TaxTMI 
TaxTMI 
2026 (1) TMI 4
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....Court is tasked upon to decide in the present Petitions. 2) The Petitions are filed by the Petitioner challenging the Awards passed by the three Member Appellate Tribunal constituted under the Rules, Bye-laws and Regulations of National Stock Exchange of India Ltd. By the impugned Awards, the Appeals preferred by the Petitioner have been dismissed and the Arbitral Awards dated 14 November 2022 passed by the learned Sole Arbitrator are upheld and confirmed. The learned sole Arbitrator had in turn confirmed the order passed by Investors Grievance Redressal Committee (IGRC) dated 31 January 2022 upholding the claim of Respondent and awarded 50% losses incurred by them towards execution of Future & Options Segment. 3) Petitioner- Sharekhan Limited (Sharekhan) is an incorporated entity and a registered stock broker with Securities and Exchange Board of India (SEBI) and is also a member, inter alia of National Stock Exchange of India Ltd. (NSE) and Bombay Stock Exchange Ltd. (BSE). Petitioner provides trading platform to its clients to trade in the stock markets through both modes, online and offline. 4) Respondents, Dr. Monita Kisan Khade (Monita) and Kisan Rajaram Khade (Kisan....
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....al Tribunal comprising of the learned sole Arbitrator constituted under the bye-laws, Rules and Regulations of NSE. By Awards dated 14 November 2022, the learned sole Arbitrator has dismissed the claims raised by the Petitioner, thereby upholding the orders passed by IGRC. The learned sole Arbitrator relied inter-alia on SEBI Circular dated 22 March 2018 providing for keeping evidence of clients placing orders in various forms. Thus, the Petitioner is held responsible for not maintaining any call records and pre-trade confirmations as mandated under SEBI Circular dated 22 March 2018. While rejecting the claims of the Petitioner, learned sole Arbitrator directed payment of further amount of Rs. 37,935/- to Kisan. 8) Petitioner filed Appeals before the Appellate Arbitral Tribunal challenging the Awards dated 14 November 2022 passed by the learned sole Arbitrator. The Appellate Arbitral Tribunal has however proceeded to dismiss the Appeals preferred by the Petitioner by orders dated 2 June 2023. The Appellate Arbitral Tribunal has also relied upon SEBI Circular dated 22 March 2018 for holding Petitioner responsible for not maintaining any pre-trade confirmation records and upholdin....
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....Khavar (supra) and has held that regulatory directions are not mandatory in nature. He would submit that award of 50% claim of losses in absence of proof of actual suffering of loss amounts is irrational and unreasoned approach which is described as panchayati approach by this Court in Peerless Securities Ltd. Mr. Katariya would accordingly submit that since SEBI Circular dated 22 March 2018 cannot be the basis for awarding the claim, the impugned Award suffers from patent illegality and is opposed to public policy of India. 11) Mr. Katariya would further submit that Respondents were fully aware of various trades executed in their accounts from time to time. That contact notes were delivered by email in respect of each trade. That additionally, text messages were sent to the Respondents after each trade. Therefore, Respondents cannot be permitted to rely on SEBI Circular dated 22 March 2018 to wriggle out of consequences of trades executed. Mr. Katariya would accordingly pray for setting aside the impugned Awards. 12) The Petitions are opposed by Mr. Dave, the learned counsel appearing for the Respondents. He would submit that the three Fora have concurrently held in favour o....
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....g 50% losses suffered by the Respondents. He would pray for dismissal of the Petitions. 14) Rival contentions of the parties now fall for my consideration. 15) Monita and Kisan, both retired medical professionals, decided to try their luck in the stock market. Though initially in 2008, the couple were passive investors and had opened demat accounts only for investment purposes, after their retirements in the year 2015, they apparently decided to actively participate in stock market trading, by learning the nitty-grittiest of the stock market transactions. Accordingly, Monita joined tuitions to learn about stock market trading and during the process, came in contact with Siddhi, who was the authorised person of the Petitioners. 16) Instead of stock brokers directly dealing with clients, they are permitted to appoint Authorised Persons who can be both, individuals or entities, to act as an agent of the Stock Broker. Authorised Persons bring in clients for the stockbroker, who then provides access to the Authorised Person on the trading platform. The Authorised Persons take orders from their clients and may also offer investment guidance to their clients. Authorised Persons help....
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....rned Sole Arbitrator and the Appellate Arbitral Tribunal would indicate that both have essentially relied on SEBI Circular dated 22 March 2018 for holding the Petitioner responsible in respect of the trade transactions. It would be apposite to reproduce the findings recorded by the learned sole Arbitrator and the Appellate Arbitral Tribunal on the basis of SEBI circular dated 22 March 2018. The learned sole Arbitrator has held in paras-7 to 11 of the Award as under :- 7. It is not in dispute that no pre-trade confirmation was provided by the Applicant and the transcript which was provided for the date of 18.06.2019 and 27.06.2019 was for cash segment and not for dealing in F & O and that as per the ledger account, trading in F&O commenced on 19.09.2019. 8. Applicant in his submission had stated that the Respondent had deposited a total sum of Rs. 19,14,199.72 with the Applicant and took pay out of Rs. 2,86,710/. On a perusal of ledger account, it is observed that pay-in and pay-out was for cash segment and not for F&O segment. Further it is also observed that interest has been debited by the Applicant from December 2019 (i.e., after the F&O trade commenced) which ....
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....ave not maintained any call recordings and no pre-trade confirmation was produced by the applicant and relying on the SEBI Circular No: SEBI//HO/MIRSD/DOPICIR/P/2018/54 dated 22/03/2018, reject the claim. Further the judgment of the Bombay High Court relied heavily upon by the Applicant is not applicable to the facts of the case since Arbitration and Reconciliation Act, 1996 is not applicable to IGRC proceedings and the Bombay High Court is on Arbitration and Reconciliation Act, 1996. 20) When the Petitioner approached the Appellate Arbitral Tribunal, the issue of failure to maintain pre-trade confirmations again cropped up. The Appellate Arbitral Tribunal again chose to base its findings mainly on compliance with SEBI Circular dated 22 March 2018. The Appellate Arbitral Tribunal has held in paras- 5.1, 5.2 and 5.4 of the Award as under :- 5.1 The crux of this Appeal matter is whether the trading in F&O segment during the disputed period done by the AP of the Appellant was authorised or not. The Appellant could not produce any call recording of order placement/ post trade confirmation calls etc, which is mandatory as per SEBI circular dated March 22, 2018. When asked as....
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....ave mainly relied upon Petitioner's failure to scrupulously follow the requirement of maintaining pretrade and post-trade confirmations under SEBI Circular dated 22 March 2018 for upholding the claims of the Respondents. 22) It would therefore be apposite to refer to the SEBI Circular dated 22 March 2018, which is issued to prevent unauthorised trading by the stock brokers. Para (III) of the SEBI Circular directed as follows: III. To further strengthen regulatory provisions against unauthorized trades and also to harmonise the requirements across markets, it has now been decided that all brokers shall execute trades of clients only after keeping evidence of the client placing such order, which could be, inter alia, in the form of a. Physical record written & signed by client, b. Telephone recording, c. Email from authorized email id, d. Log for internet transactions, e. Record of messages through mobile phones, f. Any other legally verifiable record. When a dispute arises, the broker shall produce the abovementioned records for the disputed trades. However, for exceptional cases such as technical failure etc....
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.... absence of prior authorisation would acquit the client of the obligation to pay for the trades that are not backed by evidence of prior authorisation. This Court further held that SEBI Circular dated 22 March 2018 is directory and not mandatory from the perspective of evidentiary standard for determining whether the client indeed traded or not ? This Court further held that mere absence of written or recorded authorisation would not absolve trading member of liability incurred through such trades. It would be apposite to extensively quote the observations of the learned Singe Judge, as the same clearly answers the issue involved in the present case. It is held in Ulhas Dandekar as under: 23. Mr. Rajadhyaksha has sought to place reliance on decisions of the Jharkhand High Court in the case of Motilal Oswal and the Delhi High Court in the case of First Global to submit that the proposition of law is absolute that the absence of prior authorisation would acquit the client of the obligation to pay for the trades that are not backed by evidence of prior authorisation. With the greatest respect to the Learned Judges who rendered these decisions, in my opinion, there cannot be a....
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....at the absence of prior recorded authorisation is evidence of nonparticipation in the trade, unintended consequences that would be at odds with the very foundation of the regulatory design and the overall scheme of ensuring market integrity would come about. 38. The SEBI Circular that provides for a carve-out for situations where evidence of prior recorded or written authorisation is unavailable, is in fact a demonstration of the deference to trade usages. The payment and receipt of funds, and the conscious and autonomous receipt and delivery of securities are trade usages in the securities market. To be unmindful of them and to read the SEBI Circular as if it were a piece of fiscal statute would be contrary to the statutory mandate of Section 28(3) of the Act, which must be adopted in all cases by the arbitral tribunal. 40. It would be useful to summarise the conclusions drawn in this judgment as follows:- a) Maintenance of prior written or recorded authorisation of trades given to a stock broker by the client is an important safety feature to protect against disputes between brokers and clients, but the same is not the exclusive and only means of demons....
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....ns by relying on NSE Regulation-3.4.1. The Division Bench held in paras-17, 18 and 19 as under: 17) Faced with the difficulty where the Appellant admittedly confirmed all transactions after they were effected, he cited the pretext of absence of pre-transactions authorisation for the purpose of wriggling out of the losses caused due to the transactions. Appellant has relied upon National Stock Exchange (Futures and Options Segment) Trading Regulations, particularly Regulation No.3.4.1 providing that the trading member shall ensure that appropriate confirmed order instructions are obtained from the constituents before placement of an order on the NEAT System. The Regulation further provides that whenever order instructions are received through telephone, members shall mandatorily use telephone recording system to record the instructions. Taking benefit of Regulation No.3.4.1, the Appellant contends that transactions in question could not have been effected in absence of pre-trade authorisation. However, in Nirmal Bang Securities Ltd. Division Bench of Calcutta High Court has held that pre-trade confirmation was mandatory only pursuant to the SEBI Circular dated 26 September ....
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....d by him. There is a difference between concept of absence of pre-trade authorisation and blatantly unauthorised trade. The present case does not involve the vice of blatantly unauthorised trades. Reliance by the Appellant on order of this Court in Amit Bharadwaj and judgment in Bonanza Commodities Brokers Pvt. Ltd. is therefore inapposite. 27) Thus, the Division Bench of this Court in Erach Khavar has held that absence of pre-authorisation cannot be permitted to be used as a handle by a person speculating in shares for the purpose of wriggling out of resultant losses out of trades This Court drew difference between the concept of pre-trade authorisation and blatantly unauthorised trades. The judgment of Division Bench in Erach Khavar also underscores an important principle that if the client fails to object to the transactions within a reasonable time and permits another person to continue effecting trades, the client cannot later take a volte face and seek to distance herself/himself from the trades effected on her/his behalf. This principle is of vital importance in a case like present one. The silence by the client in respect of trades despite acquiring knowledge thereof can....
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....4.1 of the said Regulations is, at best, directory and not mandatory. Thus, it can be said that the impugned arbitral award is in conflict with the said established position of law and hence it is in conflict with public policy of India under Section 34(2)(b)(ii) of the Arbitration Act. 30) In fact, the judgment in Peerless Securities Ltd walks a step further and deprecates the methodology of awarding claim of 50% losses by relying on judgment in Dhwaja Shares and Securities Private Limited Versus. Sunita A. Khatod [Arb. Petition No. 1424 of 2019 decided on 22 July 2025.] This Court has held in para-29 as under :- 29. There is also substance in the contention raised on behalf of the petitioner that even if the arbitral award found losses suffered by the respondent, the extent of liability of the petitioner ought to have been determined on proper and cogent evidence. This Court in the case of Dhwaja Shares and Securities Private Limited Vs. Sunita A. Khatod (supra) held that simply halving the amount claimed by the aggrieved party and awarding it, amounts to an irrational and unreasoned approach. In fact, it was deprecated as being akin to a panchayati approach in ....
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....in 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 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 ....