Stock Broker’s Liability For the Acts of Alliance Partner & Employees
Judgment dated 21.4.2026 of the High Court of Bombay, Bench at Aurangabad, in Arbitration Appeal No.128 of 2025 of IIFL Capital Services Limited Vs. Sukhadeo Gorakha Bhil
206200001282025_3.pdf
The respondent had opened demat trading account with the appellant through the sub-broker on 5.7.2024. During the period of 29.7.2024 to 23.9.2024, the respondent suffered loss of Rs.13,26,956/- due to unauthorized trades caused by the agents of the appellant. Moreover, the brokerage of Rs.9,48,302/- was unreasonable. The Arbitral Award for Rs.14,37,200/- passed in favour of the respondent was confirmed by Section 34 Court.
{A} In absence of prior written or recorded instructions for every transactions effected by an Alliance Partner or his employees through a stock broker without any objection from the client within reasonable time, whether the client would be permitted to wriggle out of losses resulting out of trade transactions ?
{B} In the facts of this case, whether the Alliance Partner and his employees has conducted transactions without pre-trade authorization in a manner prejudicial to the interest of the client and only in the interest of Alliance Partner and the stock broker and, if so, whether the stock broker is liable for the same ?
Arbitrator has recorded a finding that the transactions were conducted in the manner so as to make profits in the nature of brokerage commission only to the Alliance Partner and the Stock Broker – the Appellant herein. The Respondent having failed to raise objections within the reasonable time would not absolve the Appellant from taking responsibility of illegal trade.
The Arbitrator on the basis of evidence before it had come to the conclusion that the client made investment of Rs.14,40,000/- and that the transactions were manipulated in such a manner that the broker’s fees alone stood at Rs.9,98,701/-. The transactions were initiated in such a manner so as to benefit the broker and the Alliance Partner and not the client. The Arbitrator has rendered a f inding of civil fraud. This finding of the Arbitrator is based on evidence and, thus, takes away the case in a different dimension.
I hold that the fraudulent actions of the agent of the Appellant, i.e. Alliance Partner, in conducting the fraudulent transactions makes the Appellant / Broker liable for the losses incurred to the client. The Appellant, stock broker along with the Alliance Partner is the beneficiary of the illegal transactions and the transactions have taken place in the course of action within agents authority. The stock broker is also required, in terms of the regulations, to appoint Alliance Partner of high integrity. Thus, the stock broker cannot wriggle out of the Alliance Partners actions, which are in the course of his agency, although the Broker / Appellant may have not permitted 31 ArbAppeal128.2025 the Alliance Partner to indulge into fraudulent trades. The actions of the Alliance Partner has resulted in the profits to Stock Broker and the Broker is liable for the act of Alliance Partner and his servants. The fact situation in the present case would be covered under Section 238 of the Indian Contract Act, where the misrepresentation made or fraud committed by agents acting in the course of their business for their principal, have the same effect as committed by the principal and the principal is liable for the same. A principal is liable for the fraud committed by his agents acting within the scope of his authority irrespective whether the fraud is committed for the benefit of the principal or the agent.
Liability of the sub-broker and his employees for the unauthorized trading rests with the Trading Member of the Stock Exchange
