The Bombay High Court has held that an investor cannot hold a stockbroker liable for trading losses, or for the brokerage generated on such trades, if the trades were authorised by the investor, even if executed by a trusted third party. The Court affirmed that regulatory violations or procedural lapses by a stockbroker may attract disciplinary action from regulatory bodies like SEBI or the NSE, but they do not automatically create a right for the investor to be compensated for losses arising from trades they have consented to or confirmed.
Furthermore, the Court clarified that an Arbitral Tribunal is mandated by Section 28(3) of the Arbitration Act to decide disputes strictly based on the terms of the contract and the applicable law. It cannot decide a matter ex aequo et bono (on principles of equity and fairness) unless expressly authorised by the parties to do so under Section 28(2) of the Act. Awarding a refund of brokerage on authorised trades, where no breach of contract by the broker has been established, is contrary to the fundamental policy of Indian law and Section 73 of the Indian Contract Act, 1872, and thus constitutes a patent illegality.
The Court held that the arbitral awards passed by the Lower Arbitral Tribunal and the Appellate Arbitral Tribunal, which directed the Petitioner to refund the brokerage amount to the Respondent, were patently illegal and in conflict with the fundamental policy of Indian law. The Court found that since the trades were held to be authorised by the Respondent, there was no legal basis to direct a refund of the contractually agreed-upon brokerage.
Accordingly, the Court allowed the Arbitration Petition and set aside the Award of the Appellate Arbitral Tribunal, the Award of the Lower Arbitral Tribunal, and the underlying order of the IGRC. The Petitioner was also held to be entitled to withdraw the deposited amount of Rs. 78,66 Lakh with accrued interest.
A Single Judge Bench of Justice Sandeep V. Marne observed that that the Respondent, an educated professional, acted in a grossly negligent fashion by blindly trusting Mateen, voluntarily handing over his login credentials, and allowing trades to be conducted without any checks. It was noted that the Respondent received and confirmed trades via SMS, email, and telephone calls, and did not raise any contemporaneous objections.
The Bench found it to be a clinching factor that the Respondent continued his association with Mateen even after suffering losses, allowing Mateen to facilitate the transfer of his account to another broker, Tradebulls. The Bench thus, rejected the findings of the lower forums that the trades were executed solely for “brokerage generation, terming this conclusion perverse and a mere surmise, given that the brokerage amount was negligible compared to the total trade turnover of over Rs. 1,000 crores.
The Bench also noted that the Respondent never specifically prayed for a refund of brokerage; his claim was for the restitution of his sold shares. Thus, the direction to refund brokerage was seen as a form of ‘panchayati justice’, an impermissible equitable approach adopted by the tribunals to comfort the Respondent for his losses.
Briefly, the case involves a dispute between Nirmal Bang Securities Pvt Ltd. (Petitioner), a stockbroker, and Shashi Mehra HUF (Respondent), whose Karta is a practicing Chartered Accountant. In April 2019, the Respondent reactivated a dormant trading account with the Petitioner at the behest of one Mateen Attar, who falsely presented himself as an Authorised Person (AP) of the Petitioner. The Respondent handed over his trading account’s login ID and password to Mateen, who then executed a massive volume of trades in the Equity, Futures & Options (F&O), and Currency Derivatives (CDS) segments between 25 April 2019 and 21 June 2019, with a total trade value exceeding Rs. 1,057 crores.
These trades resulted in significant losses and generated a brokerage liability of Rs. 78.66 Lakh (including GST). It was later revealed that Mateen was never the Petitioner’s AP, although his father was registered as an AP on 3 May 2019, after the trading had already commenced. The Respondent then filed a complaint with the Investor Grievance Redressal Committee (IGRC), which directed the Petitioner to refund 75% of the brokerage. On appeal, the Arbitral Tribunal enhanced this to a 100% refund, a decision that was subsequently upheld by the Appellate Arbitral Tribunal.
Appearances:
Senior Advocate Nikhil Sakhardande, along with Advocates Shubra Swami, Samyak Pati, Valentine Mascarenhas, and Janani Sitaraman, for the Petitioner
Advocates Deepak Dhane, Viraj Bhate, and Jidnyasa Kamble, for the Respondent
