Jharkhand High Court
Motilal Oswal Financial Services ... vs Chandrabhushan Kumar on 20 December, 2024
Author: S. N. Pathak
Bench: S.N. Pathak, Anubha Rawat Choudhary
IN THE HIGH COURT OF JHARKHAND AT RANCHI
Commercial Appeal No. 9 of 2024
Motilal Oswal Financial Services Limited (formerly known as Motilal
Oswal Securities Limited), a company incorporated under the
Companies Act, 1956, having its registered office address at Motilal
Oswal Tower, Rahimullah Sayani Road, Opposite Parcel ST Depot,
Prabhadevi, P.O. Prabhadevi, P.S. Prabhadevi, District Mumbai - 400
025 (Maharashtra), through its Authorized Signatory namely Vikash
Ranjan Sahay, aged about 46 years, son of Birendra Prasad, resident
of C-207, Surabhi Apartment, Near Mahendra Prasad Inter College,
Lalpur, G.P.O., Ranchi, P.S. Lalpur, District Ranchi.
... ... Award Holder/Respondent/Appellant
Versus
Chandrabhushan Kumar, aged about 45 years, son of Shri Sripal Jha,
resident of Veena Niwas, Bhagwan Tea Garden, Near Transformer,
Kali Nagar, Namkum, P.O. Namkum, P.S. Namkum, District Ranchi
(Jharkhand).
... ... Judgment debtor/Applicant/Respondent
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CORAM : HON'BLE DR. JUSTICE S.N. PATHAK
HON'BLE MRS. JUSTICE ANUBHA RAWAT CHOUDHARY
---
For the Appellant : Mr. Indrajit Sinha, Advocate
: Mr. Ajay Kumar Sah, Advocate
For the Respondent : Mr. Ajit Kumar, Senior Advocate
: Mr. Shrestha Gautam, Advocate
---
C.A.V. on 25th September 2024 Pronounced on 20th December 2024
Per, Anubha Rawat Choudhary, J.
1. This appeal has been filed challenging the judgment dated 28.06.2024 passed in Commercial Arbitration Case No. 22 of 2023 by the learned Additional Judicial Commissioner-III-cum-Presiding Officer, Commercial Court, Ranchi whereby the appeal has been allowed and the appellate arbitral award dated 15.09.2023 passed by the learned Appellate Arbitral Tribunal has been set-aside.
2. The prayer before the learned Additional Judicial Commissioner-III-cum-Presiding Officer, Commercial Court, Ranchi was made under section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the Act of 1996) for setting aside the appellate arbitral award passed on 15.09.2023 by the Appellate Arbitral Tribunal (hereinafter referred to as AAT) comprising of Presiding Arbitrator and 2 co-arbitrators. The original award was passed by the learned Arbitral Tribunal (hereinafter referred to as AT) vide award dated 08.05.2023.
3. The findings of the learned Commercial Court is recorded in paragraph 27 of the impugned order which is as under:
"27. This is a case where the petitioner/applicant has alleged unauthorized trading by the broker /respondent. Much is not required to be looked into the matter in view of the limited scope of intervention under section 34 of the Arbitration and Conciliation Act 1996.
As per the petition, the applicant was approached in the year 2019 by the respondent for opening a Demat account for stock trading.
The circular dated 22 June 2018 of the Securities and Exchange Board of India is in respect of Prevention of Unauthorized Trading by Stock Brokers. It clearly says that - "II. SEBI in the past has taken several steps to tackle the issue of " Unauthorized Trades "viz Periodic Running Account Settlement, Post transactions SMS/ email by exchanges/Depositories, Ticker on broker / DP websites etc. It was observed that in spite of measures taken, a considerable proportion of investor complaints is of the nature of " Unauthorized Trades ".
III. To further strengthen regulatory provisions against un-authorized trades and also to harmonise the requirements across markets, it has now been decided that all brokers shall execute trades of clients only after keeping evidence of the client placing such order, which could be, inter alia, in the form of:
a. Physical record written & signed by client, b. Telephone recording, c. Email from authorized email id, d. Log for internet transactions, e. Record of messages through mobile phones, f. Any other legally verifiable record.
When a dispute arises, the broker shall produce the above mentioned records for the disputed trades. However for exceptional cases such as technical failure etc. where broker fails to produce order placing evidences, the broker shall justify with reasons for the same and depending upon merit of the same, other appropriate 2 evidences like post trade confirmation by client, receipt / payment of funds/securities by client in respect of disputed trade, etc. shall also be considered."
The respondent is supposed to keep all the details about the trading authorized by the petitioner. The learned Arbitrator in- stead of asking the respondent to provide the details of the confirmation about trading has put the onus upon the petitioner to prove that there was unauthorized trading which is against the circular. The circular does not speak so.
Further the GRC has held that there was no preauthorization of purchase and sale, However, purchase was in the knowledge of petitioner. Dissenting view of the learned Arbitrator has held that material brought on record by trading member were all of after trade which cannot be taken as authorization. The voice recording shows only conversation and not authorization.
Further when there is allegation of unauthorized trading, out of 726 conversation only 22 conversation were produced by the respondent which goes to show that they were very selective in producing the conversation/call recordings. As regards the statement of account etc., it may be stated that it proves nothing. At least it does not prove that trading was authorized by the petitioner. There were instances even when the petitioner has conversation regarding purchase of 400000 shares of vodafone, the respondent has purchased 444000 shares. The circular does not talk about post trading authorization else this will be misused by the broker. Every time the broker will be trading, it will have to get the prior authorization.
Further it is beyond comprehension that how any onus can be put on the petitioner holding that he has knowledge about stock trading. The purpose of engaging broker is not that. A person engages any broker for his specialized knowledge. Even if the petitioner has full knowledge about stock trading, it does not entitle the respondent to avoid authorization from the petitioner. There is difference between the 'knowledge' and 'authorization'. The Arbitral appellate tribunal missed these facts and this is apparent on the face of record to show that the findings is against the Public Policy.
Another important fact is that the learned Tribunal has also ignored the fact that the Respondent didn't square off the transaction within the stipulated time (ie. within a week as per T + 5 norm) and allowed continuous debit balance in the Applicant account for about 103 days till the value of shares in the account of the Applicant became NIL. This was in gross violation of the SEBI Circular dated 20th June, 2019 wherein the unpaid shares 3 have to be squared - off in T+ 5 days. There is no explanation by the respondent regarding this conduct which is in violation of the SEBI circular.
Yet another important aspect is opening of an NSDL account in the name of petitioner which has been denied by the petitioner. This is a serious aspect. The petitioner has put the argument that there was no reason for him to open this account since he has already Demat account mapped to the trading. In this respect the Arbitral Tribunal has come to conclusion that "the said Account of the Applicant with NSDL Payments Bank is spurious, and an outcome of forgery done by the Trading Member and its subsidiary company to divert and manipulate the funds of the Applicant. The Trading Member has also resorted to unfair trade practice by violating the standing guidelines of the SEBI by pledging the shares of the Applicant with Motilal Oswal Finvest Ltd. (A subsidiary NBFC of the Trading Member)." This finding was challenged before the Appellate Arbitral Tribunal. The learned Appellate Arbitral Tribunal left this issue undecided. It held that "Any comment made by this Tribunal with respect to this issue shall be fructuous. The constituent is free to take the matter with appropriate authority". This has an important bearing to show the conduct the respondent.
The award of appellate tribunal on these score is against the public policy of India and error is apparent on the face of record. Therefore, in view of the foregoing analysis the order of appellate arbitration award passed on 15.09.2023 is set aside.
It is further directed that the applicant will bear the cost of sending back the record of the learned Appellate Arbitration Tribunal to the learned Appellate Arbitration Tribunal and will ensure the return of the learned Appellate Arbitration Tribunal's record."
4. The case arises out of complaint made by the respondent (hereinafter referred to as the claimant) to National Stock Exchange Limited (hereinafter referred to as NSE) on 02.09.2022 before the Investor Grievance Resolution Panel which was also referred to as GRC- Grievance Redressal Committee, hereinafter referred to as GRC/ IGRP). The IGRP issued notice to the appellant- trading member and after granting opportunity to the parties, dismissed the claim of the claimant vide order dated 12th October 2022 indicating that the claimant was free to pursue his claim in any forum including arbitration as next course of action, if he may so desire.
45. Consequently, the claimant invoked arbitration clause in terms of the bye-laws, rules and regulations of National Stock Exchange of India Limited. The arbitration was conducted by a three-member committee. The AT decided the matter in favour of the claimant vide arbitral award dated 08.05.2023. The matter was taken up by the appellant before the AAT. The AAT gave a split verdict in ratio of 2:1 and the arbitral award dated 08th May 2023 was set-aside.
6. The appellate arbitral award was subject matter of challenge before the learned Commercial Court under section 34 of the Act of 1996 and by the impugned judgment dated 28.06.2024, the learned Commercial Court has set-aside the appellate arbitral award and has thereby restored the arbitral award passed by the AT dated 08th May 2023.
Background of the case.
7. As per the complaint dated 08.09.2022 filed before the IGRP the claimant stated that he had opened a Demat as well as share trading account in the year 2019 and one employee of the appellant (M/s Motilal Oswal Financial Services Limited) namely Chandan Mishra was deputed to look after his share trading account as well as Demat account.
The complaint.
8. The claimant claimed to have invested more than 3 crores in shares under the instructions of the appellant and in the year 2020 said Chandan Mishra had purchased the shares of Canara Bank without taking prior consent of the claimant for which the claimant gave warning and specifically instructed him that for any trading, he has to take prior consent from him and without his consent no trading should be done. In the year 2020, the appellant had informed the claimant that Ritesh Gupta and Sanjeev Suman Sahay would look after the Demat account and share trading account and on several occasions, after trading they had given post confirmation about the trading done by them which was always objected to by the claimant. Even Ritesh Gupta and Sanjeev Suman Sahay used to purchase huge quantity of shares to the tune of 50,000 shares or more than 1,00,000 shares at a 5 time. In the year 2021, the claimant was introduced with Margin Trading Facility (MTF) by Ritesh Gupta and Sanjeev Suman Sahay and thereafter, he availed the MTF facility but it was to the surprise of the claimant that the appellant invested his money in shares and without providing him the MTF facility, they showed NIL balance in his Demat account.
It was further stated by the claimant that when the trading account statements were provided by the appellant to the claimant, he was surprised and shocked to see that there were many transactions in the month of March 2022 which were done without his consent like transaction related to-
Indiabulls Housing Finance Limited - 1,57,921 shares, New India Assurance Company Limited - 1,53,830 & 33,499 shares and Future Consumer Limited - 10,00,000 shares.
It was also surprising to the claimant that all the shares were sold without his prior consent at a very low rate due to which his Demat balance came to zero.
The specific case of the claimant was that there was no prior consent in connection with the aforesaid transactions. It was the specific case of the claimant that there was manipulation of accounts and unauthorized trading done by the appellant herein and therefore, the losses suffered by him were required to be compensated. The claimant claimed an amount of Rs. 3,65,18,233.16 (Rs. 2,75,37,473.85 + Rs. 89,80,759.31) as losses suffered by him.
Response of the appellant before GRC
9. When the matter was taken up by the GRC, the appellant was issued notice and in response the specific case of the appellate before the GRC was that the claimant had initiated his cash segment transaction since 09.08.2019. Accordingly, all the transactions were duly executed and the contract notes, ledgers, bills, quarterly settlement statements, etc. were sent to the claimant on his registered email-id. It was their further case that the trading information was also sent via SMS to the claimant on his registered mobile number. It was 6 their further case that trades executed in the claimant's account were as per his knowledge, consent, instruction and the claimant was in continuous touch with his dealer for execution of his trades. The appellant also provided the sample audio recordings of the calls between claimant and the representative of the appellant towards the trades executed in the account. The appellant also asserted that the claimant was accessing his trading account through online mode by using his User Id and password and was completely monitoring his trade positions, holding details, profit and loss positions of his holdings and in this regard, the appellant also provided a copy of email log evidencing the dispatch of user Id and password. In response to the specific allegation regarding unauthorized transaction in the shares of Indiabulls Housing Finance Limited, New India Assurance Company Limited and Future Consumer Limited, the appellant stated that all the trades were executed as per claimant's consent and knowledge and the same was evident from the perusal of the sample audio recording provided by them and it was asserted that from the audio recording it was crystal clear that the claimant was fully aware of purchase price of his holdings and was continuously monitoring the price movement of his holdings. On this score, it was asserted that the allegation of unauthorized trading executed in claimant's account was completely false and without any basis. The appellant also gave specific reply with regard to the transactions executed in the month of March 2022 and it was asserted that in March 2022 there were two sale transactions executed in claimant's account i.e. on 04.03.2022 and 30.03.2022 and the said sale transactions were executed as per the instructions of the claimant which were said to be evident from the enclosed audio recordings. In response to the claimant's allegation regarding margin availed under MTF, it was stated by the appellant that the claimant had not opted MTF as regulated under SEBI Circular dated 13.06.2017 and appellant had not provided any funding to the claimant under MTF segment. It was stated by the appellant that they had received all the payments in the claimant's trading account from his mapped bank 7 account. The allegation of unauthorized trading was alleged to be an afterthought to recover the losses from the appellant. It was submitted by the appellant that MTF was activated in March, 2021 but there was no funding in the account and due to relationship with the claimant, interest rate was lowered to 15.5%.
The appellant denied any manipulation in the account of the claimant regarding unauthorized transactions. It was asserted by the appellant that from audio clips, it was evident that the claimant was aware of sales of shares in question and therefore, if permission to sale was there, then it is presumed that they also agreed to buy. Findings of GRC
10. The GRC made their observations referring to the materials placed by the respective parties and inter alia observed as under:
• "That from the audio clip provided by the Trading Member it is found that, there was no preauthorization of purchase of shares of India Bulls and New India Assurance Company Ltd. However, the Audio Clips produced by the Trading Member advocates that the purchase of above- mentioned scrips was in the knowledge of the complainant, and he has given instruction to purchase 10 lac shares of Future Consumer Ltd. It also appears from the Audio Clip that complainant was fully aware of the holdings of shares in his account as he used to interact with the advisor of the company regarding sale / purchase of the shares. • The Trading Member has provided e-log of operation of the trading application which indicates that the complainant kept updates of his transactions on regular intervals."
11. The order given by the GRC is as under:
"C. Order given by GRC Member After hearing the contention of the complainant and the Trading Member & after considering submission made by them it is our considered opinion that the claim of the complainant appears to be an afterthought hence it is difficult to uphold the claim of the complainant, however he is free to peruse his complaint in any forum including arbitration as next course of action if he may so desire.
Admissible Claim: NOT ADMITTED"8
12. Proceeding before Arbitral Tribunal (AT) The claimant proceeded for arbitration and the learned AT recorded that the claimant had confined his relief as against the transactions pertaining to the following shares:
(i) India Bulls Housing Finance Ltd. - 1,57,921 shares
(ii) New India Assurance Company Ltd. - 1,53,830 & 33,499 shares
(iii)Future Consumers Ltd. - 10,00,000 shares.
The appellant, inter alia, had brought on record 22 call recordings in support of their stand that the transactions were authorized. The learned AT framed the following issues in paragraph 17 of the award as under:
"17. That, the point of determination in the present Arbitration Application based on rival submission of the parties is as follows:
(i) Whether the sale and purchase of these three shares, viz., India Bulls Housing Finance Limited, New India Assurance Company Limited and Future Consumer Ltd. By the Trading Member was unauthorized?
(ii) Whether the Trading Member had engaged in unfair practice while operating the account of the Applicant and whether the MTF facility was activated, and any interest was levied towards the same?
(iii) Whether the NSDL Payments Bank account was opened at the instance of the Applicant, and whether the transaction was taken therein will have any bearing on the claim of the Applicant?
(iv) Whether the Applicant is entitled for the claim as set forth before GRC and before this Tribunal?"
Decision of AT on issue no.(i) The AT observed that there is vast difference between authorization and knowledge and observed that in the attending facts of the case, the appellant could not read beyond what was required by them to be followed under SEBI circular. The AT also recorded that the GRC had clearly observed that though the claimant did not authorize or consent to the sale/purchase of the disputed shares, the claimant had the knowledge of the same. The AT held that this observation of GRC was not assailed by the appellant and further observed that the transaction will be considered valid only 9 when there is a pre-authorization which was lacking in the case. The findings in connection with lack of pre-authorization have been recorded while dealing with the issue no. (i) in paragraph 19(a) to 19(f) of the award.
The AT also held in paragraph 19(i) of the award that GRC failed to address the issue as to why the shares of Future Consumers Limited were sold on 30th March 3022 which was way beyond T+90 days. The AT ultimately held as follow:
"In the light of the fact stated hereinabove and the materials placed on the record, this Tribunal has arrived at a conclusion that the Trading Member has indulged into unauthorized trade practices, and to avoid objections from the client and to cover up the losses, they engaged in an aggressive style of trading by assuming higher positions in a completely discretionary manner."
Decision of AT on issue no.(ii) The AT held that MTF facility was activated by the appellant and huge amount of money was charged from the claimant towards interest without extending MTF facility. Decision of AT on issue no.(iii) The AT held that the account of the claimant with NSDL Payments Bank was spurious and outcome of forgery done by the appellant and its subsidiary company to divert and manipulate the funds of the claimant. A finding was also recorded that the appellant had also resorted to unfair trade practice by violating the standing guidelines of Securities and Exchange Board of India (hereinafter referred to as SEBI) by pledging the shares of the claimant with Motilal Oswal Finvest Limited (a subsidiary NBFC of the appellant). Decision of AT on issue no.(iv) The AT held that the appellant had retained the shares for more than stipulated period as per SEBI guidelines and against that, it had collected huge amount towards interest and charges which came to Rs. 89,80,759.31.
The arbitral award by AT is dated 08th May 2023. The award is in favour of the claimant. The order of GRC was set-aside and the appellant was directed to compensate the claimant by paying an amount of Rs. 3,65,18,233.16 (Rs.2,75,37,473.85 towards 10 unauthorized trading of the shares in dispute plus Rs. 89,80,759.31 towards expenses levied in the account of the claimant) along with interest @ 8% per annum payable from the date of the complaint before the GRC towards wrongful loss which was incurred by the claimant due to the conduct of the appellant. Cost of arbitration was also directed to be paid in accordance with the relevant exchange/SEBI circular.
Proceeding before Appellate Arbitral Tribunal (AAT)
13. The matter was then taken up in the 2nd tier arbitration before the AAT by the present appellant. The finding of the majority members of the AAT has been recorded in paragraph 5.0 from internal page 19 of the award. The AAT mentioned the root cause of the complaint in paragraph 5.1 and the findings and conclusions of the majority member of the AAT are quoted as under: -
"5.1 The root cause of complaint is unauthorized trade executed in the account of the Constituent. This Tribunal has to test the fact whether the following trades were authorised by the Respondent:
Future Consumer Limited - 10,00,000 shares, NIACL - 1,53,830 shares and 33499 shares India Bulls Housing Finance Limited - 1,57,931 shares"
5.2 It has been observed that the Appellant has raised concern that the Constituent has preferred this claim as per his convenience. The Constituent has earlier claimed that the trades executed in the Month of March 2022 were unauthorized and further modified/altered the claim that all the transactions pertaining to above mentioned scrips were unauthorized. The Appellant has also emphasized that the claim amount mentioned by the complainant are without basis. The complaint filed by the Constituent with NSE and in the Arbitration application is "I was surprised and shocked to find out that many transactions in the month of March were done without my consent like Indiabulls Housing Finance Limited - 157921 shares: New India Assurance Company Limited- 153830 & 33499 shares, Future Consumer Limited-1000000 shares; and it was even more surprising that all the shares were sold out without my prior consent at a very low rate, the reason due to which, my DMAT balance came to 'Zero"
11Further while calculating the claim amount the Constituent has relied on holding statement of (18/01/2022 which replicates holding value of Rs. 6,02,08,100.00 against a debit balance of Rs. 2,19,98,081.25. In the said holding report, the value of Rs. 6,02,08,100.00 consist of the above-mentioned disputed scrips. The Constituent has hence claimed the difference of Buy and Sell of the value of above-mentioned scrips which comes to Rs. 2,75,37,473.85. Additionally, the Constituent claims for an amount of Rs. 89,80,759.31 as miscellaneous charges charged by the Appellant.
By reading both the paragraphs together, there is no doubt that the Constituent has accepted one leg of the transaction of the disputed scrips i.e., the buy transaction of the disputed scrip. At one hand the Constituent is relying on the holding statement and on another, he is disputing the buy trade of the scrips mentioned in the holding report. Further there is no dispute that the Constituent has paid a sum of Rs. 3,12,37,000.00 during his trading tenure from his Axis bank account. The Constituent did not provide the detail as to for which purpose the amount has been paid to the Appellant during the trading tenure. Hence, claiming both the legs of the disputed scrips as unauthorised seems to be an afterthought.
"5.3 The appellant has provided transcript of voice recordings. We have read and heard the voice recordings placed on record. By analysing the voice recording there is no doubt that the Constituent is not novice in the securities market. He has been heard talking about the scrips in question. It is pertinent here to mention that the Constituent has not objected to the voice recording. The Constituent could not convince the forum as to why he has not raised any dispute with regard to scrip in question while he was in regular touch with the representative of the Trading member. The Arbitration tribunal has pressed on the circular issued by the SEBI in 2018 with respect to the unauthorized trade and has relied on the pre-trade authorization as mandatory requirement. However, in the same circular the SEBI in exceptional case has provided scope for considering other evidence also to conclude any dispute. 5.4 This Tribunal is inclined to elaborate on the voice recording placed on record for the disputed trades. Future Consumer Limited:
Refer: Voice recording date: 20/12/2021 Indiabulls Housing Finance Limited -
Refer: Voice recording date: 16/12/2021 @ 14:40 Refer: Voice recording date: 16/12/2021@ 15:23 Refer: Voice recording date: 20/12/2021 12 New India Assurance Corporation Limited Refer: Voice recording date: 02/12/2021 Refer: Voice recording date: 23/02/2022 Refer: Voice recording date: 30/03/2022"
Constituent admission to Pay dues:
Refer: Voice recording date: 23/02/2022 "... MOFSL Representative: accha Client:.....fir position khara karenge. aur hum soch rahe hai ki 4 karod rupaya pay karke isko aisehi rakh le".
Constituent admission to loss:
Refer: Voice recording date: 23/02/2022 ..Client: 2 crore ke aas pass loss ho gaya MOFSL Representative: hmm, yeh Russia mein ladai ho gaya aur barbad ho gaye.......
Refer: Voice recording date: 29/03/2022:
Client: ....."Karan kamai dhamai kuch nahi hua 3 sava 3 crore chala gaya is dhande mein"...
Constituent admission to Sell:
Refer: Voice recording date: 04/03/2022: .."Client: ha suman MOFSL Representative: umm sir keh rahe hai ki apna je portfolio jo hai na sir who neeche aagaya hai 11 percent pe Client: toh kya karte hai, bech dete hai, us din bech diye they, baaki aaj phir bech dete hai.
MOFSL Representative: toh payment karke hold nahi kijiyega sir, kuch din.
Client: paisa nahi denge, paisa hum bahot gawa chuke hai ab, yeh hold kame ka kya matlab, bech kar ke phir kharid lenge"
Refer: Voice recording date :29/03/2022: MOFSL Representative: lekin sir actually stock pura girte jaraha haina toh wo bhi paisa dalenge toh bhi toh gal jayega pura.
Client: nahi nahi nahi hum wo baat nahi jante, hum ye bol rahe hai ki aapko stock bechna hai aap stock bechiye aapko account nil karna hai aap karlijiye, thi khai? Further ab hum paisa is dhandhe mein nahi denge. Karan kamai dhamai kuch nahi hua 3 sava 3 crore chala gaya is dhande mein.....13
Further it is important to mention the voice recording date 29/03/2023 and 30/03/2023 as in the same recording the constituent is providing blanket approval to the representative and has clearly said to sell the outstanding position which consists of scrip under dispute. The constituent in the said recording is discussing on the loss and surprisingly he has not raised any dispute with respect to trades in question. The constituent at no place has shown his disregard to any of the trades.
"5.5 The Constituent has also access to his online Application and he has admitted all the post trade related information without any dispute. The Constituent has not disputed the mobile number and email address registered with the Appellant. The Constituent has been ignorant in this matter. He has not taken any heed to communication sent by the Trading Member and as per law Ignorance is not an excuse. 5.6 Further it shall not be appropriate to deal with the other issues raised with respect to opening of account with NSDL Payment Bank and Motilal Oswal Finvest Limited as both the entities are regulated by another Regulator, i.e., RBI. This Appellate Arbitration application is filed under bye laws, rules and regulations of National Stock Exchange of India limited (NSEIL) and rules and regulation prescribed by the Regulator, SEBI. The Constituent in this case has not provided verifiable evidence to prove that the trading member or its associates are in collusion and defrauded him to open the said account. The account was opened online by capturing live pictures and there are signatures of the Constituent in the POA signed between Motilal Oswal Finvest Limited and NSDL Payment Bank. The Constituent has not questioned his signature on the document, moreover the Mobile number and Email Id registered on the above-mentioned account is also not questioned. Any comment made by this Tribunal with respect to this issue shall be fructuous. The Constituent is free to take up the matter with appropriate authority.
5.7 The Constituent has been regularly talking about limit in his account and has also in few recordings has asked to take the limit for trading. In the recording dated 23/02/2022, he is stating to deposit a sum of Rs.4 Crores. The Constituent has also paid on 19/01/2022 for Rs.2,05,011.80 with the narration "IMPS/P2A/201922315584/Motilal/HDFCBAN/X247132 and 11/02/2022 for Rs.2,75,011.80 with the narration "IMPS/P2A/201922315584/Motilal/ HDFCBAN/X247132 from his bank account to the Appellant's account for which the Appellant has clarified that no such Payment was made to their trading account, hence it was made to his Loan account 14 through NEFT which advocates that the Constituent was well aware of the Loan account being opened in his name. 5.8 Further as the voice recording has been taken into consideration it is also important to point out the below conversation:
Refer: Voice recording date: 29/03/2022:
"MOFSL Representative: us mein toh maniyega sir interest toh hum kara hi denge who toh ho jaega sir, ek do din ka time hi lag raha hai bas.
Client: kya lag rahahai?
MOFSL Representative: ek do din ka bas time lagega us mein who toh ho jaega sir Client: kya ho jayega?
MOFSL Representative: matlab jo interest v interest walaa p nahai Client: Haan.
MOFSL Representative: who toh humlog reversal kara hi lenge."
Hence in the light of the justice, it is warranted to admit the Interest part in favour of the Constituent. The details of the miscellaneous charges as charged by the Appellant are as per the below table:
Charges levied in Trading Account 35,12,117.50 DP charges 1,42,580.93 Interest charges 26,59,987.95 Penalties 7,56,496.35 Short collection of transaction charges 19.1 Reversal of charges -46,967.64 The panel is of the considered view to admit Rs. 33,69,516.00 (26,59,987+7,56,496- 46,967) which is the total interest charged and penalty levied by the Appellant in the account of the Respondent.
6.0 CONCLUSION 6.1 Thus, the panel members of this Appellate Tribunal very determinatively find and hold that the losses sustained by the Respondent due to the execution of the disputed trades in his account, can't be termed as unauthorized. Accordingly, we are of the opinion that the Arbitral Award dated 08/05/2023 is not sustainable in law, hence is hereby set aside. The claim of the Respondent is allowed to the tune of Rs. 33,69,516.00."
1514. The dissenting member of the AAT clearly held that the sale and purchase of shares by the appellant was unauthorized and opening of NSDL Payments Bank account by the claimant could not be proved by the appellant although it was the appellant who argued before the AT about opening of NSDL Payments Bank to justify the transactions. The findings of the dissenting member on the aforesaid two point are as under:
"The issues involved for determination as to whether sale and purchase of shares by the trading member was unauthorized.
Before adverting to the issue, it is necessary to consider the relevant guideline in form of circular issued by the SEBI. In order to protect the interest of the investor and also to curb the practice of unauthorized trade the SEBI has issued guidelines in the form of circular dated 22-03-2018 that the transaction undertaken by the brokers must be authorized to execute the trade only after keeping the evidence of authorization for the period not less than three years. It is evident that onus is always on trading member to prove that the trading was done after authorization of the investor. It is also pertinent to mention that the settled principle is that the act must be done in the manner prescribed and not otherwise.
Learned counsel for the trading member submitted that sale and purchase was done only after authorization by the investor but has failed to bring any material on record regarding authorization. Learned counsel pointed out communication between the parties which cannot be termed pre authorization. GRC considered the audio clip provided by the trading member and came to the conclusion that there was no pre authorization of purchase and sale. However, purchase was in the knowledge of respondent. During course of hearing no evidence was brought / pointed out about the pre authorization. Material brought on the record by the trading member were all of after trade which cannot be taken as authorization. Learned counsel for the trading member pointed out voice recording between trading member and investor which is merely conversation between them. It also appears that representative of the trading member was persuading the respondent to purchase the share of Voda phone. Such conversation cannot be 16 considered pre authorization as purchase was made more than shares affirmed by the respondent.
The contention of trading member that the investor i.e the respondent is expert in the field of trading, and he was aware of the trading. In support of contention the trading member brought e log on the record to say that the trading was within the knowledge of the respondent. There is difference between knowledge and authorization. Knowledge means awareness of fact or circumstances whereas authorization means to confer legal authority to empower. A person may have knowledge of fact which may not have been authorized by him.
Further contention of trading member that investor is an educated person and as such it cannot be presumed that he was ignorant of the transaction. Such contention has no merit. The trading member is bond to carry out trade in manner prescribed in SEBI circular dated 22-03-2018 as indicated above. Moreover, there is no scope of classification between the educated and illiterate person under the law.
The tribunal has also taken into consideration that only twenty-two call records were submitted though he was required to submit all the call records before the GRC but those call records do not suggest prior authorization of sale and purchase of disputed shares.
On consideration of submission and material on records brought by the trading member it is evident that the trading member, the appellant has miserably failed to satisfy that trading was made after authorization by the respondent."
The dissenting member decided the question regarding genuineness of the opening of NSDL Payments Bank account and also the issue regarding execution of power of attorney in favour of the sub-broker and observed as under:
"Question has been raised with regard to genuineness of the opening NSDL Payments Bank Account and also the execution of power of attorney executed in favour of sub broker?
Learned counsel for the appellant contended that NSDL payments bank account was opened by the respondent, the documents were signed by the respondent. The account was operated by sub broker through power of attorney executed by the respondent.
The respondent denied the existence of any such account, no such account was opened by him or at his instance. He never 17 executed a power of attorney in favour of sub broker. If there is any such account, it must have been done by forgery committed by the appellant.
The opening of the account and execution of power of attorney are outcome of forgery committed by trading member is obvious from the facts that for the first time the appellant disclosed the existence of NSDL Payment Bank Account before the tribunal and at the instance of the appellant the documents from the NSDL were called by the tribunal. I. There was no occasion to open NSDL account, nor the appellant pointed out what was the need for opening such account.
II. There was no reason to execute power of attorney in the name of sub broker for operating bank account. III. The appellant did not disclose the NSDL Payment Bank Account before GRC.
IV. The stamp for power of attorney was purchased in New Delhi by Motilal Oswal Financial Services Ltd., on 05-12-2020 which was notarized on 25-03-2021 at Ranchi and submitted to the NSDL bank in Mumbai and amount of Rs.1.99 crore was transacted amongst Motilal Oswal Financial Services Ltd., trading member and NSDL Payment Bank on the same day.
V. Second column of the power of attorney the name of second party column is empty which creates doubt of genuineness of the document. The aforesaid fact was not disclosed before the GRC.
VI. From the bank statement of the NSDL payment bank account it appears that there are frequent transactions of deposit and withdrawal from the respondent account. It further appears that the trading member has routed the transfer of the amount to the NSDL Payment Bank Account from share trading account of the respondent and subsequently within a few hours the said amount was withdrawn and transferred into the account of sub broker to manipulate fund of the respondent. VII. The respondent pointed out that he procured the power of attorney from NSDL payment bank wherefrom it appears that it was signed by four different pen and different ink and signature of the respondent is also forged on the documents.
VIII. From the statement of the bank account, it appears that several transactions have taken place without any authorization of the respondent.
IX. The account was opened without any valid KYC which is also spurious and raises question over the authenticity of the opening and operation of the said bank account.18
Documents were brought at the instance of the appellant. Thus, the burden is on the appellant to prove that the documents were genuine, but no efforts were made to discharge the obligation under the law.
The trading member forged the documents on behalf of the respondent with ulterior motives and in the interest of Motilal Oswal Financial Services Ltd which is non-banking financial corporation and a subsidiary of the trading member of the company.
From the facts stated above it is obvious that opening of NSDL Payment Bank Account and execution of power of attorney are outcome of forgery committed by the trading member and its subsidiary company to divert and manipulate the fund of the respondent.
On consideration as discussed above I find no merit in this appeal thus it is dismissed. The award passed by the tribunal is confirmed."
The dissenting member of the AAT found no merits in the appeal and dismissed the appeal.
15. The appellate arbitral award passed by AAT was challenged by the claimant before the learned Commercial Court under section 34 of the Act of 1996 and by the impugned judgement the appellate arbitral award has been set aside and consequently, the arbitral award passed by AT has been upheld. The findings of the learned Court while setting aside the appellate arbitral award has already been quoted above.
16. Arguments of the appellant (trading member) I. The only issue which arose for consideration and has been decided by all the Forums is with respect to the question, whether or not, the appellant or its representative had the pre-authorization of the claimant to purchase and sell the shares of the three companies, namely New India Assurance Company Ltd., India Bulls Housing Finance Limited and Future Consumer Ltd.
II. On a plain reading of SEBI guidelines dated 22nd March 2018, it is clear that the SEBI mandates that in case of a dispute, the broker shall produce the records which show pre-authorization. On behalf of the claimant, it was contended that all the modes mentioned in the Circular dated 22.03.2018 were required to be produced in order to establish the factor of pre-authorization. It is most respectfully submitted that such an interpretation would lead to absurdity and hence ignored. On a holistic reading of the Circular dated March 22, 19 2018, it would be clear that a broker is under a mandatory obligation to prove the fact of pre-authorization by producing only one form of evidence. The appellant had to establish by producing evidence in one of the modes mentioned in the Circular dated March 22, 2018 and it did so by producing the telephone recordings along with the transcripts of the telephone recordings. The appellant was only under obligation to produce the evidence relating to the disputed transactions and not the transactions which were not in dispute. In respect of aforesaid share transactions, the appellant had produced 22 call recordings along with the transcripts. There is a clear finding of fact by the AAT that the claimant had not disputed the voice recordings or the transcript produced and this finding is not in dispute.
III. It is most respectfully submitted that the AT and also the learned Commercial Court while rendering the findings with respect to pre- authorization have not referred a single telephonic conversation which were produced in original as also by way of transcripts. The findings that there was no pre-authorization is absolutely without any evidence by these two forums i.e. the AT as also the Learned Commercial Court. The question whether or not, there are sufficient materials to come to a conclusion that there was pre-authorization for purchase and sale of the shares of the three companies is certainly a question of fact. The ground for interference with a finding of fact by a Commercial Court under Section 34 or under Section 37 of the Act of 1996 is limited and as long as there is reference to some evidence on record whether or not such evidence was sufficient, may not call for scrutiny by the courts under section 34 or section 37 of the Act of 1996.
purchase of shares of New India Assurance Company Limited IV. It is the duty of the appellant to bring to the notice of this Hon'ble Court that with respect to the purchase of shares of New India Assurance Company Ltd., the appellant could not produce any form of evidence to show that it had the pre-authorization. The appellant contended that there was pre-authorization by conduct post facto. In the SEBI Circular dated 22.03.2018, it is provided that in case of some technical failure, etc., where the broker (trading member) fails to produce order placing evidence, the trading member shall justify with the reasons for the same and depending upon merit of the same other appropriate evidences like post-dated confirmation by client like receipt / payment of funds in respect of disputed transactions shall also be considered. The claimant has argued that the said provision of the Circular dated March 22, 2018 cannot be pressed as because it is not a case of technical failure. In this context, it is most respectfully submitted that the Circular dated March 22, 20 2018 only reiterates the settled rule of evidence which relates to estoppel and waiver. The above principles have not been diluted in any manner by the circular or any rule of procedure. It is well settled principle of law that a person can waive his legal rights. Reliance is placed on the judgment of Krishna Bahadur v. Purna Theatre & Ors. reported in (2004) 8 SCC 229. A cursory look at the materials on record would show that the purchase of shares of New India Assurance Company Ltd. took place in the month of February, 2021 to August, 2021 on as many as 05 dates and after purchase, some of the shares were sold on 19.02.2021, 24.02.2021, 25.02.2021, 02.03.2021, 09.04.2021, 13.04.2021, 23.07.2021 and 28.07.2021. The above fact would be evident from Page 551, Volume-II of the Convenience Compilation. The above documents also show interconnected transactions and records evidencing that transactions are contemporaneous, which also establish that the claimant cannot at this stage contend that he had not authorized the purchase of shares of New India Assurance Company Ltd. Moreover, there was a mobile application which would show the sale and purchase of shares from the portfolio of the complainant (Pages 1420 & 1421, Volume- IV of Convenience Compilation). There are details available on record to show that the claimant had been logging into such application at various point of time (Page 375, Volume-I of Convenience Compilation). It is also not the case of the claimant that he was not aware of the purchase of shares of New India Assurance Ltd. at any point of time prior to September, 2022, or he only came to know of such purchase when his Demat account became Nil / Zero. In absence of any such pleading or evidence led by the claimant, no finding could have been returned by any Forum regarding the absence of pre-authorization of the claimant regarding purchase of shares of New India Assurance Company Ltd. Reliance has been placed in the case of Sahara India Real Estate Corporation Ltd. v. SEBI reported in (2013)1 SCC 1 (Paras-105 and 106) to submit that the conduct and actions indicate the intention which has to be judged from subsequent conduct. A person's inner intentions are to be read and understood from his acts and omissions. In view of the above legal position, it can safely be inferred that the claimant by conduct is estopped from contenting that there was no pre-authorization for purchase of the shares of New India Assurance Company Ltd.
Purchase of shares of India Bulls Housing Finance Ltd, Future Consumer Ltd., and sale of shares of New India Assurance Company Limited, India Bulls Housing Finance Ltd. and Future Consumer Ltd.
V. So far as the aforesaid five transactions are concerned the 21 appellant had produced evidence in the form of telephonic recordings along with its transcripts. The AAT has dealt with in details with these call recordings and transcripts and the contents thereof which can be found at paragraphs 5.4 of the Appellate Arbitral Award. There is sufficient material on record to show that there was pre- authorization to purchase and sell the shares in question and finding arrived at by the AAT to that effect does not suffer from any kind of perversity which warrant interference by a court under Section 34 of the Act of 1996.
VI. The learned Commercial Court while setting aside the findings of the AAT arbitrarily observed that the AAT had shifted the onus on the claimant. In Paragraph 5.3 of the award of AAT it was observed that the claimant could not convince the AAT as to why he did not raise any dispute with regard to scrip in question, while he was in regular touch with the representative of the appellant. This finding / observation does not in any manner shift the burden on the complainant for the simple reason that from a holistic reading of Paragraph 5.3 of the Appellate Arbitral Award, it would transpire that the reference to non-objection was with respect to the conduct of the claimant. Therefore, it is submitted that the finding of the Learned Commercial Court that the burden of proof was shifted is perverse and without any basis.
VII. As a consequence of the above discussion, it is most respectfully submitted that there was sufficient evidence on record to establish by applying the principles of preponderance of evidence that no wrong doing was committed by the appellant or its representative in purchasing and selling the shares of the three companies named above on behalf of the claimant and since, there was pre-authorization to act on behalf of the claimant no damages or any sum could be awarded to the claimant.
Opening of account with NSDL Payments Bank VIII. The other incidental issues have been sought to be raised by the claimant in course of hearing i.e. one relates to the opening of Loan Against Share (LAS) with NSDL Payments Bank and other relates to alleged forged Power of Attorney. It is submitted that the incidental issue is beyond the purview of arbitration under Rules, Bye-Laws and Regulation of the National Stock Exchange of India Ltd. NSDL Payments Bank Account was opened on 09.02.2021, and since, thereafter the claimant had not spent amount against purchase of the shares which reflects that the claimant had knowledge regarding the Account. The Arbitral Tribunal travelled beyond its jurisdiction and had given a finding that account with the NSDL Payments Bank is spurious and an outcome of forgery done by the Trading Member.
22The issue relating to the opening of account in NSDL Payments Bank was never raised before GRC.
IX. The scope of interference by a Court under Section 34 as also the ambit of interference by the Appellate Court under Section 37 of the Act of 1996, is very limited and is not expected to act as an Appellate Court and re-appreciate the evidence. The scope of interference could be limited to the ground provided under Section 34 of the Act of 1996. The interference would be so warranted, when Award is in violation of public policy of India which has been held to mean "Fundamental policy of Indian Law".
17. Arguments of the Respondent (claimant) A. The learned Commercial Court, Ranchi came to the finding that the award passed by the AAT is perverse on account of the following reasons: -
(i) The AAT has wrongly put the onus upon the claimant to prove that the transaction was unauthorized.
(ii) The evidence brought on record was post trade communication which does not fulfil the mandate of SEBI circular dated 22.03.2018.
(iii) Only 22 conversations were brought on record out of total 726 conversations which shows that the appellant was selective in producing the evidence. The Appellate Tribunal has also ignored the fact that the appellant did not square off the transaction within the stipulated time i.e. the T+5 norm and the same was done after 103 days.
B. Thus, the award was held to be against the public policy of India.
The following points have been raised:-
a) No preauthorization of share: -
(i) SEBI circular dated 22.03.2018 states inter alia as follows:-
To further strengthen regulatory provisions against un-authorized trades and also to harmonise the requirements across markets, it has now been decided that all brokers shall execute trades of clients only after keeping evidence of the client placing such order, which could be, inter alia, in the form of:
a. Physical record written & signed by client, b. Telephone recording, c. Email from authorized email id, d. Log for internet transactions, e. Record of message through mobile phones, f. Any other legally verifiable record.23
When a dispute arises, the broker shall produce the above- mentioned records for the disputed trades. However, for exceptional cases such as technical failure etc. where broker fails to produce order placing evidences, the broker shall justify with reasons for the same and depending upon merit of the same, other appropriate evidences like post trade confirmation by client, receipt/payment of funds/securities by client in respect of disputed trade, etc. shall also be considered.
b) The aforesaid circular has been issued in exercise of power conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992. Hence the same has statutory force.
c) It is crystal clear from the aforesaid circular that post trade confirmation would only come into picture under exceptional cases such as technical failure.
d) The appellant never made out a case of technical failure. There is absolutely no pleading or averment to the fact that on account of technical failure the appellant was unable to produce the evidence as required by law.
e) Despite the aforesaid facts and circumstances the AAT has observed that the circular in exceptional cases also provides that telephone recordings and other evidence can be looked into. Such observation or finding is not only perverse but the same is also so absurd that no prudent person could have come to that conclusion on account of the following reasons: -
i. To be covered under the exception it was required that the appellant must plead and prove the existence of exceptional circumstances. The same was never done as the appellant never made out the case they are covered under the exception as provided in the circular dated 22.03.2018. ii. The AAT has totally exceeded the jurisdiction by making out a third case which was never pleaded by either of the parties. It is a settled principle of law as held by the Hon'ble Supreme Court in Bahhaj Nahar vs. Nilima Mandal reported in (2008) 17 SCC 491 that a court cannot make out the case that has not been pleaded by the parties and such exercise amounts to exceeding of the jurisdiction. iii. The circular dated 22.03.2018 was a mandatory requirement of the law which has been given a complete go-by the AAT. The AAT has failed to consider the settled law of the land that if the law mandates a certain thing to be done a certain way it has to be done in that certain and specific way only.24
The Hon'ble Supreme Court in the case of Chandra Kishore Jha vs. Mahavir Prasad reported in (1999) 8 SCC 266 held that "It is a well settled statutory principle that if statute provides for a thing to be done in a particular manner than it has to be done in that manner and no other manner".
iv. The finding of the AAT that the claimant provided a blanket approval is also perverse in view of the fact that there is no concept of blanket approval and the law mandates specific pre-authorization for every sale and purchase transaction. v. Even if all the finding of the AAT are taken to be true for the sake of argument, then also at best the tribunal only came to a conclusion that there was knowledge of the sale transaction. However, the same cannot be construed to be pre-authorization as required by the circular dated 22.03.2018.
f) The AAT has miserably failed to take into account the best evidence rule as enshrined under Section 114(g) of the Evidence Act which provides that if the party is in possession of the best evidence and does not produce the same then adverse inference has to be drawn against the said party. Reliance has been placed on the judgment in the case of "Punit Rai vs. Dinesh Choudhary" reported in (2003) 8 SCC 204.
g) The appellant/tribunal have absolutely ignored the SEBI circular dated 22.06.2017 clause 2(d) of which states as under:-
"Clause 2.6 stands modified as, "Stock brokers shall not grant further exposure to the clients when debit balances arise out of client's failure to pay the required amount and such debit balance continues beyond the fifth trading day, as reckoned from date of pay-in, except, in accordance with the margin trading facility provided vide SEBI circular CIR/MRD/DP/54/2017 dated June 13, 2017 or as may be issued from time to time. "This clause would be effective from August 1, 2017."
h) The appellant was duty bound to square off the transaction within T+5 days however in this case the same was done after a period of 103 days which is not only violative of the mandatory requirement of the law but the same also amounts to fundamental and cardinal breach of the contract in view of the facts that all the SEBI circulars forms part of the agreement between the client and share brokers and the same contemplates reciprocal obligation to be performed by both the parties.
i) The AAT has further observed that so far as the execution of power of attorney is concerned the same is beyond the scope of the present dispute and same can be raised before appropriate authority. Such finding of the tribunal is also perverse in view of the fact that by 25 opening a separate NSDL account and executing a forged power of attorney the appellant was misappropriating the funds of the claimant without his consent or knowledge as such the opening of NSDL account and the execution of power of attorney were part of the same transaction.
j) The AAT has miserably failed to take into consideration that the NSDL Payments Bank account was opened without the pre-requisites including inter alia the deposit of Rs. 50,000/- before opening of the account as also the KYC verification was never done. Thus, it was prima facie evident that the opening of NSDL Bank account was tainted with malice.
k) Thus, the setting aside of the award passed by AAT is justified in view of the fact that the finding arrived at by the AAT was based on no pleading or evidence as also the interpretation of contract of the appellate tribunal was so irrational that no reasonable/prudent person would have arrived at. The award of the AAT has also been made in utter disregard and ignorance of vital evidence as such the same was liable to be set aside therefore the impugned order dated 28.06.2024 passed by the learned Commercial Court, Ranchi in Commercial Arbitration Case No. 22 of 2023 is correct and justified.
C. Rebuttal of the Respondent:
I. So far is the contention that the post trade conversation established the fact that the claimant/respondent was aware about the entire transaction as such he is estopped from taking advantage of the circular dated 22.03.2018, it is stated that there can be no estoppel against law as has been laid by the Hon'ble Supreme Court in Krishna Rai vs. Banaras Hindu University reported in (2022) 8 SCC 713 wherein the Hon'ble Supreme Court has categorically laid down that "There can be no estoppel against law. If the law requires something to be done in a particular manner, then it must be done in that manner, and if it is not done in that manner, then it would have no existence in the eye of the law."
II. The conversation dated 29.12.2021 is way before the illegal transaction took place in March, 2022 and the same is only with respect to purchase of one share which is not even in dispute. Even the GRC had taken note of that.
III. All the other conversations are post trade conversations which could not have been relied upon in view of the circular dated 22.03.2018 and in absence of any specific pleading that the 26 respondent/appellant is covered under the exception of the general rule as prescribed under the circular dated 22.03.2018.
IV. The contention that only 22 audio recordings were brought on record as they were concerned with instant transactions is also baseless and without any merit. In fact, the claimant had specifically stated in his statement of claim that the appellant had not brought on record all the evidence including the audio recordings with respect to the disputed transaction. V. In order to conclude it was reiterated that the pre-trade confirmation are to be done at two stages first at the stage of purchase and second at the stage of sale. In terms of the circular dated 22.03.2018 at both the stages approval is required i.e. a pre trade approval of purchase and pre trade approval of sale. The appellant had failed to complete the chain by producing the evidence.
VI. The appellant while arguing the matter had handed over a chart showing the transactions and their approvals, wherein they have admitted that there is no evidence for sale or purchase of shares of New India Assurance Company Limited.
VII. That it transpires from the aforesaid fact and circumstances that the finding of the AAT was not only perverse but the same was also de-hors the SEBI circulars which no person of ordinary prudence would have arrived at, as such the interference of the Commercial Court in the appellate arbitral award is totally justified in view of the law laid by the Hon'ble Supreme Court in the case of Delhi Metro Rail Corporation Ltd. vs. Delhi Airport Metro Express Pvt. Ltd. reported in (2024) 6 SCC 357. VIII. The concept of perverse has been further clarified to include the following:
1. Based on no evidence
2. Based on irrelevant evidence
3. Ignores vital evidence IX. Reliance has also been placed on the judgement passed in the case of OPG Power Generation Pvt. Ltd. Vs. Enexio Power Cooling Solutions India Pvt. Ltd. reported in 2024 SCConline SC 2600 - Paragraphs 63, 64 and 71.
Findings of this Court.
Scope of interference in arbitral award.
18. The case is governed by the Arbitration and Conciliation Act 1996 as amended vide Amendment Act of 2015. The portions relevant 27 for the purposes of this case of Section 34 of the Act of 1996 as amended read as follows: -
34. Application for setting aside arbitral Award - (1) ..............
(2) An arbitral award may be set aside by the Court only if-
(a) ..............................................
(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.
Explanation 1.- For the avoidance of any doubt, it is clarified that an Award is in conflict with the public policy of India, only if, -
(i) the making of the Award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or
(ii) it is in contravention with the fundamental policy of Indian law; or
(iii) it is in conflict with the most basic notions of morality or justice.
Explanation 2. --For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.
(2A) An arbitral Award arising out of arbitrations other than international commercial 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:
Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence.
19. In "Associate Builders v. DDA" (2015) 3 SCC 49, the meaning of perversity was considered while setting aside arbitral award in the following manner:
Perversity has been considered in the following terms:
"31. The third juristic principle is that a decision which is perverse or so irrational that no reasonable person would have arrived at the same is important and requires some degree of explanation. It is settled law that where:
(i) a finding is based on no evidence, or 28
(ii) an Arbitral Tribunal takes into account something irrelevant to the decision which it arrives at; or
(iii) ignores vital evidence in arriving at its decision, such decision would necessarily be perverse.
32. A good working test of perversity is contained in two judgments. In Excise and Taxation Officer-cum-Assessing Authority v. Gopi Nath & Sons [1992 Supp (2) SCC 312], it was held: (SCC p. 317, para 7) "7. ... It is, no doubt, true that if a finding of fact is arrived at by ignoring or excluding relevant material or by taking into consideration irrelevant material or if the finding so outrageously defies logic as to suffer from the vice of irrationality incurring the blame of being perverse, then, the finding is rendered infirm in law."
In Kuldeep Singh v. Commr. of Police [(1999) 2 SCC 10 : 1999 SCC (L&S) 429] , it was held: (SCC p. 14, para 10) "10. A broad distinction has, therefore, to be maintained between the decisions which are perverse and those which are not. If a decision is arrived at on no evidence or evidence which is thoroughly unreliable and no reasonable person would act upon it, the order would be perverse. But if there is some evidence on record which is acceptable and which could be relied upon, howsoever compendious it may be, the conclusions would not be treated as perverse and the findings would not be interfered with."
Patent illegality: Again sub-divided into:
a) Para 42.1- contravention of substantive law of India
b) Para 42.2 - contravention of the Arbitration Act itself.
c) Para 42.3 - arbitrator deciding outside the terms of the contract
20. The expanding nature of the interpretation of the term 'fundamental policy of Indian law' in order to set aside an Award under section 34 of the Act of 1996 was noticed and was followed by law commission recommendations which ultimately culminated in an amendment of the aforesaid Act of 1996 vide Amendment Act 2015.
The entire background and the purpose of the Amendment Act 2015 in the aforesaid Act of 1996 have been fully narrated and explained in the judgment in "Ssangyong Engg. & Construction Co. Ltd." (2019) 15 SCC 131. The expansion of "public policy of India" in "ONGC Ltd. v. Saw Pipes Ltd." (2003) 5 SCC 705 ["Saw Pipes"] and 29 "ONGC Ltd. v. Western Geco International Ltd." (2014) 9 SCC 263 ["Western Geco"] has been done away with and a new ground of "patent illegality" with inbuilt exceptions have been introduced through 2015 amendment.
21. The judgment passed by the Hon'ble Supreme Court in the case of "Ssangyong Engg. & Construction Co. Ltd." (supra) has considered the impact of the 2015 amendment in the Act of 1996 and summarised in paragraph nos. 35 to 41 of the report. Some of the points relevant for the purposes of this case are as under:-
A. The ground for interference insofar as it concerns the "interest of India" has since been deleted.
B. In paragraph 35 it has also been held that the ground for interference on the basis that the award is in conflict with justice or morality is now to be understood as a conflict with the "most basic notions of morality or justice". This again would be in line with paragraphs 36 to 39 of Associate Builders. Para 36 of Associate Builders deals with 'justice' to hold that only such arbitral awards that shock the conscience of the Court that can be set aside on this ground being against justice. C. In paragraph 37 it has been held that insofar as domestic awards made in India are concerned, an additional ground is now available under sub-section (2-A), added by the Amendment Act, 2015, to Section 34. Here, there must be patent illegality appearing on the face of the award, which refers to such illegality as goes to the root of the matter but which does not amount to mere erroneous application of the law. In short, what is not subsumed within "the fundamental policy of Indian law", namely, the contravention of a statute not linked to public policy or the public interest, cannot be brought in by the backdoor when it comes to setting aside an award on the ground of patent illegality. D. Reappreciation of evidence, which is what an appellate Court is permitted to do, cannot be permitted under the ground of patent illegality appearing on the face of the award. E. para 42.1 of Associate Builders, namely, a mere contravention of the substantive law of India, by itself, is no longer a ground available to set aside an arbitral award.
F. The change made in Section 28(3) by the Amendment Act really follows what is stated in paras 42.3 to 45 in Associate Builders, namely, that the construction of the terms of a contract is primarily for an arbitrator to decide, unless the arbitrator construes the contract in a manner that no fair-minded or reasonable person would; in short, that the arbitrator's view is not even a possible 30 view to take. Also, if the arbitrator wanders outside the contract and deals with matters not allotted to him, he commits an error of jurisdiction. This ground of challenge will now fall within the new ground added under Section 34(2-A). Para 42.3 to 45 of the judgement passed in the case of Associate Builders (supra) are quoted as under:-
"42.3. (c) Equally, the third subhead of patent illegality is really a contravention of Section 28(3) of the Arbitration Act, which reads as under:
"28. Rules applicable to substance of dispute.-- (1)-(2) * * (3) In all cases, the Arbitral Tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction."
This last contravention must be understood with a caveat. An Arbitral Tribunal must decide in accordance with the terms of the contract, but if an arbitrator construes a term of the contract in a reasonable manner, it will not mean that the award can be set aside on this ground. Construction of the terms of a contract is primarily for an arbitrator to decide unless the arbitrator construes the contract in such a way that it could be said to be something that no fair-minded or reasonable person could do.
43. In McDermott International Inc. v. Burn Standard Co. Ltd., this Court held as under: (SCC pp. 225-26, paras 112-13) "112. It is trite that the terms of the contract can be express or implied. The conduct of the parties would also be a relevant factor in the matter of construction of a contract. The construction of the contract agreement is within the jurisdiction of the arbitrators having regard to the wide nature, scope and ambit of the arbitration agreement and they cannot be said to have misdirected themselves in passing the award by taking into consideration the conduct of the parties. It is also trite that correspondences exchanged by the parties are required to be taken into consideration for the purpose of construction of a contract. Interpretation of a contract is a matter for the arbitrator to determine, even if it gives rise to determination of a question of law. [See Pure Helium India (P) Ltd. v. Oil and Natural Gas Commission and D.D. Sharma v. Union of India.]
113. Once, thus, it is held that the arbitrator had the jurisdiction, no further question shall be raised and the court will not exercise its jurisdiction unless it is found that there exists any bar on the face of the award."
44. In MSK Projects (I) (JV) Ltd. v. State of Rajasthan, the Court held:
(SCC pp. 581-82, para 17) "17. If the arbitrator commits an error in the construction of the contract, that is an error within his jurisdiction. But 31 if he wanders outside the contract and deals with matters not allotted to him, he commits a jurisdictional error.
Extrinsic evidence is admissible in such cases because the dispute is not something which arises under or in relation to the contract or dependent on the construction of the contract or to be determined within the award. The ambiguity of the award can, in such cases, be resolved by admitting extrinsic evidence. The rationale of this rule is that the nature of the dispute is something which has to be determined outside and independent of what appears in the award. Such a jurisdictional error needs to be proved by evidence extrinsic to the award. (See Gobardhan Das v. Lachhmi Ram, Thawardas Pherumal v. Union of India, Union of India v. Kishorilal Gupta & Bros., Alopi Parshad & Sons Ltd. v. Union of India, Jivarajbhai Ujamshi Sheth v. Chintamanrao Balaji and Renusagar Power Co. Ltd. v. General Electric Co.)"
45. In Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran, the Court held: (SCC pp. 320-21, paras 43-45) "43. In any case, assuming that Clause 9.3 was capable of two interpretations, the view taken by the arbitrator was clearly a possible if not a plausible one. It is not possible to say that the arbitrator had travelled outside his jurisdiction, or that the view taken by him was against the terms of contract. That being the position, the High Court had no reason to interfere with the award and substitute its view in place of the interpretation accepted by the arbitrator.
44. The legal position in this behalf has been summarised in para 18 of the judgment of this Court in SAIL v. Gupta Brother Steel Tubes Ltd. and which has been referred to above. Similar view has been taken later in Sumitomo Heavy Industries Ltd. v. ONGC Ltd. to which one of us (Gokhale, J.) was a party. The observations in para 43 thereof are instructive in this behalf.
45. This para 43 reads as follows: (Sumitomo case, SCC p.
313) '43. ... The umpire has considered the fact situation and placed a construction on the clauses of the agreement which according to him was the correct one. One may at the highest say that one would have preferred another construction of Clause 17.3 but that cannot make the award in any way perverse. Nor can one substitute one's own view in such a situation, in place of the one taken by the umpire, which would amount to sitting in appeal. As held by this Court in Kwality Mfg.
Corpn. v. Central Warehousing Corpn. the Court while considering challenge to arbitral award does not sit in appeal over the findings and decision of the arbitrator, which is what the High Court has practically done in this matter. The umpire is legitimately entitled to take the view which he holds to be the correct one after considering the material before him and after interpreting the provisions of 32 the agreement. If he does so, the decision of the umpire has to be accepted as final and binding.'"
G. A decision that is perverse as understood in paragraphs 31 and 32 of Associate Builders, while no longer a ground for challenge under "public policy of India", would certainly amount to a patent illegality appearing on the face of the award. Thus, a finding based on no evidence at all or an award that ignores vital evidence in arriving at its decision would be perverse and liable to be set aside on the ground of patent illegality. Paragraphs 31 and 32 of the judgement passed in the case of Associate Builders(supra) are quoted above.
22. In "Sutlej Construction Limited Vs. Union Territory of Chandigarh" (2018) 1 SCC 718, it has been held that when the Arbitrator has taken a reasonable view on the basis of a plausible view there is no scope of reappreciation of evidence and substitute its view unless the view taken by the Arbitrator shocks the conscience of the Court.
23. In a recent three-Judge Bench decision of the Hon'ble Supreme Court in the case of "Delhi Metro Rail Corporation Ltd. v. Delhi Airport Metro Express Pvt. Ltd." reported in (2024) 6 SCC 357, the ground of patent illegality/perversity was delineated in the following terms:
"40. In essence, the ground of patent illegality is available for setting aside a domestic award, if the decision of the arbitrator is found to be perverse, or so irrational that no reasonable person would have arrived at it; or the construction of the contract is such that no fair or reasonable person would take; Or, that the view of the arbitrator is not even a possible view. A finding based on no evidence at all or an award which ignores vital evidence in arriving at its decision would be perverse and liable to be set aside under the head of patent illegality. An award without reasons would suffer from patent illegality. The arbitrator commits a patent illegality by deciding a matter not within its jurisdiction or violating a fundamental principle of natural justice."
24. The Hon'ble Supreme Court in the case of "OPG Power Generation Private Limited Vs. ENEXIO Power Cooling Solutions India private Limited" reported in 2024 SCC OnLine SC 2600 has held in paragraphs 68 to 71 as under: -
"Scope of interference with an arbitral award 33
68. The aforesaid judicial precedents make it clear that while exercising power under Section 34 of the 1996 Act the Court does not sit in appeal over the arbitral award. Interference with an arbitral award is only on limited grounds as set out in Section 34 of the 1996 Act. A possible view by the arbitrator on facts is to be respected as the arbitrator is the ultimate master of the quantity and quality of evidence to be relied upon. It is only when an arbitral award could be categorized as perverse, that on an error of fact an arbitral award may be set aside. Further, a mere erroneous application of the law or wrong appreciation of evidence by itself is not a ground to set aside an award as is clear from the provisions of sub-section (2-A) of Section 34 of the 1996 Act.
69. In Dyna Technologies (supra), a three-Judge Bench of this Court held that Courts need to be cognizant of the fact that arbitral awards are not to be interfered with in a casual and cavalier manner, unless the court concludes that the perversity of the award goes to the root of the matter and there is no possibility of an alternative interpretation that may sustain the arbitral award. It was observed that jurisdiction under Section 34 cannot be equated with the normal appellate jurisdiction. Rather, the approach ought to be to respect the finality of the arbitral award as well as party's autonomy to get their dispute adjudicated by an alternative forum as provided under the law.
70. Now, we shall examine the scope of interference with an arbitral award on ground of insufficient, or improper/erroneous, or lack of, reasons.
Reasons for the Award - When reasons, or lack of it, could vitiate an arbitral award.
71. Section 31 (3)57 of the 1996 Act provides that an arbitral award shall state reasons upon which it is based, unless (a) the parties have agreed that no reasons are to be given, or (b) the award is an arbitral award on agreed terms under Section 30. 71.1 As to the form of a reasoned award, in Russell on Arbitration (24th Edition, page 304) it is stated thus:
"6.032. No particular form is required for a reasoned award although 'the giving of clearly expressed reasons responsive to the issues as they were debated before the arbitrators reduces the scope for the making of unmeritorious challenges'. When giving a reasoned award the tribunal need only set out what, on its view of the evidence, did or did not happen and explain succinctly why, in the light of what happened, the tribunal has reached its decision, and state what that decision is. In order to avoid being vulnerable to challenge, the tribunal's reasons must deal with all the issues that were put to it. It should set out its findings of fact and its reasoning so as to enable the parties to understand them 34 and state why particular points were decisive. It should also indicate the tribunal's findings and reasoning on issues argued before it but not considered decisive, so as to enable the parties and the court to consider the position with respect to appeal on all the issues before the tribunal. When dealing with controversial matters, it is helpful for the tribunal to set out not only its view of what occurred, but also to make it clear that it has considered any alternative version and has rejected it. Even if several reasons lead to the same result, the tribunal should still set them out. That said, so long as the relevant issues are addressed there is no need to deal with every possible argument or to explain why the tribunal attached more weight to some evidence than to other evidence. The tribunal is not expected to recite at great length communications exchanged or submissions made by the parties. Nor is it required to set out each step by which it reached its conclusion or to deal with each and every point made by the parties. It is sufficient that the tribunal should explain what its findings are and the evidential route by which it reached its conclusions.
71.2 On the requirement of recording reasons in an arbitral award and consequences of lack of, or inadequate, reasons in an arbitral award, this Court in Dyna Technologies (supra) held:
"34. The mandate under section 31 (3) of the Arbitration Act is to have reasoning which is intelligible and adequate and, which can in appropriate cases be even implied by the courts from a fair reading of the award and documents referred to thereunder, if need be. The aforesaid provision does not require an elaborate judgment to be passed by the arbitrators having regard to the speedy resolution of dispute.
35. When we consider the requirement of a reasoned order, three characteristics of a reasoned order can be fathomed. They are : proper, intelligible and adequate. If the reasonings in the order are improper, they reveal a flaw in the decision-making process. If the challenge to an award is based on impropriety or perversity in the reasoning, then it can be challenged strictly on the grounds provided in section 34 of the Arbitration Act. If the challenge to an award is based on the ground that the same is unintelligible, the same would be equivalent of providing no reasons at all. Coming to the last aspect concerning the challenge on adequacy of reasons, the court while exercising jurisdiction under section 34 has to adjudicate the validity of such an award based on the degree of particularity of reasoning required having regard to the nature of issues falling for consideration. The degree of particularity cannot be stated in a precise manner as the same would depend on the complexity of the issue even if the court comes to a conclusion that there were gaps in the reasoning for the conclusions reached by the tribunal, the court needs to have regard to the document submitted by the parties and the contentions 35 raised before the tribunal so that awards with inadequate reasons are not set aside in casual and cavalier manner. On the other hand, ordinarily unintelligible awards are to be set aside, subject to party autonomy to do away with the reasoned award. Therefore, the courts are required to be careful while distinguishing between inadequacy of reasons in an award and unintelligible awards."
71.3. We find ourselves in agreement with the view taken in Dyna Technologies (supra), as extracted above. Therefore, in our view, for the purposes of addressing an application to set aside an arbitral award on the ground of improper or inadequate reasons, or lack of reasons, awards can broadly be placed in three categories:
(1) where no reasons are recorded, or the reasons recorded are unintelligible;
(2) where reasons are improper, that is, they reveal a flaw in the decision- making process; and (3) where reasons appear inadequate.
71.4. Awards falling in category (1) are vulnerable as they would be in conflict with the provisions of Section 31(3) of the 1996 Act. Therefore, such awards are liable to be set aside under Section 34, unless (a) the parties have agreed that no reasons are to be given, or
(b) the award is an arbitral award on agreed terms under Section
30. 71.5. Awards falling in category (2) are amenable to a challenge on ground of impropriety or perversity, strictly in accordance with the grounds set out in Section 34 of the 1996 Act.
71.6. Awards falling in category (3) require to be dealt with care. In a challenge to such award, before taking a decision the Court must take into consideration the nature of the issues arising between the parties in the arbitral proceedings and the degree of reasoning required to address them. The Court must thereafter carefully peruse the award, and the documents referred to therein. If reasons are intelligible and adequate on a fair-reading of the award and, in appropriate cases, implicit in the documents referred to therein, the award is not to be set aside for inadequacy of reasons. However, if gaps are such that they render the reasoning in support of the award unintelligible, or lacking, the Court exercising power under Section 34 may set aside the award."
Findings on merit
25. The perusal of the order of GRC reveals that the parties had joined issues in connection with purchase as well as sale of the shares of the three companies namely, India Bulls Housing Finance Ltd., New India Assurance Company Limited and Future Consumer Limited. It has been the specific case of the claimant throughout that 36 both the transactions i.e. purchase and also sale of shares of the aforesaid 3 companies were without any pre-authorization in terms of the SEBI circular dated 22.03.2018. Further grievance was that the shares of aforesaid three companies were sold without any pre- authorization at a later stage without following the rule of T+5 at a very low rate due to which the claimant's Demat account balance came to zero which was violative of circular issued by SEBI dated 22.06.2017. The specific case of the claimant was that the both transactions i.e. sale and purchase were totally against the circulars issued by SEBI dated 22.03.2018 and 22.06.2017. The grievance was relating to unauthorized share trading and manipulation in trading account.
26. On the other hand, the specific case of the appellant before the GRC was that prior consent was taken before share trading and that the claimant had not availed Margin Trading Facility (MTF) as per SEBI circular dated 13.06.2017 and they had not provided any funding under MTF and they received all the payments in the trading account of the claimant from mapped bank account. The applicability of the circulars by SEBI and its binding effect was not in dispute. However, they had heavily relied upon the conduct of the claimant to say that the transactions were duly authorized and in order to substantiate this, they primarily relied upon call recordings which were selectively produced - total 22 in numbers by stating that only those 22 call recordings were relevant in connection with the said transactions relating to shares of the three companies mentioned above. It is further not in dispute that the appellant brought only 22 audio clips out of 726 audio clips of the calls between the claimant and the representative of the appellant and it was alleged by the claimant that the 22 audio clips were selectively brought on record and the rest were deliberately suppressed.
27. The entire case before the authorities primarily revolved around the SEBI circular dated 22.03.2018 which is quoted as under:
"Securities and Exchange Board of India CIRCULAR 37 SEBI/HO/MIRSD/DOP1/CIR/P/2018/54 March 22, 2018 To, All recognized Stock Exchanges, Dear Sir/Madam, Sub: Circular on Prevention of Unauthorised Trading by Stock Brokers I. This master circular consolidates and updates the requirements/obligations with regard to Prevention of Unauthorised Trading by Stock Brokers prescribed by the following circulars A. CIR/HO/MIRSD/MIRSD2/CIR/P/2017/108 dated September 26, 2017 B. CIR/HO/MIRSD/MIRSD2/CIR/P/2017/124 dated November 30, 2017 C. CIR/HO/MIRSD/MIRSD2/CIR/P/2018/109 dated January 11, 2018 Prevention of Unauthorised Trading by Stock Brokers II. SEBI in the past has taken several steps to tackle the issue of "Unauthorized Trades" viz Periodic Running Account Settlement, Post transactions SMS/email by exchanges/Depositories, Ticker on broker/DP websites etc. It was observed that in spite of measures taken, a considerable proportion of investor complaints is of the nature of "Unauthorized Trades".
III. To further strengthen regulatory provisions against un-authorized trades and also to harmonise the requirements across markets, it has now been decided that all brokers shall execute trades of clients only after keeping evidence of the client placing such order, which could be, inter alia, in the form of:
a. Physical record written & signed by client, b. Telephone recording, c. Email from authorized email id, d. Log for internet transactions, e. Record of messages through mobile phones, f. Any other legally verifiable record.
When a dispute arises, the broker shall produce the above mentioned records for the disputed trades. However for exceptional cases such as technical failure etc. where broker fails to produce order placing evidences, the broker shall justify with reasons for the same and depending upon merit of the same, other appropriate evidences like post trade confirmation by client, receipt/payment of funds/ securities by client in respect of disputed trade, etc. shall also be considered.
IV. Further, wherever the order instructions are received from clients through the telephone, the stock broker shall mandatorily use telephone recording system to record the instructions and maintain telephone recordings as part of its records.
V. The Brokers are required to maintain the records specified at Para III above for a minimum period for which the arbitration accepts investors' complaints as notified from time to time currently three years. However in cases where dispute has been raised, such records shall be kept till final resolution of the dispute.38
VI. If SEBI desires that specific records be preserved then such records shall be kept till further intimation by SEBI.
VII. The earlier circulars on the same subject mentioned in Para 1 of this Master Circular stand rescinded.
VIII. This master circular shall continue to be effective from 1st April 2018. IX. The Stock Exchanges are directed to:
a. bring the provisions of this circular to the notice of the Stock Brokers and also disseminate the same on their websites. b. make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the above directions in coordination with one another to achieve uniformity in approach. c. communicate to SEBI, the status of the implementation of the provisions of this circular in their Monthly Development Reports. X. This circular is issued in exercise of powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 to protect the interest of investors in securities and to promote the development of and to regulate the securities market.
Yours faithfully, Debashis Bandyopadhyay General Manager"
28. The GRC primarily did not admit the claim on the ground that the claimant had knowledge of the transactions. However, it gave specific finding that there was no pre-authorization for purchase of shares in connection with India Bulls Housing Finance Limited and New India Assurance Company Limited and also recorded that there was authorization to purchase 10 lakhs shares of Future Consumer Limited only. It was also asserted by the appellant that appellant had provided e-log of operations of trading application and the claimant kept updates of his transactions on regular basis. The findings of the GRC have already been quoted above. The GRC while rejecting the claim observed that the claimant was free to pursue his complaint to any forum including arbitration as next course of action if he may so desire. Thus, the issue before the GRC included both purchase as well as sale of shares with regard to aforesaid three companies.
29. The matter was taken up by the claimant before the Arbitral Tribunal (AT) and the issue before the AT was with regard to purchase as well as sales of shares of the aforesaid 3 companies. However, a new issue cropped up before the AT in the midst of the hearing and on 16.02.2023 the appellant moved an application under section 27 of the 39 Act of 1996 calling for records of bank account from NSDL Payments Bank alleged to have been opened by the claimant and a detailed order dated 20.02.2023 allowing the said petition was passed. Vide order dated 16.03.2023 it was brought to the notice of the AT that power of attorney was not provided by NSDL Payments Bank and it was observed that the admissibility, reliability and genuineness of the documents were to be considered at the time of hearing and the arguments were concluded on 03.04.2023.
30. On the basis of the points raised, the AT framed the following issues:
"(i) Whether the sale and purchase of these three shares, viz. India Bulls Housing Finance Limited, New India Assurance Company Limited and Future Consumer Ltd. by the Trading Member was unauthorized?
(ii) Whether the Trading Member had engaged in unfair practice while operating the account of the Applicant and whether the MTF facility was activated and any interest was levied towards the same?
(iii) Whether the NSDL Payments Bank account was opened at the instance of the Applicant, and whether the transaction taken place therein will have any bearing on the claim of the Applicant?
(iv) Whether the Applicant is entitled for the claim as set forth before GRC and before this Tribunal?"
31. After perusal of all the pleading, evidence, circulars and authorities placed before the AT, the AT came to a finding that there were no pre-authorization of trades as per the mandatory requirement of SEBI circular dated 22.03.2018.
The AT also found that the broker (appellant herein) was required to retain the record pertaining to authorization for a period of not less than 3 years as such since a duty is casted upon the broker to retain the records of pre-authorization the onus is always upon the broker to dispel the allegation of unauthorized trading. The AT came to the finding that the present appellant had miserably failed to bring on record any verifiable document regarding pre- authorization and from the audio clips that were brought on record; at best it could be gathered that the claimant only had the knowledge and 40 knowledge cannot be construed to mean pre-authorization as required by the SEBI circular dated 22.03.2018.
The AT further held that if law requires a certain thing to be done in a certain way, then that particular thing has to be done in that certain specific way only and there cannot be any departure from the same. The SEBI circular contemplated a pre-authorization of share and mere awareness or knowledge of a fact cannot be construed to mean authorization.
The AT also found that GRC had come to a finding that the claimant did not authorize or consented to the sale/purchase of the disputed shares and the finding of GRC to that effect was never challenged or assailed by the present appellant.
The AT also came to a finding that there was non-compliance of the SEBI circular dated 22.06.2017 which mandates the Rule of T+5 Square-off and the present appellant had failed to address as to why the share were sold after inordinate delay of more than 90 days. The AT further held that nothing was brought on record to suggest that the account with NSDL Payments Bank was opened at the instance of the claimant. The stamp papers for power of attorney were purchased from New Delhi on 05.12.2020 and notarized on 25.03.2021 and the same day it reached Mumbai in pursuance of which a transaction of about Rs. 1.99 Cores was done on the same day. The NSDL account was opened without any KYC documents. Further, there was requirement of payment of Rs. 50,000/- for opening of the account and same was also not complied with.
32. The AT held that the claimant is entitled to a claim of Rs. 3,65,18,233.16 i.e. Rs. 2,75,37,473.85 towards unauthorised trading and Rs. 89,80,759.31 towards expenses levied by the present appellant.
33. The matter was taken up by the present appellant before the AAT who has set-aside the award of the AT by 2:1 majority.
34. The AAT while setting aside the arbitral award passed by AT has not at all considered and pronounced upon the findings and reasonings given by the AT. The AAT has not dealt with interpretation 41 and reasonings given by the AT with regard to the circular issued by SEBI dated 22.03.2018. The AAT has primarily gone into the conduct of the claimant and has given a complete go-by to the circular of SEBI dated 22.03.2018 which is admittedly binding on the parties and has the force of law. The award of the AAT on the face of it suffers from perversity, having been passed in complete disregard to the circular issued by SEBI. The AAT while recording its finding has not only ignored the mandate of the SEBI circular dated 22.03.2018, but has observed that claimant was not a 'novice' in the securities market and seemed to be well aware of the stock market transactions. The AAT also ignored the fact that on the face of the SEBI circular dated 22.03.2018, the exceptional clause could be invoked only in such circumstances where on account of technical failure etc., the trading member/broker was unable to produce pre-authorization for purchase and sale and was permitted to prove it by other evidences, which was the interpretation given by the AT.
The AAT also refused to decide the issue with regard to opening of NSDL Payments Bank account and the connected papers produced or procured during the proceedings from the concerned bank although the said issue was raised not at the instance of the claimant but by the appellant before the AT by filing a petition under section 27 of the Act of 1996 which was duly allowed and such steps were taken by the present appellant primarily to justify the action of the appellant. The said opening of account by the claimant as alleged by the appellant but denied by the claimant had a serious bearing in the matter, but the AAT refused to go into such issue and decided the case in favour of the appellant although such issue was duly decided by the AT in favour of the claimant. The dissenting member of the AAT has considered both the issues i.e. the issue regarding unauthorized sale and purchase of the shares relating to aforesaid three companies and also the claim of the appellant regarding opening of NSDL Payments Bank account by the claimant and both the issues were decided against the appellant.
4235. This Court is of the considered view that on the aforesaid reasons the majority award of the AAT ex-facie suffers from perversity on the face of it as it has ignored the import of the SEBI circulars. Further, the AAT relied upon truncated evidence with regard to call recordings which was selectively produced by the appellant by stating that only those call recordings i.e. 22 out of 726 were relevant in spite of there being serious objection with regard to selective production of call recordings. Thus, on the face of it, the award of the AAT suffered from perversity and was patently illegal even when seen in the limited scope of interference under section 34 of the Act of 1996.
36. It has been rightly submitted by the learned counsel for the claimant that the finding of the AAT that the claimant/respondent provided a blanket approval is also perverse in view of the fact that there is no concept of blanket approval and the law mandates specific pre-authorization for every sale and purchase transaction. It has also been rightly submitted that even if all the finding of the AAT are taken to be true for the sake of argument, then also at best the tribunal only came to a conclusion that there was knowledge of the sale transaction. However, the same cannot be construed to be pre-authorization as required by the circular dated 22.03.2018. Such submissions are in line with the findings of AT. It has been rightly submitted by the learned counsel for the claimant that the circular dated 22.03.2018 was a mandatory requirement of the law which has been given a complete go-by by the AAT. It has been rightly submitted that the present appellant has never made out a case of technical failure and it was never their case that on account of technical failure etc. they were not in a position to produce the evidence of required pre-authorization in terms of mandatory requirement of SEBI circular dated 22.03.2018. Further it has also been admitted by the appellant that they had no pre- authorization with respect to purchase of New India Assurance Company Limited.
4337. This Court finds that the learned Commercial Court, Ranchi rightly came to finding that the award passed by the AAT is perverse by interalia, citing followings reasons: -
(i) The AAT has wrongly put the onus upon the claimant to prove that the transaction was unauthorized.
(ii) The evidence brought on record by the present appellant was relating to post trade communication which did not fulfil the mandate of SEBI circular.
(iii) Only 22 conversations were brought on record out of total 726 conversations which shows that the present appellant was selective in producing the evidence.
(iv) The AAT has also ignored the fact that the present appellant did not square off the transaction within the stipulated time i.e. the T+5 norm and the same was done after 103 days.
38. As a cumulative effect of the aforesaid findings, this Court finds no reason to interfere with the impugned judgment passed by the learned Commercial Court whereby the majority view of the AAT vide award dated 15.09.2023 has been set-aside and the award of the AT dated 08th May 2023 has been restored.
39. This commercial appeal is accordingly dismissed.
40. Pending interlocutory application, if any, is closed.
(Dr. S. N. Pathak, J.) I Agree.
(Dr. S. N. Pathak, J.) (Anubha Rawat Choudhary, J.) Jharkhand High Court, Ranchi Dated: 20th December 2024 Pankaj A.F.R 44