Bombay HC on Share Trade Confirmation over Procedural Gaps
Arbitral Award – Share Trading – Pre-transaction authorization – NSE (Futures and Options Segment) Trading Regulations
The appellant had Depository Account with the respondent – stock broker registered with BSE and NSE.
The appellant had transferred 1500, 5000 and 7000 shares of three respective companies to the respondent as security.
In the transactions of purchase and sale of shares during the period of 30th June to 27th September 2015, on the basis of instructions given on mobile phone and other means, the appellant had suffered loses.
The appellant objected to the Ledge Account sent by the respondent. On 27.1.2016, the respondent paid back the balance credit amount standing in the Ledge account to the appellant.
In the complaint filed with IGRP of NSE for value of shares, the order was passed and claim for Rs.46,60,000/- was granted to the appellant.
This was challenged by filing arbitration case with NSE.
On 10.4.2017, the Arbitral Tribunal passed Award, dismissed the challenge of the respondent but reduced the claim to Rs.35,77,412/-.
Both the sides challenged the said Award before the Appellate Panel of Arbitrators.
On 14.8.2017, the Presiding Arbitrator gave dissenting Award allowing the appeal of the appellant. However, majority members gave separate Award of 8.8.2017 dismissing the appeal of the appellant but increased the claim to Rs.46,60,000/-. This was challenged by both the parties in section 37 appeals.
HELD that the question was whether the transactions in question were carried out with the authorization of the appellant or not. The majority Award is cryptic one which did not take into consideration any evidence on record and recorded a bald finding of non-authorisation by the appellant.
The learned Single Judge has set-aside the majority Award essentially on seven grounds mentioned in para 14 of the judgment.
There is no dispute to the position that the appellant had confirmed all the trades after they were transacted. Thus, he had not only full knowledge of each transaction but consented to the appellant. The case does not involve transactions being effected in one or two days.
It is unbelievable that a person who notices and confirms several effected transactions for about three months would be oblivious of profits or losses resulting out of such transactions. If there was absence of any authorization by the appellant, he would have protested against the transaction immediately when transactions started on 1.7.2015. He raised objections for the first time after ten long months.
He did not prospect against even a transaction for three long months. To make the case of the appellant worse, he had confirmed the Ledger Account by signing the same on 5.10.2015 and accepted balance of Rs.37,829,69/- on 27.1.2017 without raising any demur.
NSE (Futures and Options Segment) Trading Regulations – Regulation No.3.41 provides that the trading member shall ensure confirmed order instructions are obtained and in case of telephonic instructions, the member shall mandatorily use telephone recording system to record the instructions.
HELD that pre-trade confirmation was mandatory only pursuant to the SEBI Circular dated 26.9.2017 as per the Division Bench Judgment of the Calcutta High Court in Nirmal Bang Securities Ltd and Keynotes Capital Ltd, cases.
The violation of NSE Regulations for pre-trade authoisations can at the highest be a ground for penalizing a stock broker but cannot be a reason to wriggle out of consequences of trade particularly when the trade transaction is confirmed by the constituent.
There is a difference between concept of absence of pre-trade authorization and blatantly unauthorized trade. The present case does not involve the vice of blatantly unauthorized trades.
