TaxTMI 
TaxTMI 
2025 (12) TMI 826
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....o awarded simple interest at the rate of 9% p.a. on the awarded sum. FACTS 2) The Petitioner-Central Depository Services Ltd. (CDSL) is a company established under the provisions of Companies Act, 1956 and also a Depository under section 12(1-A) of the Securities and Exchange Board of India Act, 1992 (SEBI Act) and a facilitator for holding securities in a dematerialized form. Respondent No. 2-BRH Wealth Kreators Limited (BRH) is a Kolkata based public limited company and registered as a stock- broker with the Stock Exchanges. It is also a registered Depository Participant (DP) with the Petitioner. Respondent No. 1 earlier held a Demat account of Karvy Stock Broking Limited. However, on account of compulsory closure of the said account, Respondent No. 1 opened demat account with Respondent No. 2-BRH on 27 June 2018. Respondent No. 1 and her late husband jointly executed a Power of Attorney (POA) dated 29 June 2018 in favour of Respondent No. 2. The husband of Respondent No. 1 expired on 7 June 2019, which fact was apparently not communicated to Respondent No. 2 or to the Petitioner. Acting on the Power of Attorney executed by Respondent No. 1, Respondent No. 2-BRH transferred....
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....2022 holding that the pledge created by BRH in favor of HDFC Bank was valid and the same was validly invoked by HDFC Bank. Accordingly, the order passed by the WTM was set aside. It appears that order passed by SAT is subject matter of pending Civil Appeal No. 2986 of 2022 before the Supreme Court. 5) In the meantime, SEBI passed a separate order on 11 January 2023 holding that BRH had violated its duty as a broker under SEBI circulars dated 18 November 1993 and 26 September 2016 by pledging the shares of its client. BRH was accordingly debarred from the market for seven years and directed to repay the investors under the supervision of NSE. By order dated 6 June 2023, SAT permitted Respondent No. 1 to initiate arbitration proceedings against the Petitioner with further direction to the Petitioner to take steps for initiation of such arbitration proceedings. Accordingly, the Arbitral Tribunal comprising of three Arbitrators was constituted by the Petitioner for resolution of dispute raised by Respondent No. 1. 6) Respondent No. 1 filed its Statement of Claim before the Arbitral Tribunal on 17 July 2023 against Petitioner and BRH. Petitioner filed its statement of Reply dated ....
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....the shares from the Second CM/TM account, pledge request from Respondent No. 1 was not necessary as the ownership in the shares no longer remained with Respondent No. 1 at the time of creation of pledge. That while ignoring this vital aspect, Arbitral Tribunal has erroneously conflated the legally, separate and distinguishing roles of broker and DP and has further ignored the extant legal regime, which recognizes their distinct, legal functions and roles. 9) Mr. Kadam would further submit that the case involves transfer of shares from the account of Respondent No. 1 by BRH in its capacity as broker using the POA to the own TM/CM Accounts of BRH and the final pledge occurred from the Second CM/TM Account of BRH to HDFC. That under the SEBI Circulars applicable on the date of transaction, such transfer by brokers of client securities to CM/TM accounts for margin requirements were permissible and got prohibited only with effect from June 2020. That SEBI's Circular dated 26 September 2016 prohibited persons acting as broker from using client securities/funds for proprietary purposes with further directions for reporting transactions to the Exchanges envisaging monitoring/compliance ....
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....RH (Second TM/CM account), BRH became 'beneficial owner' within the meaning of section 2(1) of the Depositories Act. In its capacity as 'beneficial owner', BRH made a request for pledging of shares in his capacity as DP under Regulation 79 of DP Regulations. In his capacity as DP, BRH was only obligated under Regulation 79 to check whether the securities were available in the account and make note of the same. CDSL, as a Depository under Regulation 79, was to merely obtain concurrence of pledgee (HDFC bank) and then register the pledge. All the above acts are meticulously performed by Petitioner as a DP and that therefore there is no breach of DP Regulations or of Depositories Act by the Petitioner. Mr. Kadam would therefore submit that the root of the transactions emanates from misuse of the POA by BRH in its capacity as broker. That though this is recognized by Arbitral Tribunal, it has erroneously held Petitioner liable in the secondary capacity under Section 16 of the Depositories Act. 12) Mr. Kadam would further submit that the Arbitral Tribunal has erroneously allowed the claim in ignorance of SEBI circular dated 24 July 2023 by holding that award of claim would 'meet the ....
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....indings followed by observations of what Tribunal describes as 'in furtherance of justice'. That Regulations in vogue at the relevant time did cast a duty on the Petitioner to prevent such fraudulent act of Depository's agent. That the findings rendered on the basis of material on record lend to an eminently correct finding and in a plausible view, which ought not to be interfered with in exercise of powers under Section 34 of the Arbitration Act. 15) Mr. Kanade would further submit that the Petitioner in its capacity as depository has acted contrary to the provisions of the Depositories Act and CDSL Regulations as well as various SEBI Circulars and has failed to monitor and supervise BRH as its DP. That Section 4 of the Depositories Act and Bye-laws 5.3.2 expressly recognizes DP as Petitioner's agent. That Section 16 of the Depositories Act read with Bye-law 5.3.24 mandates the Petitioner to indemnify the beneficial owner for loss caused by negligence of either depository or by DP. That CDSL Regulation-46 and the Code of Conduct in Part-D of the Third Schedule further required the Petitioner to maintain adequate systems to protect the investor and monitor DP compliance. In the ....
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....osition that BRH acted in its role solely as a broker. That it was acting in dual capacity of stockbroker and DP. Mr. Kanade would further submit that the view taken by the Arbitral Tribunal is possible and plausible view not warranting any interference in exercise of power under section 34. That the Award is founded on admitted facts and the provisions of the Depositories Act, SEBI Regulations and CDSL's own Bye-laws. The findings are neither perverse nor contrary to record. He would rely upon judgments of the Apex Court in Reliance Infrastructure Limited versus, State of Goa (2024) 1 SCC 479 and Consolidated Construction Consortium Limited Versus. Software Technology Parks of India (2025) 7 SCC 757. That the arbitration proceeded under Clause 22.9.2 of Petitioner's own Bye-laws that contemplates summary proceedings. That entitlement and quantum of claim of Rs. 86,02,768/- was expressly admitted by the Petitioner in its pleadings. That this Court cannot act as an appellate Court by undertaking the exercise of re-appreciation of evidence which Petitioner is expecting this Court to do. Mr. Kanade would accordingly pray for dismissal of the Arbitration Petition. REASONS AND AN....
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....on behalf of clients (TM) and clear and settle trades for itself and other trading members (CM). This dual role allows the firm to execute trades and then manage the associated clearing and settlement responsibilities, such as managing margins and ensuring timely pay-in and pay-out of funds and securities. 24) It appears that in similar manner, BRH had transferred securities of as many as 9,493 clients into its TM/CM account. However, there were no underlying trades to support such transfers, and the transfers were effected by misusing the POAs secured by BRH from its clients. At that time, such transfers used to be effected based on POA mainly for margin requirements. However, in the present case, BRH fraudulently effected the transfer of shares in clients' accounts to its own TM/CM accounts without any margin requirement. On account of transfer of shares into its own TM/CM account, BRH became owner of the transferred securities. In short, BRH committed theft of shares. On the strength of fraudulent acquisition of ownership of transferred shares, BRH thereafter secured a loan facility from HDFC Bank by pledging the stolen shares which were fraudulently transferred in its Second....
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....e opening of the account with BRH till the date of disablement of BRH's trading rights, her claim was found to be inadmissible. Another response dated 7 March 2022 was given by NSE to Respondent No. 1 regretting the claim for reimbursement of lost shares, once again stating that she had not traded on the exchange. APPROACH BY INVESTOR TO CDSL 28) Having driven away by NSE, Respondent No. 1 filed Appeal No. 460 of 2023 before SAT for appointment of Conciliator/Arbitrator. By order dated 6 June 2023, the SAT directed Respondent No. 1 to file a fresh claim in the prescribed form as per Clause-22.6.1.1 of the Bye-laws. Upon filing of such claim, Petitioner was directed to initiate arbitration proceedings. 29) Accordingly, the Arbitral Tribunal comprising of a presiding officer and two co-arbitrators came to be constituted by the Petitioner. The Arbitral Tribunal took up for consideration singular issue as to whether, and to what extent, Petitioner was liable in respect of claim of Respondent No. 1 for value of lost shares. Though, Respondent No. 1 had raised the claim in the sum of Rs. 94,56,449/-, Petitioner presented before the Arbitral Tribunal the exact valuation of variou....
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.... insulate the Depository from defaults committed by BRH as DP. The Tribunal also held that the Depositories Act makes it abundantly clear that DP performed its role as an agent of the Depository. It criticised SEBI's adjudication order dated 24 July 2023 for taking empathetic view of Petitioner's incapacity to monitor BRH. The Tribunal further held that provision contained in Regulations relating to reconciliation and auditing were not complied with either in entirety or complied with in a questionable manner. The Tribunal further held that fundamental question of lack of inadequate monitoring and supervision by CDSL could be raised leading to inescapable conclusion that CDSL, as a principal, could not have been expected to function blissfully oblivious as securities of 9493 clients of BRH as DP were fraudulently pledged to HDFC without obtaining their consent to the pledge request as required under the Depositories Act and Regulations. 33) The Arbitral Tribunal thereafter referred to SEBI's letter dated 25 July 2023 and held that issuance of the said letter was SEBI's ardent attempt to bring closer to the matter of claims, already made or were in the process of being made. The ....
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....as registered broker of NSE and Depository Participant of Petitioner-CDSL. If the alleged negligent and fraudulent acts are found to have been committed by BRH purely in its capacity as a broker, Petitioner would stand absolved of responsibilities arising out of such acts. However if any of the negligent acts are attributable to the role of BRH as DP, Petitioner as a Depository would have to share responsibility for such acts towards Respondent No. 1. This is because, under Clause 5.3.2 of CDSL Bye-laws, a DP, while conducting any business with the beneficial owner, acts as an agent of CDSL. Clause 5.3.2 of CDSL Bye laws provides thus:- 5.3.2. A participant while conducting any business as a participant with a Beneficial Owner shall act as an agent of CDSL 38) Thus real key to the dispute is to find out the exact capacity in which BRH has acted in the present case. It is the contention of Petitioner - CDSL that the negligent and fraudulent acts are performed by BRH in its capacity as broker and not in his capacity as DP of the Petitioner. It is therefore contended on behalf of the Petitioner that the Stock Exchange (NSE) would be liable for fraudulent and negligent acts....
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....ares based on POA, BRH has also acted in its capacity as DP. 41) In fact Petitioner has contended that it was obliged and mandated to give effect to the transfer of shares from client's account to broker's TM/CM Account since transaction was based on POA. It thus appears that the Petitioner as a Depository satisfied itself that the transaction of transfer of shares was backed by an underlying document and accordingly participated in the act of transfer of title in the shares in favour of BRH by authorising the transfer transaction. Since the transaction of transfer of shares from client's account to BRH's account required nod of the Petitioner, it cannot be contended that the said act was that of a pure broker. It involved activity of BRH as DP as well. I am therefore unable to accept submission made on behalf of the Petitioner that BRH acted as a mere broker by effecting the transaction of transfer of shares from Demat account of Respondent No. 1 to its own TM/CM Account. 42) As a matter of fact, the Arbitral Tribunal has conducted an in depth enquiry into the role of BRH as DP by recording detailed findings in paragraph 33-A to 33-N of the Award. The opening sentence of par....
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....ory Participant as well. The Arbitral Tribunal has recorded a plausible finding that the role played by BRH is also in its capacity as DP. 45) I therefore, do not find any patent illegality or even perversity in the findings recorded by the Arbitral Tribunal holding that the acts are performed by BRH in its capacity as DP as well. LIABILITY OF DEPOSITORY TO COMPENSATE INVESTOR FOR NEGLIGENT ACTS OF DP 46) Once it is held that BRH acted in its capacity also as DP while performing acts of transfer of shares of Respondent No. 1 from her Demat account to his TM/CM account and thereafter creating pledge in favour of HDFC Bank, solution to the problem becomes easy. Section 16 of the Depositories Act makes Petitioner-CDSL directly liable for indemnifying the beneficial owner in respect of negligent acts of DP. Section 16 of the Depositories Act provides thus:- 16. Depositories to indemnify loss in certain cases. (1) Without prejudice to the provisions of any other law for the time being in force, any loss caused to the beneficial owner due to the negligence of the depository or the participant, the depository shall indemnify such beneficial owner. (2) W....
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....y BRH. Petitioner needs to share the responsibility of the said fraud as it has permitted its own DP to unauthorisedly transfer shares of as many as 9493 clients into own accounts of BRH. It never thought it necessary to enquire as to how shares of such large number of clients were getting transferred into the own accounts of BRH and how it was creating a pledge of such large number of shares for securing loan advances of hundreds crores from HDFC Bank. 49) Be that as it may. Whether Petitioner was in knowledge of fraudulent acts of BRH or whether it could have acquired such knowledge with reasonable diligence, is immaterial. Section 16 of the Depositories Act makes Petitioner liable for negligent acts of DP irrespective of the fact whether Petitioner is responsible for such act or not. All that needs to be proved is that DP committed a negligent act. The moment the negligent act of DP is proved, liability to pay compensation is on the Depository. The Depository can recover monies from the DP. The objective behind Section 16 of the Depositories Act is to ensure quick and smooth compensation to victims of negligent acts committed by DP. Since Depository appoints the agent, if age....
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....epository to indemnify beneficial owner is absolute. RELEVANCE OF SEBI CIRCULARS PRE AND POST FRAUD 53) In addition to the specious plea of dissection of role of BRH as broker for saving its skin, Petitioner-CDSL has also raised a plea that after discovery of fraud by BRH, several measures are taken by SEBI for preventing such frauds in the future. A detailed reference is made to various circulars issued by SEBI after detection of fraud. It is sought to be suggested that the measures subsequently implemented by SEBI were not available when the transactions in question took place. It is therefore sought to be suggested that at the relevant time, the instructions then prevalent permitted use of POA for transfer of shares by a broker for the purposes other than margin limits and on account of such permissibility, the unauthorised transactions in question have taken place. It is contended that post discovery of fraud by BRH, now use of such POA is not permissible for the purposes other than margin limits. 54) Accordingly, Petitioner has relied on few Circulars issued prior to the transaction in question. Circular dated 17 April 2008 issued by SEBI addressed to Stock Exchanges ....
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....ring to facilitate investor/client to continue or discontinue with the broker. 55) Thus, POA was not permitted to be used by stock brokers for executing trades in the name of client without client's consent. This aspect would clearly show distinction between use of POA for effecting trades as broker and use of POA for only transferring shares from client's account to another account. Since there was prohibition on effecting of trade of shares of clients by using POA, BRH did not use its capacity as broker, but merely transferred the shares from Demat account of Respondent No. 1 into his own TM/CM account by misusing POA. This aspect would again provide clarity to the fact that the act of transfer of shares is not done by BRH in his capacity only as a broker (since no trade is excluded), but it has also used its capacity as DP for effecting such transfer. The Circular shows that POA is also available with Depository, a copy of which needs to be provided to the client. Here, CDSL has examined the act of transfer of shares from demat account of Respondent No. 1 to BRH's TM/CM Account and had satisfied itself that the transaction was backed by the POA. Petitioner has admitted that i....
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....om clients for validation of instructions. 59) Petitioner thus contends that the safety measures now introduced by SEBI after the incident, were not available when the transaction in question occurred. This contention is raised basically to demonstrate before this Court that the transactions effected by BRH and given effect to by Petitioner were not in breach of any of the then prevalent SEBI circulars. 60) On the other hand, Mr. Kanade has relied on SEBI Circular dated 17 December 2018 implementing 'Early Warning Mechanism' for preventing unauthorised transfer of client's shares and had fixed certain responsibilities on Depositories. The said circular had taken note of unauthorised pledges by brokers and had directed stock exchanges and depositories to evolve early warning mechanism by sharing data amongst themselves to prevent unauthorised transfer and pledge of shares by brokers. 61) It thus cannot be contended that there was complete absence of regulatory framework by SEBI prior to the transactions in question. However as observed above, there is no necessity of delving deeper into such regulatory framework of SEBI as it is not necessary to enquire whether Petitioner b....
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.... cases of Unauthorised Transfer of securities by misuse of Power of Attorney ("POA") by Broker/DP 1. SEBI is in receipt of several investor complaints wherein the POA provided by clients for facilitating settlement of securities was misused by the brokers for unauthorized transfer of Investors' securities. Pursuant to the same, meetings were held with officials of stock exchanges and depositories on April 26, 2023 and May 8, 2023. 2. With regard to the same, your attention is drawn to para 2D of SEBI Circular no. SEBI/HO/DMS/CIR/P/2017/15 dated February 23 2017, which states as under. D. Admissibility of claim for making payment out of IPF in Stock Exchanges In the event of default by the member, all transactions executed an exchange platform shall be eligible for settlement from IPF (subject to maximum limit), subject to the appropriate norms laid down by the Defaulters' Committee. 3. It is felt that the above provision provides scope for considering genuine cases where investor has complained before disablement/default of the broker/DP and where it is apparent that there is no collusion between the investor and the broker/DP, a....
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....securities from client's account to the account of broker/any other entity without corresponding trade obligations, Depository is made responsible. Petitioner relies on paragraph 6 of the said circular, which seeks to apply the provisions to even pending cases. Petitioner also contends that the Circular dated 25 July 2023 holds the stock exchange responsible since the shares are transferred by misuse of POA. 65) Thus even under the Circular dated 25 July 2023, depository is responsible for compensating the investor for negligent acts of its DP. 66) Even otherwise, Circular dated 25 July 2023 cannot be used by the Petitioner for the purpose of saving its own skin and putting in the ball in the court of Stock Exchange (NSE). The Circular is issued by SEBI for segregating the cases of negligence/fraud for compensation through IPFs of stock exchanges and depositories. Such segregation for use of IPF does not mean that responsibility of a depository arising out of negligent acts of DP under Section 16 of Depositories Act gets diluted in any manner. 67) Petitioner's contention that Respondent No. 1 would receive compensation from NSE's IPF appears to be erroneous. The Circular d....
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....herefore even as per the Circular dated 25 July 2023, Petitioner would be liable to compensate/indemnify for Respondent No. 1 for loss suffered by Respondent No. 1. 71) In my view, the Arbitral Tribunal has rightly held Petitioner-CDSL responsible for fraudulent and negligent acts of BRH. NSE cannot be held responsible in the present case as no trades are effected on NSE. The case involves theft of shares (and in any case, negligent acts) by a Depository Participant, making Petitioner responsible under Section 16 of the Depositories Act. 72) In any case, identification of role of BRH as a DP is a finding of fact recorded by the Arbitral Tribunal which need not be interfered by this Court in exercise of powers under Section 34 of the Arbitration Act. The Arbitral Tribunal has applied its mind to totality of circumstances of the case and has thereafter recorded a finding of fact that BRH has acted also as DP in the present case. This is a plausible finding. The Arbitral Tribunal is constituted by CDSL for adjudication of grievances of clients of its DP's. CDSL's own Arbitral Tribunal has held that BRH has also acted in its capacity as DP. The finding cannot be termed as so perv....
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....pported by reasons. The conclusions reached by the Arbitral Tribunal cannot be treated as so irrational that no reasonable person would arrive at it. What Petitioner has attempted to do before me is to urge me to take another possible view for exonerating CDSL in respect of negligent and fraudulent acts committed by BRH. While BRH is held responsible also in his capacity as DP by the Arbitral Tribunal, Petitioner has made attempt to convince this Court to take another view by treating acts of BRH in capacity as broker alone. Even if it is assumed that the view of treating BRH as mere broker is also possible, that alone would not be a sufficient ground for setting aside the impugned Award. The case involves a unique and possibly unpresedented fraud where broker and DP has stolen shares of client entrusted with it and has indirectly caused sale of the same by creating pledge with HDFC Bank. The Artibtral Tribunal has considered the composite role of BRH in the transaction as broker and DP and has held that BRH has also acted as DP is causing transfer of shares and in creating the pledge. These are plausible findings and cannot be treated as absolutely irrational. Though Petitioner ha....
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....sing the powers under Section 34 of the Arbitration Act for invalidating the Award. 77) What Petitioner is attempting to so is mere footballing of the genuine claim of Respondent No. 1 from itself to NSE. Its whole attempt to convince this Court to treat fraudulent acts of BRH in sole capacity as broker is aimed at passing on the responsibility to NSE. There is ample material on record to indicate that BRH has not acted in its capacity solely as broker. It has not effected any trades on the Stock Exchange. As DP, it acted as agent of the Petitioner, with whom the shares were entrusted for safe keeping in dematerialised form. BRH used its capacity as DP to ensure that the ownership of shares entrusted with the Petitioner is transferred onto itself. It used the POA for transfer of such ownership. It acted in twin capacities as broker and DP to internally effect the transfer of ownership of shares. Therefore the findings of the Arbitral Tribunal that BRH acted also in capacity as DP cannot be termed as perverse. What BRH has done is a misuse of POA for the purpose of stealing the shares of Respondent No. 1. It is difficult to hold that this act of stealing is done by BRH in its cap....