TaxTMI 
TaxTMI 
2025 (7) TMI 277
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....t No. 1. 2. In the present case, the respondent No. 1 is the stock broker, respondent No. 2 is the National Stock Exchange of India Limited (for brevity "the NSE"), the respondent No. 3 is the Arbitration Department of the NSE and the respondent No. 4 is the Securities and Exchange Board of India (for brevity "the SEBI"). FACTUAL BACKGROUND 3. The brief facts of the case as per the pleadings are that on 13.07.2007, the petitioner entered into a Member Client Agreement (for brevity "the MCA") with the respondent No. 1. According to the MCA, the petitioner, being "the client", agreed to invest and trade in securities, contracts and other instruments admitted for trading on the NSE. The MCA also allowed the petitioner to trade in the derivatives segment and enter into derivative contracts through the respondent No. 1, being "the stock broker". 4. In 2007, the petitioner opened its trading account with the respondent No. 1. From September 2010 to June 2011, the petitioner, with the client ID No. PP 14 RG 012, traded in Nifty Futures through the respondent No. 1. The petitioner deposited a total of Rs. 1,46,00,000/- into the trading account via RTGS, including Rs. 1,21,00,000/- on 1....
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....sed by the petitioner in the grounds of appeal, pleadings and submissions. Further the petitioner may kindly be awarded interest from 01.11.2013 till the final date of disposal of this application of the petitioner along with the cost of arbitration proceedings both at the original and appellate stage held in the National Stock Exchange Limited, New Delhi and the costs involved in pursuing this application. ii. The kind directions of the Hon'ble Court may be issued to the National Stock Exchange Limited, Mumbai and New Delhi to provide all the information sought by the petitioner which is essential to determine the claim of the petitioner. If the respondent broker and the exchange fail to provide the factual details vis-a-vis the prevailing position of substantive law contained in the rules, regulations, orders, notifications etc. issued by the market regulator SEBI and in pursuance thereof by the exchange in terms of the said trading regulations then it is impossible to settle the subject matter of dispute through arbitration as per the present law in force as contained in sub clause (i) of clause (b) of sub section 2 of section 34 of the said Arbitration Act. As such the Ho....
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....gh Saini v. High Court of Delhi, (2012) 4 SCC 307, is applicable in the present case, asserting that once the foundational award is removed due to lapse of time, any derivative or appellate award loses its legal basis. 14. Consequently, both the Original and Appellate awards are deemed void and the arbitrators, having become functus officio due to time lapse, no longer possessed the legal mandate to decide on the matter in both the original arbitral proceedings as well as the appellate arbitral proceedings. 15. Reliance is placed on the decisions of the Hon'ble Supreme Court, in Pathapati Subba Reddy (Died) by LRs & Ors. v. The Special Deputy Collector (LA), 2024 INSC 286, Shri Mukund Bhavan Trust & Ors. v. Shrimant Chhatrapati Udayan Raje Pratapsinh Maharaj Bhonsle & Anr., Civil Appeal No. 14807 of 2024, Order dated 20.12.2024 and H. Guruswamy & Ors. v. A. Krishnaiah since deceased by LRs, 2025 INSC 53, wherein it has been reiterated that the law of limitation is a matter of public policy, mandating fixed periods for litigation to end. 16. The Hon'ble Supreme Court in NBCC Limited v. J.G. Engineering Private Limited, (2010) 2 SCC 385 held that judicial leniency in extending tim....
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....hese records. The failure to do so, coupled with the neglect of the arbitrators to call and verify these critical documents, as also outlined in their appointment letters, has resulted in biased and collusive award that favor respondent No. 1, thereby compromising the integrity of the arbitration process. The petitioner contends that this omission is a clear violation of Section 34(2)(b) Explanation 1(i) of the Arbitration Act. Standard Operating Procedures: 22. The petitioner argued that the branch of respondent No. 1 and its employees have not been approved or recognized by the NSE; the respondent No. 1 has failed to furnish information despite repeated requests. The respondent No. 1 did not comply with the Standard Operating Procedures (for brevity "the SOP") or Clauses 2.1.2, 4.1.1 and 4.2.1.(b) of the NSE Regulations for operating a branch and for having NCFM-qualified employees/dealers. Further, the NSE, which should ensure compliance, has not provided the requested details and appears biased, acting as a spokesperson for the respondent No. 1 and arbitrators. The petitioner stated that the findings of the arbitrators are contradictory and illegal because they downplayed the....
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....It emphasizes that every trade must be supported by unequivocal, documented consent of the client. The reliance of the arbitrators on a limited, allegedly manipulated sample of recordings is stated as a distorted interpretation that disregards the lack of written evidence. This approach violates natural justice principles and prescribed code of conduct by the SEBI for arbitrators. Contract Notes, Quarterly Statement of Accounts, Daily Margin Statements etc.: 25. The petitioner contended that the respondent No. 1 violated the regulations, notably the SEBI Circular No. MIRSD/SE/Cir-19/2009 dated 03.12.2009 and NSE Circular No. NSE/INSP/2010/91 dated 03.02.2010, by entering derivative trades without obtaining the specific option of the petitioner through written authorization. According to the petitioner, derivative trades form an independent class requiring clear and confirmed orders and the failure of the respondent No. 1 to provide proper disclosures or verify the instructions of the petitioner renders the trades unauthorized. In addition, the respondent No. 1 did not send any quarterly statements to the petitioner constituting intimation of such derivative trades. The respondent....
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....ontended that the award is driven by fraud, corruption and institutional inefficiencies and that the arbitrators exceeded their jurisdiction by rewriting the contract and ignoring evidence. It is stated that the award is violative of Sections 28(1), 28(3) and 34(2)(b)(ii) of the Arbitration Act. The petitioner argues that the award is vitiated by patent illegality, as the appellate arbitrators dismissed the grounds of appeal without proper consideration. 28. It is further submitted that respondent No. 1 has committed blatant violations of the MCA which outlines that both parties must adhere to the NSE Bye-Laws, the NSE and SEBI Regulations and relevant government notifications. The violations include not reconciling accounts periodically, not providing mandatory daily activity logs and not maintaining acknowledged duplicate copies of contract notes as required by SEBI and the NSE Regulations. It is also asserted that the respondent No. 1 carried out unauthorized trades in an inactive account, illegally retained funds and securities and disregarded the required procedures such as the Running Account Authorization. 29. Moreover, both the original and appellate arbitrators provided ....
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....issal of the present petition, despite being responsible for managing arbitration and regulatory compliance. This amounts to misconduct and a failure to act as a neutral regulatory authority. 35. The arbitration in question is described as institutional and mandatory, conducted under the rules of the NSE approved by the SEBI. It is stated that the NSE, being the custodian of all arbitral records, must assist the court in understanding and verifying the process required to be adhered to. SUBMISSIONS ON BEHALF OF RESPONDENT NO. 1 The Appellate Award is not time barred. 36. The petitioner contended that the Appellate Award issued on 31.07.2015, is null and void because it was rendered beyond the time limits set by Bye-Law 19(b) of the NSE Bye-Laws. The petitioner argues that the Appellate Tribunal is functus officio, meaning it no longer has the authority to act and therefore, the award should be considered invalid. 37. It is pertinent to note that the Appellate Tribunal was appointed on 11.09.2014 and was required to dispose of the appeal within 3 months, by 10.12.2014. An extension of 2 months was granted on 01.12.2014 and a further the parties agreed for reconstitution of the ....
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....d conditions of the trading account. The tribunal noted that the petitioner deposited a significant amount shortly after opening the account, indicating knowledge of the trading activities. 45. In paragraph 7 of the Appellate Award, the Appellate Tribunal noted that the respondent No. 1 had the right to square off positions if the petitioner failed to meet margin requirements, as stipulated in the MCA. The tribunal found that the respondent No. 1 acted within its rights under the MCA. 46. In paragraph 8 of the Appellate Award, the Appellate Tribunal examined audio recordings of conversations between the petitioner and the representatives of the respondent No. 1, confirming that the petitioner did not deny the authenticity of these recordings. The tribunal dismissed the claims of the petitioner that the recordings were manipulated, stating that they were relevant to the case. 47. In paragraph 10 of the Appellate Award, the Appellate Tribunal determined that the respondent No. 1 did not breach any applicable NSE or SEBI Regulations, stating that the absence of strict compliance with documentation requirements did not render the trades illegal. 48. The respondent No. 1 argued that....
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....ion and suggesting that other recordings have been destroyed or concealed. The respondent No. 1 clarifies that the Original Tribunal specifically directed the production of sample recordings/transcripts, which is why only the transcripts for four days were provided. There was no requirement from the tribunal to produce all transcripts related to every trade executed by the petitioner. Written Consent of the Petitioner: 53. The respondent No. 1 refuted the claim of the petitioner that written consent was not obtained prior to executing transactions, asserting that such consent is not strictly mandated under the relevant regulations. Regulation 3.4.1 of the NSE regulations states that trading members must obtain "appropriate confirmed order instructions" from clients before placing orders on the NEAT system. However, it does not explicitly require these instructions to be in written form. Regulation 17(j) of the SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 (for brevity "the SEBI Regulations") requires brokers to maintain written consent for contracts entered into as principals, but this does not negate the validity of trades executed based on confirmed instructions receiv....
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.... squaring off of the positions, which aligns with the terms of the MCA. Furthermore, the respondent No. 1 claims that there was no violation of Regulation 3.10(a) of the NSE Regulations because the margin was collected from the petitioner. The transaction was closed due to the non-payment of daily settlement obligations by the petitioner, in accordance with Regulation 3.10(b) of the NSE Regulations. SUBMISSIONS ON BEHALF OF RESPONDENT NO. 2 AND 3 NSE is neither a necessary nor a proper party to the present proceedings. 56. The respondent No. 2 and 3 argued that the NSE is neither a necessary nor a proper party to the current proceedings under Section 34 of the Arbitration Act. 57. The dispute arose solely from the MCA between the petitioner and the respondent No. 1, in which the NSE is not a party. Therefore, the involvement of the NSE in the proceedings is unwarranted. 58. The respondent No. 2 and 3 submitted that the NSE has already complied with the relief sought by the petitioner, as the arbitral record has been submitted to the court. 59. The arbitration proceedings were conducted under the aegis of the NSE, but the NSE was not involved in the dispute between the petitio....
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....ffidavit noted that both parties had no objection to the same panel of arbitrators being reconstituted. 65. The respondent No. 2 and 3 argued that both parties were aware of the expiration of the time period for the Appellate Award and consciously approved the reconstitution of the same panel of arbitrators, as evidenced by the letter of the petitioner dated 28.01.2015. 66. The respondent No. 2 and 3 emphasized that there is no provision in the NSE Bye-Laws for the automatic termination of the arbitral tribunal upon the expiration of the mandate of the arbitrator. SUBMISSIONS ON BEHALF OF RESPONDENT NO. 4 SEBI is neither a necessary nor a proper party to the present proceedings. 67. The respondent No. 4 asserted that SEBI is not a necessary or proper party to the proceedings, as the dispute arises solely from the MCA between the petitioner and the respondent No. 1, with SEBI not being a party to this agreement or the arbitration proceedings. Reliance is placed on Section 2(j) of the Securities Contracts (Regulations) Act, 1956 and the SEBI Act. 68. The respondent No. 4 highlighted that this Court, by an order dated 19.10.2016, removed SEBI from the list of parties, affirming ....
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....ons 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." 74. In Delhi Metro Rail Corporation Limited (supra), the Hon'ble Court endorsed the position in Associate Builders (supra) and Ssangyong Engg. & Construction Co. Ltd. (supra), on the scope for interference with domestic award under Section 34 of the Arbitration Act. The relevant paragraphs reads as under: "39. 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. [Patel Engg. Ltd. v. North Eastern Electric Power Corpn. Ltd., (2020) 7 SCC 167 : (2020) 4 SCC (Civ) 149.] A "finding" based on no evidence at all or an award which ignores ....
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.... as under: "6.5 The appeal shall be disposed of within three months from the date of appointment of appellate panel of such appeal by way of issue of an appellate arbitral award." 79. Bye-Law 19(b) of the NSE Bye-Laws reads as under: "19 (b) The Appellate Arbitrator shall consist of three arbitrators who shall be different from the ones who passed the Arbitral Award appealed against and such Appellate Arbitrators shall dispose of the appeal by way of issue of an Appellate Arbitral Award within three months from the date of appointment of the Appellate Arbitrator." 80. Clause 6.6 of the SEBI Circular dated 11.08.2010 reads as under: "6.6 The Managing Director/ Executive Director of the stock exchange may for sufficient cause extend the time for issue of appellate arbitral award by not more than two months on a case to case basis after recording the reasons for the same." 81. The petitioner argued that the Appellate Award was passed beyond the legally mandated time limits as prescribed under Bye-law 19(b) of the NSE Bye-laws as it was rendered beyond the three‐month period from the appointment of the appellate tribunal. Further, the petitioner argued that the extension....
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....ep any litigation or dispute pending indefinitely. Even public policy requires that there should be an end to the litigation otherwise it would be a dichotomy if the litigation is made immortal vis-a-vis the litigating parties i.e. human beings, who are mortals." 86. Further, the Hon'ble Supreme Court in the case of H. Guruswamy & Ors. (supra) has held as under: "17. We are of the view that the question of limitation is not merely a technical consideration. The rules of limitation are based on the principles of sound public policy and principles of equity. No court should keep the 'Sword of Damocles' hanging over the head of a litigant for an indefinite period of time." 87. In NBCC Limited (supra), the arbitration proceedings had lingered on for 9 years. The Hon'ble Supreme Court held that the said delay defeated the notion of the whole process of resolving the disputes through arbitration. The decision of the High Court in fixing a time schedule within which the arbitration should be concluded was upheld. The relevant paragraph is extracted as under: "14. Arbitration is an efficacious and alternative way of dispute resolution between the parties. There is no denying the fact....
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....cuments. This should not be permitted and allowed as it will defeat the very purpose of arbitration and would result into full fledged hearing or trial before the Court, while adjudicating objections under Section 34 of the Act. Objections are required to be decided on entirely different principles and an award is not a judgment. Under the Act, an Arbitrator is supposed to be sole judge of facts and law. Courts have limited power to set aside an award as provided in Section 34 of the Act. The Act, therefore, imposes additional responsibility and obligation upon an Arbitrator to make and publish an award within a reasonable time and without undue delay. Arbitrators are not required to give detailed judgments, but only indicate grounds or reasons for rejecting or accepting claims. A party must have satisfaction that the learned Arbitrator was conscious and had taken into consideration their contentions and pleas before rejecting or partly rejecting their claims. This is a right of a party before an Arbitrator and the same should not be denied. An award which is passed after a period of three years from the date of last effective hearing, without satisfactory explanation for the delay....
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....thus, prescribe for time limits as well as consequence of the non-compliance with such timelines. Merely inaction of the relevant authority (being NSE and SEBI) will not legitimize the delay on behalf of the Appellate Tribunal. 93. The decision of the Hon'ble Supreme Court in Harinarayan G. Bajaj v. Rajesh Meghani, (2005) 10 SCC 660 (para 15), highlights that "the arbitration proceedings as provided in the Bye-laws and Regulations are subject to the provisions of the Arbitration and Conciliation Act, 1996, to the extent not provided for in the Bye-laws and Regulations [Bye-law (14)]" and further outlines that the disputes "shall be submitted to arbitration in accordance with the provisions of these Bye-laws and Regulations. [Bye-law (1)]". This reinforces that any deviation from established procedural timelines invalidates the proceedings. 94. Hence, despite the absence of an automatic expiry clause for the mandate of the arbitral tribunal under NSE Bye-Laws, Bye-law 7(b) empowers the Relevant Authority to terminate an arbitrator who fails to act within the prescribed time, thereby indirectly limiting the mandate of the arbitral tribunal. It can be seen that the intent and spirit....
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....It cannot be stated to be judicial proceedings to be attended by all the parties. Even otherwise, how party can presume that the arbitrator would not follow the mandate of the arbitration agreement, once the agreed period is over. The arbitrator could have and/or might have, after expiry of two years, and as extendable by consent one year more, refused to pass Award or terminated the arbitration proceedings suo motu. Any judgment and/or order cannot be presumed or assumed by the parties after closing of the matter unless actual order is passed and/or circulated to the parties. 32. The delay by the Arbitrator, to pass the award in such fashion itself, in our view, is a misconduct as contemplated under the Act. It is also illegal as it is not in pursuance of the agreed clause and is in breach of terms. The Arbitrator himself must refuse to continue first and/or ask for extension if parties want to. The permission and/or consent which is required to be in writing as per the agreement clauses cannot be deemed to have been granted on the basis of alleged unilateral waiver by only one party. *** 37. In Snehadeep (Supra) the Written statement was filed before the Arbitrator, though ....
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.... down definite times lines and by enforcing strict adherence to them. Of course, there may be occasional and genuine exceptional situations, when those times lines may be relaxed in the interest of justice and fair play, but by and large, those time lines should be strictly enforced even handedly and consistently by the tribunal. 47. The reason why the act does not lay down a fixed time within which the tribunal should render the award from the time of its entering upon the reference is not to set the arbitral proceedings at large and give an unlimited time to the tribunal to conclude the proceedings and render the award. Under the Arbitration Act, 1940, section 28 empowered the Court to extend the time of the arbitrator for making the award in case the award was not made within the period of four months, which was the statutorily fixed time for making of the award, or within the mutually extended time period. It was felt that the procedure for extension of time, which required one of the parties to approach the Court for extension of time, was proving to be self-defeating and counter-productive, inasmuch, as, the petition under section 28 remained pending in the court for a very....