applicant no.1 company. The respondent had signed his Know Your Client form as well as risk disclosure document and was allotted a client code. The documents entered into mutually by both the parties contains the clauses strictly as per the requirement of SEBI and it contains very important clauses starting from provisions relating to acquainting the client with the system of operation and several cautions and risk involved in the transactions. It is after the respondent no.2 having acquainted herself fully with the functioning of the system and the risk involved as entered into the agreement and have mutually signed the documents to support their client agreement. As per the clause in the agreement the applicant company through its personnel used to be in touch with the complainant by telephone and by email as agreed upon the instructions were received with regards to trade over the mobile phone. Based on such instructions, the trade is carried out and copy of contract note is forwarded electronically to its clients like the respondent no.2. From the record of the company, it was found that the respondent no.2 has put in trades in Futures & Options segments of Page 7 of 16 R/CR.MA/2861/2008 JUDGMENT National Stock Exchange on various dates starting from 18.12.2007 to 10.01.2008. The complainant company was therefore, authorized by the respondent no.2 herself to act as per her instructions to trade in the instant case, also in Futures & Options segment the respondent no. 2 had placed orders for purchase of stocks of ESSAR Oil, RPL, RCOM and ISPAT Securities. The trade in RPL and RCOM was squared off by the respondent no.2. However, shares of ESSAR Oil were put in Future & Options segment. The transaction was accordingly executed at National Stock Exchange on 09.01.2008 and the contract note is also generated in its regards. This trading is done under a transparent system, which is visible to all the client including the respondent no.2 and the contract note was automatically forwarded to the respondent no.2. This was done in due course and long before the complaint came to be filed.
7. It is also submitted that the SEBI regulation provide for resolving any dispute that arises with the clients and in the instant case the respondent no.2 has not resorted to any procedure to resolve his grievance through the provisions of SEBI Act. It is Page 8 of 16 R/CR.MA/2861/2008 JUDGMENT submitted that in the instant case inconformity with the system of trading wherein, the margin money to be collected towards the transactions of the Stock Exchange is determined by the system itself and not by the companies like the applicant. The companies have to collect the margin money from its client in accordance with the rules and regulations of the National Stock Exchange. Accordingly in the instant case for the transaction of ESSAR Oil the respondent no.2 was required to make payment of margin money for which the respondent authorized the applicant company to transfer shares lying in the demat account into the common pool to comply with the margin requirement. The respondent no.2 had issued delivery instruction slip authorizing the complainant to transfer the shares from demat account. Such slip is dated 10.01.2008 and is produced on record. It is further submitted that, the amount required to be paid towards the traded stocks depends upon the price of the same in the market in the instant case on account of sudden fall in the market the transaction of the respondent no.2 suffered a loss and therefore, she was required to pay the difference between the Page 9 of 16 R/CR.MA/2861/2008 JUDGMENT closing price of the day and contract price in connection with the ESSAR Oil shares. There is an expiry date before which the transactions has to be ordered, which is governed by clause 5 of the agreement itself. It is in this regards the notice was issued for respondent no.2 to make the payment to recover the dues.
8. It is submitted that the entire transaction is maintained on the ledger by company as per the Contract Regulations Act and the ledger thus maintained of the respondent no.2, clearly indicates the transaction which she had authorized.
9. It is submitted that the applicant company to honor the transaction had to make the payment to the Stock Exchange on behalf of the respondent no.2 complainant. Such transactions are also through banks and therefore completely transparent transactions. The respondent no.2 herself has paid part of the amount by cheque and had issued instructions to sale equity shares of Sujata Metals and to appropriate the proceeds towards her dues. This incident took place on 11.01.2008. It is submitted it is only after this Page 10 of 16 R/CR.MA/2861/2008 JUDGMENT that is an afterthought, the applicants thought it fit to file the complaint in February 2008. It is submitted that in similar situation, this Court has passed an order in case of Religare Securities Ltd. and others V/s State of Gujarat and others in group of applications being Cr.M.A. 8129, 7936, 3145 of 2008 reported in 2014 SCC Online Guj 8607.
10. It is lastly submitted that as per the provisions contained in the contract between the parties which provides for arbitration, the parties had invoked the arbitration clause and arbitration was conducted and ultimately an award came to be passed on 29.07.2008, wherein, the arbitrator passed an award in favour of the applicant company ordering that the respondent no.2 was having outstanding amount against her account with the applicant company. This award has become final and binding to the parties, which is not even challenged by the respondent no.2, hence also the present criminal proceedings against the applicants is required to be quashed.
11. Heard learned advocate for the applicants and Page 11 of 16 R/CR.MA/2861/2008 JUDGMENT perused the documents on record.
12. Clause 5 of the agreement entered into between the applicant company and the respondent no.2, reads as under:
(5) The client shall indemnify and keep indemnified the Member (MSFL) harmless from and against all claims, demands, actions, proceedings, loss, damages, liabilities, changes and/ or expenses that are occasioned or may be occasioned to the Member (MSFL) directly, or indirectly, owing to bad delivery or shares/ securities and/ or as a result of fake/ forged/ stolen shares/ securities/ transfer documents that are introduced or that may be introduced by or through the client during the course of its dealings/ operations on the Exchange.
(8) The client hereby unconditionally, absolutely, and irrevocably undertakes to pay immediately any amount due and payable under the agreement on being called upon to do so, merely on a demand in writing or otherwise from the Stock Broker stating that the amount has become due and any such demand made on the client shall be conclusive as regards the amount due and payable by the client.
(9) The client further agrees to pay the charge, taxes, levies etc. imposed under the service tax, securities transaction tax and other taxes as may be levied by the Page 12 of 16 R/CR.MA/2861/2008 JUDGMENT Central/ state government as the case may be through Appropriate legislations from time to time, the quantum of such charges, taxes, levies, etc. shall be reflected in the contract notes/bills raised by the Member (MSFL) on the client.
Clause A & B of the Risk Disclosure Documents is as under:
(A) Futures trading involves daily settlement of all positions. Every day the open positions are marked to market based on the closing level of the index. If the index has moved against you, you will be required to deposit the amount of loss (notional) resulting from such movement. This margin will have to be paid within a stipulated time frame, generally before commencement of trading next day.
(B) If you fail to deposit the additional margin by the deadline or if an outstanding debt occurs in you account, the broker/member may liquidate a part of or the whole position or substitute securities.
In this case, you will be liable for any losses incurred due to such closeouts.
Clause 8 of Voluntary Document is as under:
8. I/We hereby agree and undertake that in case of any failure on my/our part to meet pay in/margin or any other liability, merely on your demand, you shall have the right to realize the same from my/our credits, securities, collaterals, balances, margins, deposits or all or any such other Page 13 of 16 R/CR.MA/2861/2008 JUDGMENT balances lying with you.
All these documents are found to be signed by the respondent no.2 in presence of two witnesses.
13. The Court has also perused the contract notes which evidence the transaction of shares. This contract notes give the specified date and time at which the transactions have taken place and at the price at which the transactions have taken place.
14. The Court has also perused the arbitration award dated 29.07.2008 in connection with the arbitration proceedings in arbitration matter no.F&O/M034/2008 between the applicant company and respondent no.2.The arbitration award is ordered to be taken on record. The arbitrator has narrated in great detail the nature of transaction which has taken place and the claim of the applicant were examined and ultimately concluded that is is the respondent no.2 which is required to pay certain amount.
15. Having examined the relevant documents on record, the Court comes to the conclusion that the transfer of shares which took place on National Stock Exchange by the applicant company on behalf of the respondent no.2 is in response to the due course of Page 14 of 16 R/CR.MA/2861/2008 JUDGMENT its business and inconformity with the agreement between the parties. The Criminal case therefore, registered subsequently appears to be an afterthought with a view to overcome the liability of the respondent no.2, which has arisen out of the transactions. It is also found that though under the agreement clause, the remedy to resolve the dispute is made, including filing a complaint with the SEBI, the respondent no.2 has not resorted to such remedy and has thought it fit to criminal proceedings, which in the opinion of the Court, is clear abuse of process of law.
16. The perusal of the criminal complaint suggests that, on which on the very same day, learned Magistrate has passed order under Section 156(3) of Cr.P.C. directing registration of the F.I.R. Contents of the complaint do not reveal any specific role of any of the applicants no.2 to 5 so as to attract provisions of Sections 406, 408 and 420 of the I.P.C. There is no allegations to suggest that any of the applicants had misrepresented before the complainant so as to influence her decision to enter into the transaction. In fact, there is no allegation that the Page 15 of 16 R/CR.MA/2861/2008 JUDGMENT complainant had ever met the applicants in connection with any of the share transactions. The principles of vicarious liability cannot be invoked in the facts of the present case.
17. The judgment of this Court in case of Religare Securities Ltd.(Supra), which contains facts identical to the present case wherein, this Court has considered the clause of the agreement between the parties, the award of the Arbitrator and considering the fact that the transactions of such nature is a dispute of Civil nature. Therefore, this Court has proceeded to quash the F.I.R. The facts being identical the Court also relies upon the reasoning given in the case of Religare Securities Ltd. (Supra).
18. In view of the above, the present application is allowed. Criminal Case No.16 of 2008 is ordered to be quashed and set aside, consequently all proceedings initiated pursuant to Criminal Case No.16 of 2008 are also ordered to be quashed and set aside. Rule is made absolute.
(A.Y. KOGJE, J) URIL Page 16 of 16