2026 (1) TMI 4 - HC - SEBI

Clients authorising third-party F&O trades despite missing pre/post confirmations; broker not liable for losses, award set aside.

Non-maintenance of pre-trade and post-trade confirmations mandated by the SEBI Circular dated 22 March 2018 was held to attract regulatory/disciplinary ... Failure to scrupulously follow the requirement of maintaining pretrade and post-trade confirmations under SEBI Circular dated 22 March 2018 - Liability to bear the losses incurred by a client in trades - challenged the Awards passed by the three Member Appellate Tribunal constituted under the Rules, Bye-laws and Regulations of National Stock Exchange of India Ltd - awarded 50% losses incurred by them towards execution of Future & Options Segment - HELD THAT:- Failure to adhere to the regulatory directives by SEBI or NSE may entail necessary disciplinary measures against the Stock Broker. However, the same would not necessarily create a liability on the stockbroker to compensate the client/investor in respect of the losses suffered in the trade transactions. In a case like the present one, where clients have authorized or have let another person to effect trades on their behalf, relied on her skills and took the risks in the volatility of the stock market, cannot later turn around and disown the trade transactions by taking a specious plea that the stockbroker did not maintain written/recorded pre-trade confirmations. The maintenance of written/recorded trade confirmations would have some significance in a case where it is proved that the client/investor had actually not given any instruction for effecting a particular trade and somebody in the office of stockbroker has unauthorisedly effected a trade. In that case, the client/investor cannot be held responsible for losses arising out of such blatantly unauthorised trades and the stockbroker would be made responsible for consequences arising out of such trades. However, in a case where client/investor specifically admits that he/she authorised another person to effect trades on his/her behalf, client/investor. In case before the Division Bench in Erach Khavar [2025 (9) TMI 185 - BOMBAY HIGH COURT] also, the appellant therein had authorised another person to effect trades in his account and the appellant has received all the contract notes and text messages. He later sought to wriggle out of consequences of such trades by disowning the same by relying on NSE Regulation 3.4.1. In the present case also, Respondent specifically admitted that they had trusted Siddhi and had allowed her to effect trades on their behalf. This is not a case where Siddhi is an unknown person to Respondents, who has effected trades in their accounts in a blatantly unauthorised manner. Therefore Respondents cannot take shelter behind regulatory directives of SEBI Circular dated 22 March 2018 and hold Petitioner responsible for recovering the losses suffered by them. The methodology adopted by the Arbitral Tribunals in not conducting any enquiry into the losses suffered by Respondents due to the alleged negligent act of the Petitioner and straightaway awarding 50% of loss suffered in the trades executed in F & O Segment is required to be deprecated. Such an approach actually is in conflict with the fundamental policy of India under Section 32(2)(b)(ii) of the Arbitration Act. Here, award of sum is not out of any contractual obligations between the parties. It is towards damages suffered due to alleged negligent conduct of Petitioner in not maintaining the pre-trade conformations. This principle therefore would not be attracted to the present case as Respondents have made no attempt to lead evidence of loss and simply claimed the entire amount of loss suffered in trades executed on their behalf. Thus, the impugned Awards are clearly unsustainable and liable to be set aside. - Petitions are accordingly allowed. Issues: (i) Whether failure by a trading member to maintain pre-trade or call-record confirmations as per SEBI circular dated 22 March 2018 entitles the client to recover trading losses from the trading member; (ii) Whether an arbitral award that grants 50% of claimed losses without proof or empirical basis is sustainable.Issue (i): Whether absence of pre-trade/recorded confirmations mandates that trades are treated as unauthorised and that the trading member must compensate clients for resulting losses.Analysis: The SEBI circular prescribes forms of evidence for order placement but contemplates reliance on other appropriate evidence where recorded/written proof is unavailable. Prior decisions establish that maintenance of recorded authorisations is an important safeguard but not the exclusive determinative evidentiary standard. Where a client has knowledge of trades, receives contract notes or other confirmations and permits another person to trade on the account, the arbitral tribunal must assess all attendant evidence to determine whether the client exercised autonomous choice. Failure to comply with regulatory recording requirements may attract regulatory or disciplinary consequences but does not ipso facto create a civil right to avoid payment for trades that were in substance authorised or acquiesced to by the client.Conclusion: The absence of pre-trade or recorded confirmations under the SEBI circular does not, by itself, entitle the client to recover trading losses from the trading member; entitlement depends on factual assessment by the arbitral tribunal of all evidence regarding authorisation and acquiescence.Issue (ii): Whether an award that simply halves the claimed loss (50%) without empirical proof of actual loss or reasoned calculation is valid.Analysis: Awards of damages require proof of loss. Where precise computation is impossible but evidence of loss exists, tribunals may apply a reasoned rough-and-ready approach. However, mechanically awarding 50% of a claimed amount without enquiry, evidence or reasoned basis lacks a proper evidentiary foundation and risks patent illegality under the grounds of Section 34. Prior authority criticises a panchayati or arbitrary halving method when no attempt is made to ascertain or substantiate the actual loss.Conclusion: An arbitral award that grants 50% of claimed losses without evidentiary basis or reasoned assessment is unsustainable and vulnerable to setting aside for patent illegality.Final Conclusion: The impugned awards are set aside because (i) regulatory non-compliance with recording requirements alone does not automatically create civil liability to compensate trading losses where factual evidence indicates authorisation or acquiescence, and (ii) the awards awarded 50% of claimed losses without an evidentiary or reasoned basis, rendering them unsustainable.Ratio Decidendi: Failure to maintain pre-trade recorded/written confirmations under regulatory circulars is directory for evidentiary purposes and does not automatically absolve a client of trading liabilities; an arbitral tribunal must assess all relevant evidence to determine authorisation or acquiescence, and damages cannot be awarded on a mechanical 50% basis without proof or reasoned calculation.