Delhi District Court
Kotak Securities Ltd vs Arpit Kakar(Obj 34 ) on 30 July, 2024
IN THE COURT OF MR. SATYABRATA PANDA, DJ-04,
PATIALA HOUSE COURTS, NEW DELHI
CS No. 92 of 2019
Date of Institution : 20.05.2019
Final arguments heard : 24.05.2024
Date of Judgment : 30.07.2024
Kotak Securities Ltd.
6th Floor, Kotak Infinity, Building No.21,
General A K Vaidya Marg,
Malad (E) Mumbai,
Through Authorised Representative
Mr. Abhishek Pandey
.....Applicant
Vs.
1. Mr. Arpit Kakar,
Flat No.14,
The Palms Apartment,
Sector 6, Dwarka,
New Delhi
2. National Stock Exchange Ltd.,
4th Floor, Jeevan Vihar Building,
Parliament Street, New Delhi-110001.
.....Respondents
JUDGMENT
1. The petitioner has filed the present petition under section 34 of the Arbitration and Conciliation Act challenging the arbitral award dated 13/02/2019 passed by the learned sole arbitrator Mr. Ravi Kant in the arbitration proceedings between the parties.
OMP No. 92/2019Kotak Securities Ltd. Vs. Arpit Kakar & Anr.
Page No. 1 of 212. The undisputed position is that the petitioner is a stockbroker with the National Stock Exchange (NSE). The respondent was a client of the petitioner since 2015 and had opened his account with the petitioner to execute transactions for sale and purchase of shares by using off- line trading facility in Cash and Future & Option Segment provided by the petitioner as stockbroker.
3. The dispute between the parties is in respect of squaring of the outstanding positions on 21/09/2018 by the petitioner in two scripts. The respondent filed a complaint with the Investor Grievance Resolution Panel (IGRP) of the NSE as per the terms and conditions agreed between the parties. After considering the grievance of the respondent and the response of the petitioner, the IGRP passed order dated 31/10/2018 in favour of the respondent allowing the respondent's claim for Rs. 1,19,225/-. It would be appropriate to extract the order dated 31/10/2018 of the IGRP, as under:
"IGRP Proceedings In the Complaint No. 1810240808102112 of Mr. Arpit Kakkar against Kotak Securities Ltd.
IGRP Meeting held on October 31, 2018.
A. ISSUES RAISED BY THE PARTIES Issues raised by the complainant:OMP No. 92/2019
Kotak Securities Ltd. Vs. Arpit Kakar & Anr.Page No. 2 of 21
The complainant was not present but was represented by his mother Ms. Ranjana Kakkar.
The complainant states that he has been the client of the Trading Member (herein after referred to as TM) for the past three years. He was holding the position in the F&O segment of the market. On 21" Sept, 2018, the margin shortfall as reported by the trading Member to him was a mere Rs. 200/-. During the day the Trading Member had squared off the position without any prior intimation to him. The dealing operator had communicated the squaring off to the complainant thereafter.
During the past three years there has been margin shortage at many occasions was even to the tune of more than one lakh rupees and the information was also send by the broker through mall but his position was never squared off. The TM used to collect the cheques for the same from him. He had always made the shortfall good and never refused to give the cheque and in some cases has also paid the margin shortfall penalty levied by the TM.
Further, on the given day, despite the margin shortfall, the Trading Member also allowed him to buy shares in the cash market. Also, had there been margin shortfall, the TM should have squared the position in the morning itself. Also, MTM is to be OMP No. 92/2019 Kotak Securities Ltd. Vs. Arpit Kakar & Anr.Page No. 3 of 21
settled on daily basis and the Margin shortfall, before the opening of next trading day.
Responses of the trading member (TM) to the issues raised by the complainant:
The Trading member has stated that there was a margin shortfall and margin statement were send to the complainant through email thereby updating him about the status of the account. The complainant has also confirmed having received the mail about the margin shortfall. The complainant should have tracked the volatility in the margin and had taken necessary action about his position. As the client failed to clear the shortfall his position was squared off as per the 'Rights and Obligations' accepted by the client at the time of opening the account.
B. ORDER OF THE IGRP Observations of IGRP:
Both the complainant and the respondent were heard at length. The complainant also played the voice recordings between them. This call was made by the Trading Member after the position of the complainant was squared off.
The complainant had been dealing with the TM for the last about three years He had been allowed the OMP No. 92/2019 Kotak Securities Ltd. Vs. Arpit Kakar & Anr.Page No. 4 of 21
margin limits in the past even to the tune of one lakh rupees also. As per the TM, they had informed the complainant about the margin shortfall by mail in the morning itself. The TM has relied on the fact that there was a margin shortfall and the position was squared off as per their Rights and Obligations.
The Trading Member in the instant case has applied dual standards with regards to the application of its Rights and Obligation. One the one hand it had allowed margin shortfall to the complainant in the past and on the other it had stated that the margin shortfall was informed and thus the positions were squared off. On the other hand the complainant is also allowed to trade in the cash market, In such a case the positions could also have been squared off in the opening hours of the market itself as the shortfall was already informed to the complainant. Squaring the position due to margin shortfall and allowing trading in the cash market does not go together.
It is a fact that there could be volatility in the market suggesting the squaring off the position but that cannot be the sole criteria. In the instant case the complainant could have been informed prior to squaring the position or should not have been allowed trading in the cash market.OMP No. 92/2019
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Orders given by IGRP In view of the above, the complaint is allowed at this forum. The amount of loss suffered and claimed by the complainant is allowed.
Admissible Claim: Rs 1,19,225/-"
4. The petitioner thereafter invoked arbitration in terms of the agreement between the parties. The arbitration proceedings were conducted before the sole arbitrator and resulted in the impugned award dated 13/02/2019. It would be appropriate to extract the impugned award as under:
"AWARD
1. The present application for Arbitration has been filed by M/s Kotak Securities Ltd., a Trading member, against the respondent-constituent, Mr. Arpit Kakar making a claim of Rs.1, 30,632.77. The claim has been denied by the respondent. A hearing was fixed and held on 30-01-2019, on which date both parties presented their case through their authorised representatives who made detailed submissions in support of their respective cases. The Award which follows is based on a consideration of these submissions and a perusal of the written material brought on record.OMP No. 92/2019
Kotak Securities Ltd. Vs. Arpit Kakar & Anr.Page No. 6 of 21
2. The applicant Trading member has stated in its Statement of Claim that the respondent had made a complaint on October 09, 2018 to the NSE which was heard by the Investor Grievance Cell, who vide their order dated October 31, 2018, decided the matter in favour of the respondent and held that the respondent was entitled to receive from the Trading Member a sum of Rs.1, 19,225. Aggrieved by this order of the IGRP, the applicant has filed the present application for Arbitration. The Applicant has added to the above sum an amount of Rs.11, 407.77 on account of contractual charges and expenses, bringing the total to Rs.1, 30,632.77. The applicant has stated that the respondent had joined the applicant as a client on April 09, 2015 and started trading in cash market on April 20, 2015 and in F&O segment on June 17, 2015. It is submitted that on September 04, 2018, the respondent purchased 1 lot of FUTSTKCANFINHOME27SEP2018 and on August 30, 2018, he had purchased 1 lot of FUTSTKPNB27SEP2018. He also purchased 1000 shares of Bank of Baroda on September 18, 2018 but these were sold on the 19th. September, 2018. It is stated that on the opening of September 21, 2018, the respondent's position was in a debit of Rs. 1,544.34 and there was a margin of Rs.1, 10,516.30 against his open positions. However, in the afternoon of September 19, there was sharp OMP No. 92/2019 Kotak Securities Ltd. Vs. Arpit Kakar & Anr.Page No. 7 of 21
volatility in the prices of these two positions and there was a sharp erosion of margin. As the margin went into negative and there was further fall in the market, the applicant was constrained to liquidate the open positions. The applicant has cited clause 19 of SEBI's "Rights and Obligations" in support of its claim as also the SEBI circular dated March 19, 2004.
3. The respondent has strongly disputed the claim. It is submitted that the Trading Member on its own, and without any prior intimation or margin call to the respondent, had squared off the positions, causing a loss. It is pointed out that any shortage in the margin is expected to be made good by the client before the opening hours of the next day. However, in the present case the positions were squared off at 1 p.m. without giving any intimation to the respondent. The respondent has pointed to his history with the Trading Member to establish that whenever there was any shortfall in the margin, it was promptly mad good. It is pointed out that there have been 39 instances of such shortfall but on each and every occasion the shortfall was made good before the next day's opening. The respondent has also cited the order of the IGRP where the matter was decided in favour of the respondent after hearing both parties.OMP No. 92/2019
Kotak Securities Ltd. Vs. Arpit Kakar & Anr.Page No. 8 of 21
4. I have carefully considered the matter and have examined the material brought on record. The issue in the case is limited, namely, whether the squaring off the two positions by the applicant was justified. It is clear that the action of the applicant in squaring off the two open positions was more of a panic reaction rather than an action based on the laid down and accepted norms. The applicant Trading Member has given in his written submissions a chart showing the continued decline in the prices of the two positions on the subsequent dates and has argued that "the applicant's decision to square off the open positions has been proved to be in favour of the respondent only." This submission, however, cannot help the applicant as the information in the chart was not available when the positions were squared off. The clause 1.7.2 of the SEBI circular dated March 19, 2004 cited by the applicant is also of no avail, because bit envisages the squaring off by the Trading Member "in the interregnum between making of the margin call and receipt of payment from the client", and it is an admitted position that in the present case no such call had made to the respondent.OMP No. 92/2019
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5. On the facts and in the circumstances of the case, therefore, I hold that there is no merit in the Applicant's case and the same is dismissed."
5. Being aggrieved by the aforesaid arbitral award, the petitioner has challenged the same by way of the present petition.
6. As per the record, the respondent was served with the notice of the petition on 22/12/2021. However, the respondent did not appear in the matter.
7. The learned counsel for the petitioner has submitted that there is a patent illegality in the award. It is submitted that the arbitrator had misunderstood and misinterpreted the terms of the contract and trade usage as envisaged in stock market exchange. It is submitted that the definition of "margin call" was that "when the percentage of an investor's equity in a marginal account falls below the broker's record amount". It is submitted that an investor's margin account contains securities both with a combination of the investor's own money and money borrowed from the investor's broker. It is submitted that this means that the share broker had every right to redeem in the amount when the investor's money falls below the broker's record amount. It is submitted that "margin call"
means the broker's demand that the investor deposit the additional money of securities into the account. It is submitted that the sole arbitrator had interpreted margin call as a telephonic call to the investor prior to the trading OMP No. 92/2019 Kotak Securities Ltd. Vs. Arpit Kakar & Anr.Page No. 10 of 21
of the shares. It is submitted that this is clear from the observation of the arbitrator that "it is the admitted position that in the present case no such call had been made to the respondent". It is submitted that hence it is crystal clear that the arbitrator had misinterpreted the trade usage like margin call and had interpreted the same as a simple telephonic call. It is submitted that hence there was violation of section 28(3) of the Arbitration and Conciliation Act which provided that in making the award the arbitrator was to take into account the terms of the contract and trade usage applicable to the transaction. It is submitted that as such the award suffers from a patent illegality. Learned counsel has relied upon the decisions in Associate Builders v. DDA (2015) 3 SCC 49 and Delhi Airport Express Pvt. Ltd. v. DMRC (Civil Appeal No.5628/2021.
8. I have considered the submissions of the learned counsel for the petitioner and I have perused the record.
9. A perusal of the record shows that in the statement of claim filed before the arbitrator, the petitioner was seeking to justify the liquidation of the securities on the basis of Clause 19 of the "Rights and Obligations of Stock Brokers, Sub-Brokers and Clients" document and Clause
(e) of the "Policies and Procedures for Client Dealings"
document which was part of the agreement between the parties and also on the Clause 1.7.2 of the SEBI circular dated 19/03/2004.OMP No. 92/2019
Kotak Securities Ltd. Vs. Arpit Kakar & Anr.Page No. 11 of 21
10. It would be appropriate to extract the Clause 19 of the "Rights and Obligations of Stock Brokers, Sub-Brokers and Clients" document and Clause (e) of the "Policies and Procedures" document as follows:
Rights and Obligations of Stock Brokers, Sub-
Brokers and Clients
"LIQUIDATION AND CLOSE OUT OF
POSITION
19. Without prejudice to the stock broker's other rights (including the right to refer a matter to arbitration), the client understands that the stock broker shall be entitled to liquidate/close out all or any of the client's positions for non-payment of margins or other amounts, outstanding debts, etc. and adjust the proceeds of such liquidation/close out, if any, against the client's liabilities/obligations.
Any and all losses and financial charges on account of such liquidation/closing out shall be charged to and borne by the client."
Policies and Procedures for Client Dealings "e. The right to sell clients' securities or close clients' positions, without giving notice to the client, on account of non-payment of client's dues:
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Without prejudice to other rights (including the right to refer a matter to arbitration), KSL would be entitled to liquidate/close out without any notice all or any of the client's position for non payment of margins or other amounts, outstanding debts etc. and adjust the proceeds of such liquidation/close out, if any, against the clients liability/obligations. Any and all losses and financial charges on account of such liquidation/closing out shall be charged to and borne by the client.
Company on best effort basis will try and inform the client and give him reasonable time for payment. However it will be the responsibility of client to track his margins/ obligations by going through margin statements sent to the client on daily basis.
In case the payment of margin/security is made by the client through a bank instrument, KSL shall be at liberty to give the benefit/credit for the same only on completion of bank reconciliation and realization of the fund from the said bank instrument etc., at its absolute discretion. Where the margin/security is made available by way of securities or any other property, KSL is empowered to decline its acceptance as margin/security and/or to accept it at such reduced value as the stock broker may deem fit by applying haircuts or by valuing it by marking it OMP No. 92/2019 Kotak Securities Ltd. Vs. Arpit Kakar & Anr.Page No. 13 of 21
to market or by any other method as it may deem fit in its absolute discretion.
KSL has the right but not obligation, to cancel all pending orders and to sell/close/liquidate all open position/ securities/ shares at the pre-defined square off time or when mark to market percentage reaches or crosses stipulated margin percentage, whichever is earlier. KSL will have sole discretion to decide referred stipulated margin percentage depending upon the market condition. In the event of such square off, the client agrees to bear all the losses based on actual executed prices. The client shall also be solely liable for all and any penalties and charges levied by the exchange (s)."
(Emphasis is mine)
11. Although the aforesaid Clause 19 and Clause (e) entitled the petitioner to liquidate/close all or any of the client's position for non-payment of margins and adjust the proceeds of such liquidation/close out, Clause (e) specifically provided that "Company on best effort basis will try and inform the client and given a reasonable time for payment". Hence, in case of margin shortfall, it was incumbent upon the petitioner on a "best effort basis" to try and inform the respondent and give a reasonable time for payment. However, the petitioner could not show that it had made any effort to try and inform the respondent OMP No. 92/2019 Kotak Securities Ltd. Vs. Arpit Kakar & Anr.
Page No. 14 of 21regarding the margin shortfall and give some reasonable time for payment.
12. It is in this respect that the observation of the arbitrator that no margin call was given assumes relevance. In general market parlance, margin call refers to the broker's demand that the investor deposit additional money or securities into the account so that the value of the investor's equity and the account value rises to a minimum value indicated as the maintenance requirement. The Cambridge Business English Dictionary (Cambridge University Press) (https://dictionary.cambridge.org/dictionary/english/margi n-call) refers to "margin call" as a term used in "Finance, Stock Market" and defines it as "a demand to increase the amount of money or assets in a margin account because it has fallen below the lowest amount allowed" . Hence, clearly margin call is a demand/communication by the broker to the investor to deposit additional money or securities in the margin account so that it can rise beyond the maintenance requirement. As already mentioned, even Clause (e) of the "Policies and Procedures for Client Dealings" document required the petitioner to inform the respondent and given a reasonable time for payment before liquidating the respondent's outstanding position in case of margin shortfall. In the present case, as rightly observed by the arbitrator, no margin call was made. The respondent was intimated about the squaring off of the positions after the same had already been done.
OMP No. 92/2019Kotak Securities Ltd. Vs. Arpit Kakar & Anr.
Page No. 15 of 2113. The argument made by the learned counsel for the petitioner that the sole arbitrator had misinterpreted the meaning of the term "margin call" and had construed the same as a "telephonic call" is really without any substance. As already mentioned, a margin call is a demand made by the broker to the investor to deposit additional money or securities to maintain the maintenance requirement in the margin account. This demand can be made by the broker through various means such as through text SMS, email, or even by a telephonic call, however, it has to be communicated by the broker to the investor so that the investor can take steps to make payment. As already mentioned, this is what is also envisaged in Clause (e) of the "Policies and Procedures for Client Dealings"
document which required the petitioner to inform the respondent and given a reasonable time for payment. In the present case, the petitioner has been unable to show that it had made any demand to the respondent to make payment of additional money so as to make good the shortfall in the margin account. Rather, without making any such margin call, the petitioner went forward and squared of the positions without prior intimation to the respondent.
14. Insofar as the petitioner had relied upon the Clause 1.7.2 of the SEBI circular dated 19/03/2004 in the arbitration proceedings, I find that rather than helping the case of the petitioner, this SEBI circular also goes against the case of the petitioner. It would be appropriate to extract the OMP No. 92/2019 Kotak Securities Ltd. Vs. Arpit Kakar & Anr.
Page No. 16 of 21relevant portions of the SEBI Circular SEBI/MRD/SE/SU/Cir-15/04 dated 19/03/2004 as follows:
"1.6 Margin requirements 1.6.1 The initial and maintenance margin for the client shall be a minimum of 50% and 40% respectively, to be paid in cash. For this purpose;
i. "initial margin" would mean the minimum amount, calculated as a percentage of the transaction value, to be placed by the client, with the broker, before the actual purchase. The broker may advance the balance amount to meet full settlement obligations.
ii. "Maintenance margin" would mean the minimum amount, calculated as a percentage of the market value of the securities, calculated with respect to the last trading day's closing price, to be maintained by the client with the broker.
1.6.2 When the balance deposit in the client's margin account falls below the required maintenance margin, the broker shall promptly make margin calls. However, no further exposure can be granted to the client on the basis of any increase in the market value of the securities. 1.6.3 The exchange/broker shall have the discretion to increase the margins mentioned at 1.6.1 above and in such a case, the margin call shall be made, as and when required."
"1.7 Liquidation of securities by the broker in case of default by the client OMP No. 92/2019 Kotak Securities Ltd. Vs. Arpit Kakar & Anr.Page No. 17 of 21
1.7.1 The broker may liquidate the securities if the client fails to meet the margin call made by the broker or fails to deposit the cheques on the day following the day on which the margin call has been made or where the cheque deposited by the client has been dishonoured.
1.7.2 The broker may also liquidate the securities in case the client's deposit in the margin account (after adjustment for mark to market losses) falls to 30% or less of the latest market value of the securities, in the interregnum between making of the margin call and receipt of payment from the client. 1.7.3 However, the broker shall not liquidate or use in any manner the securities of the client in any situation other than the ones mentioned at paras 1.7.1 and 1.7.2."
(Emphasis supplied by me)
15. As per Clause 16.2 of the aforesaid circular, when the balance deposit in the client's margin account fell below the required maintenance margin, "the broker shall promptly make margin calls". Hence, upon the balance deposit falling below the maintenance requirement, the broker was mandated to promptly inform the investor and demand that payment be made to maintain the required maintenance margin. This is again in line with Clause (e) of the "Policies and Procedures for Client Dealings"
document which required the petitioner to inform the respondent and given a reasonable time for payment to maintain the margin account.OMP No. 92/2019
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16. As per Clause 1.7.3 of the aforesaid circular, the broker could not liquidate the securities of the investor in any other manner other than as provided in Clauses 1.7.1 and 1.7.2.
17. As per Clause 1.7.1, the broker could liquidate the securities if the investor failed to meet the margin call made by the broker or failed to deposit the cheques on the day following the day on which the margin call was made or where the cheques deposited were dishonoured. In the present case, the position is that no margin call was made by the petitioner to the respondent and hence, the petitioner could not have liquidated the securities under Clause 1.7.1.
18. Insofar as Clause 1.7.2 of the circular is concerned, the same provided that the broker may also liquidate the securities in the interregnum between making of the margin call and receipt of payment in case the clients deposit in the margin account after adjustment for mark to market loss fell to 30% or less of the latest market value of the securities. Even in such a case, for the liquidating the securities, there ought to have been a margin call made by the broker to the client. Since in the present case, there was no margin call made by the petitioner to the respondent, again there would be no application of Clause 1.7.2.
19. Hence, since the petitioner could not liquidate the securities either under Clauses 1.7.1 or 1.7.2, in terms of OMP No. 92/2019 Kotak Securities Ltd. Vs. Arpit Kakar & Anr.
Page No. 19 of 21Clause 1.7.3, the petitioner could not have liquidated the securities in any other manner.
20. In the result, the arbitral award upholding the order of the IGRP does not call for any interference in the present petition.
21. Moreover, I find that the dispute has been adjudicated between the parties as per the proceedings which were envisaged in the terms and conditions between the parties i.e. firstly through a hearing before the IGRP and thereafter in the arbitration proceedings. These proceedings have been envisaged under the rules of the National Stock Exchange which have been agreed to by the parties. These rules provide for experts on the panel of the IGRP and the arbitrator is also selected by the parties through a panel of experts. The parties were given the opportunity of hearing before both the IGRP and the arbitrator, and having considered the facts and circumstances of the case and the evidence before them, the IGRP and subsequently the arbitrator have both held in favour of the respondent. I find that the learned arbitrator has considered the contentions and submissions of the parties, has applied his mind to the matter and has ultimately passed the reasoned award. The learned arbitrator has appreciated the matter and has passed the award, which was well within his jurisdiction. I see no scope for interference with the impugned award under section 34 of the Arbitration and Conciliation Act.
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Page No. 20 of 2122. Accordingly, the petition under section 34 of the Arbitration and Conciliation Act filed by the petitioner is dismissed.
23. Parties to bear own costs.
24. File be consigned to record room after due compliance.
Digitally
signed by
Satyabrata
Satyabrata Panda
Panda Date:
2024.07.30
17:13:01
+0530
(SATYABRATA PANDA)
District Judge-04
Judge Code- DL01057
PHC/New Delhi/30.07.2024
OMP No. 92/2019
Kotak Securities Ltd. Vs. Arpit Kakar & Anr.
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