TaxTMI 
TaxTMI 
TaxTMI 
2015 (4) TMI 1192
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....ed by the petitioner. 3. On 14th August, 2012, the petitioner and the respondent executed 'Know Your Client' form and Member Client Agreement thereby the respondent appointing the petitioner as her commodity broker for execution of transactions for sale and purchase of commodities listed for trading at the said MCX. It is the case of the petitioner that in the said Member Client Agreement, the respondent had given mandate to the petitioner for sending her Electronic Contract Notes on her email id [email protected] and had given authority to maintain her ledger account with the petitioner on running account basis. It is also the case of the petitioner that the respondent had also given to the petitioner authority for sending her SMS for providing her bill summary, her ledger balance and applicable margin by providing mobile no.9819190786. The respondent had executed a letter/undertaking and authorised the petitioner for adjustment of debit and credit balance of the respondent between different segments of the Exchange and between different exchanges in her ledger account amongst respondent group which includes the petitioner and BPL. 4. It is the case of the petiti....
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....h resulted into MTM loss of Rs. 69,33,254.49 in the account of the respondent. It is the case of the petitioner that after closing of the open position of 110 lots of silver the petitioner had informed the respondent. However, she did not raise any objection to the decision of the petitioner. The petitioner had also sent one SMS to the respondent about her bill debit amount of Rs. 69,33,254.49 for close of open position and ledger debit balance of Rs. 33,80,103.86. The petitioner also prepared a contract note and sent the same to the respondent by email. It is the case of the petitioner that the respondent had received SMS confirmation and ECN and never raised any objection about closing of open position by the petitioner. 8. It is the case of the petitioner that on 30th March, 2013 the ledger account of the respondent in the books of petitioner's group company BPL was showing a credit balance of Rs. 34,06,935.21 and the debit balance of Rs. 33,80,103.86 in MCX and there was net consolidated credit of Rs. 26,831.35. On 13th April, 2013 the respondent executed transaction for purchase of 2000 shares of Reliance Industries Ltd. and 16000 shares of Steel Authority of India Ltd. ....
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....its that the petitioner had sent SMS to the respondent intimating her margin shortfall position for payment of money to meet margin requirement and maintained open position. He submits that on 26th March, 2013 the respondent made payment of Rs. 20 lacs towards part of margin money. On 28th March 2013 after giving credit of Rs. 20 lacs, there was still margin shortfall of Rs. 37,23,679.37. On 30th March, 2013 the petitioner closed out the open position of 110 of silver. It is submitted by the learned counsel that since there was margin shortfall and MTM losses due to reduction in the price of silver, the petitioner exercised their rights and closed open position. The respondent did not raise objection for long period and even offered to pay the amount to the petitioner. 12. Learned counsel appearing for the petitioner invited my attention to the averments made in the statement of claims filed by the petitioner and the reply of the respondent before the arbitral tribunal. He submits that the respondent in the written statement did not dispute the delivery of the margin statement by the petitioner. The respondent also did not object to the petitioner squaring up the transaction on 30....
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....osition of a constituent member when the call for further margin or any other payment due is not complied with is not mandatory but is directory. He submits that since the respondent had already made payment of Rs. 20 lacs, the petitioner did not close out the transaction earlier. Paragraph (5) of the judgment of this court in case of Uttam Chand Garg (supra) read thus :- 5. Thus, the learned Arbitrator has, after going through the documents produced before him by the parties, reached a finding on fact that on 24th September, 2010 as well as 30th September, 2010, there was sufficient margin in the account of the Petitioner and that the Petitioner has also failed to produce any evidence to substantiate his case that the Respondent had charged excessive brokerage to the Petitioner. The learned Arbitrator has further correctly held that in any event, noncompliance with the requirement of collecting margin by a trading member from the clients does not invalidate the trades admittedly executed at the instance of the Petitioner and that the requirement of collecting margin by a trading member from the clients is only meant to secure the smooth compliance of the trades executed on the E....
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....l have to be given why they are not followed. If the brokers are permitted to carry on transactions contrary to the regulations framed by which they are bound, it will endanger the system itself. In my opinion, the learned Arbitrator was not justified in making the award requiring the petitioner to pay the amount which was being claimed by the respondents on account of illegal and unauthorised transactions. In the result therefore, the petition succeeds and is allowed, the award is set aside. 18. Learned counsel for the petitioner submits that the Division Bench in the judgment delivered on 6th February, 2014 in case of Marwadi Shares and Finance Ltd. vs. Amit Bhardwaj in Appeal (L) No.314 of 2011 arising out of the said order and judgment dated 25th March, 2011 in case of Amit (supra) has held that the learned Single Judge could not have come to the conclusion that the transactions were illegal when there was no factual basis or evidence in this regard led by the respondent before the arbitral tribunal. Learned counsel placed reliance on the observations of the Division Bench in paragraph (10) observing that the Division Bench was not suggesting that only because a trading member....
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....ch constituents or such higher amounts, as the Trading Member deems fit. The Trading Member may, if so desire, for administrative convenience maintain the daily settlement margin balance upto a preagreed balance level to avoid collecting and paying daily settlement amount on a daily basis, which may be referred to as maintenance margin. The trading member may keep the unutilised margin deposits of its Constituents in bank deposits and pay interest accrued thereon to its Constituents or utilise the same as per the instructions of such Constituents. (Emphasis Supplied) These Regulations have been specifically framed under Chapter III of the Bye Laws of the NSEIL for the purpose of dealing in derivative contracts. A perusal of Regulation 3.10 clearly shows that the trading members shall buy and/or sell derivative contracts on behalf of the constituent only on receipt of a minimum percentage of margin as the relevant authority may decide from time to time, on the price of the derivative contracts proposed to be purchased, unless the constituent already has an equivalent credit with the trading member. The said Regulation also permits the trading member to collect a higher margin ....
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....nd is therefore liable to be set aside. 19. Learned counsel for the petitioner also placed reliance on the judgment of this court delivered on 28th February, 2011 in case of Shreepalkumar Pukharaj vs. Edelweiss Securities Ltd. in Arbitration Petition No.297 of 2010 and in particular paragraph (9) and would submit that since the respondent never raised objection against the petitioner closing out the open position of the respondent and had not disputed the factum of receipt of all the contract notes and SMS etc., the respondent cannot be permitted to urge at the belated stage that the said transaction was illegal for want of demand of margin money. 20. Mr.Narula, learned counsel for the petitioner also placed reliance on the judgment of this court delivered on 1st October, 2012 in case of Shankarlal V.Keswani vs. India Infoline in Arbitration Petition No.446 of 2012 and in particular paragraph 17 and would submit that this court while construing the byelaw 247A(5) of the Bombay Stock Exchange Limited has held that the said byelaw gives a discretion to the member broker to close out the transaction by selling the securities within two days or seven days as the case may be in case t....
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....in the account of the client/constituent. 21. Learned counsel for the respondent on the other hand would submit that even according to the statement showing the analysis of margin shortfall tendered by the petitioner before this court, there was a margin shortfall in the sum of Rs. 37,23,679.37 as on 28th March, 2013. The said margin shortfall increased to Rs. 54,19,639.37 according to the petitioner on 25th March, 2013. He submits that thus if according to the petitioner, there was already margin shortfall as far back as on 20th March, 2013, the petitioner ought to have close out the open position on the next day of the margin shortfall on 20th March, 2013. He submits that the respondent received the demand for margin money of Rs. 20 lacs on phone sometime prior to 20th March, 2013 which respondent complied with by depositing the said amount of Rs. 20 lacs with the petitioner. He submits that even after payment of Rs. 20 lacs according to the petitioner, there was a margin shortfall of Rs. 32,31,319.37 as on 27th March, 2013 and of Rs. 37,23,679.37 as on 28th March, 2013. He submits that the petitioner thus in any event ought to have closed out the open position immediately after....
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....o the account of the constituent in respect of such unauthorised transactions. Paragraphs 32, 33, 55 to 58 and 60 of the said judgment reads thus :- 32] The learned Counsel further placed reliance on bye-laws 8.4, 8.6.5 and 8.6.6 of the MCX which provide for payment of margin money and the right of the broker to close out open position of a constituent member in case of failure on the part of the constituent to comply with the call for further margin or if any payment is due by the constituent to the clearing member. By law 8.4, 8.6.5 and 8.6.6 of MCX are extracted as under:- "8.4 Members of the Exchange shall deposit initial margin in cash or may furnish Fixed deposit or bank guarantees or such other instruments as maybe specified by the Exchange from time to time to fulfill the initial margin requirement in respect of open positions. Variation margin shall be paid only in cash or cheque, or by electronically debiting the account of the member of the exchange with the designated Clearing bank of the Exchange." "8.6.5 An Exchange member may close out an open position of a client when the call for further margin or any other payment due is not complied with by the client;" "....
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..... If the Constituent defaults in paying the daily margin, the Member shall be entitled to liquidate/close out all or any of the Constituent's positions, without prejudice to the Member's right to refer the matter to arbitration. Any and all losses and financial charges on account of such liquidation/closing out shall be charged to and borne by the Constituent. The Member is permitted in its sole and absolute discretion to impose additional margin (even though not imposed by the Exchanges, the Clearing Corporation/Clearing House) and the constituent shall be obliged to fulfill such additional margin requirements." 55] Bye-law 8.2.2 clearly provides that every member of the Exchange executing transactions on behalf of the client shall collect from the clients the margins specified from time to time, against their open positions within such time as may be prescribed by the Relevant authority. By-law 8.5 provides that failure to pay any variation margin may lead to the exchange members being deactivated/suspended and declared as defaulters by the exchange. The relevant authority may also take such other measures including disciplinary actions, against the defaulting members....
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.... demanding any margin money from the claimant and without any instructions from the claimant though there was debit balance, all such transactions carried out by the respondent, without any instructions and without any demand for margin money, were unauthorised and no such debit could have been made in the account of claimant in respect of such unauthorised transactions. A trading member who has carried out any such transactions in breach of bye-laws of MCX cannot make any claim against the constituent and/or debit any amount to the account of the claimant in respect of such unauthorised transactions. 60] Insofar as the issue of margin money is concerned, it is held by the arbitral tribunal that there was credit balance for the all the period, except on three dates. The respondent had admittedly not issued any call money notice to the claimant to make good the short fall on those three dates and on the other hand, had done brisk trading on those dates in her account, without any margin, which indicates that the allegations about trading in her account without her consent, can hardly be brushed aside. The arbitral tribunal also rendered a finding after perusal of the copy of the p....
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....span of time, just after few minutes of market open, the credit balance of the respondent got completely exhausted due to sudden mark to open loss and mark to market loss came to Rs. 69,33,254.49 within next 3 to 4 minutes. It was averred by the petitioner that as a result, the respondent had a debit balance of Rs. 33,80,103.86 after adjusting the credit balance available with the petitioner. It was the case of the petitioner that the movement was so drastic that it was practically not possible to strike a conversation with the respondent. The petitioner even tried to contact/inform the respondent but by the time they did so, the respondent's position got squared off and she suffered losses. 27. It is also stated in the rejoinder filed by the petitioner before the arbitral tribunal that the respondent had always made payments or rather paid her margins against her open position or to increase her position. It was alleged that the respondent always deposited part margin on her position and promised to deposit remaining amount in coming days, but never complied on it. 28. A perusal of the reply filed by the respondent in the arbitral proceedings indicates that it was her case t....
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....tered into between the parties and are not perverse and thus no interference with such findings of fact is permissible under section 34 of the Arbitration and Conciliation Act, 1996. 30. Insofar as judgment of this court in case of Pankaj Goshar (supra) is concerned, a perusal of the said judgment indicates that this court has while considering the issue of limitation has held that if the statement of accounts was forwarded to the debtor by the creditor, the purpose of forwarding that statement of account was to call upon the debtor to pay the amount. It is held that the demand for payment can be made when the right to claim the payment accrues. The right of the respondent to demand the payment was the cause of action of the respondent against the petitioner. In this case, the petitioner could not prove that the petitioner had raised the demand for margin money from time to time though even according to the petitioner there was a shortfall continuously in the account of the respondent since 20th March, 2013 which continued till 29th March, 2013. The judgment of this court in case of Pankaj Goshar (supra) thus does not assist the petitioner in any manner whatsoever. 31. Insofar as....
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....ried out by the broker without compliance of the mandatory requirements under requisition 3.10 of demanding margin money in case of shortfall, the transaction was illegal but has set aside on the ground that there was no factual basis or evidence led by the constituent before the learned Single Judge and thus the same could not have been decided by the learned Single Judge. The views expressed by the learned Single Judge that the broker having carried out transaction in violation of the regulations and thus could not make any demand against the constituent is not set aside on merits. In my view the judgment of the Division Bench of this court in case of M/s.Marwadi Shares and Finance Ltd. (supra) thus does not assist the case of the petitioner. 33. Insofar as the judgment of this court in case of Uttam Chand Garg (supra) relied upon by the learned counsel for the petitioner is concerned, in that matter, the constituent had admitted that the trades were executed by the broker at his instance. It was also admitted that there was adequate margin money for the transactions to be carried out on behalf of the constituent with the broker. Considering this position, this court held that s....
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.... held that a trading member who had carried out any such transactions in breach of bye-laws of MCX cannot make any claim against the constituent and/or debit any amount to the account of the constituent in respect of such unauthorised transactions. In this case also it is clear beyond reasonable doubt that even according to the petitioner there was huge shortfall in the margin money atleast since 20th March, 2013 which continued till 29th March, 2013 even though the respondent made payment of Rs. 20 lacs to the petitioner on 26th March 2013. There was a shortfall in the margin money according to the petitioner in the sum of Rs. 34,28,329.37 as on 29th March, 2013. 36. In my view the whole purpose of such bye-laws in the Multi Commodity Exchange of India Ltd. is to provide safeguard that there is mitigation of loss and thus it makes mandatory for the broker to square off the transactions immediately upon there being a shortfall which according to the broker had not been paid by the constituent inspite of demand. If the petitioner would have squared off the open position when there was shortfall of margin money prior to 30th March, 2013, the petitioner would not have faced the volat....