Depository liability for participant misconduct upheld where supervisory safeguards failed and arbitral award was not patently illegal.

Under the Depositories Act, 1996 and the SEBI Depositories and Participants Regulations, 2018, a depository's continuing supervisory duties over participants include segregation of accounts, regulation of transfers, and compliance with prescribed pledge procedures. On the facts found, the participant misused client securities for its own borrowing, while the depository failed to implement or detect the safeguards expected under the regulatory framework. The arbitral tribunal's view that the depository was liable under Section 16 for negligent acts of its participant was held to be reasoned and plausible, not patently illegal or perverse. The award and the Section 34 judgment were therefore upheld, and no interference under Section 37 was warranted.

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Issues: Whether the arbitral award, as affirmed in Section 34 proceedings, fastening liability on the depository under Section 16 of the Depositories Act, 1996 for losses caused by the depository participant's misuse of client securities suffered from patent illegality or perversity warranting interference in appeal under Section 37 of the Arbitration and Conciliation Act, 1996.

Analysis: The statutory scheme under the Depositories Act, 1996 and the SEBI (Depositories and Participants) Regulations, 2018 recognises a continuing supervisory role of the depository over its participants, including the obligation to maintain segregated accounts, regulate transfers, and act on pledge instructions in the manner prescribed by the regulations and bye-laws. SEBI circulars issued for enhanced supervision and early warning mechanisms were treated as part of the governing regulatory framework. On the facts found by the Tribunal, the participant misused the power of attorney, transferred dormant client securities into its own account, pledged them for its own borrowing, and the depository failed to implement or detect the regulatory safeguards expected of it. The liability under Section 16 was therefore anchored in negligence, not in fraud, and the Tribunal's conclusion that the depository remained liable as principal for negligent acts of its participant was held to be a reasoned and plausible view.

Conclusion: The award and the Section 34 judgment were upheld; no ground for interference under Section 37 was made out, and the depository's liability to indemnify the respondent for the loss was affirmed.

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