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Fraudulent Siphoning Off Shares of Investors – Misuse of Power of Attorney by Stockbroker – Liability of CDSL as Depository

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The petitioner is the Depository and facilitator for holding securities in demat form.   Respondent No.2 is the registered stock broker based in Kolkata registered with NSE and also a registered Depository Participant of the petitioner.

On 27.6.2018, respondent no.1 opened demat account with the

respondent no.2 and her late husband jointly executed PoA dated 29.6.2018.  However, the husband of the respondent no.1 expired on 7.6.2019 which was not informed either to the petitioner or the respondent no.2.

The respondent no.2 transferred shares of 9493 clients i(including the respondent no.1) nto own account and acquired title to the said shares.  The said shares were pledged with HDFC Bank.  The petitioner accepted the request for pledge.

On 30.9.2019, the National Stock Exchange suspended respondent no.2 for non-compliance of regulatory provisions of the Stock Exchange.  Since the respondent no.2 defaulted its loan, HDFC sold the pledged securities.

On 11.1.2023, SEBI passed an order and barred the respondent no.1 from the market with directions to repay the investors under the supervision of National Stock Exchange.

On 6.6.2023, the Securities Appellate Tribunal permitted the respondent no.1 for arbitration against the petitioner.

The Arbitral Tribunal held the petitioner liable to indemnify the respondent no.1 for breaches committed by respondent no.1 and allowed the claim of Respondent No.1 to the extent of Rs.86,02,768/- being the value of her lost shares on the date of dispute, with interest at 9% p.a. vide Award dated 30.1.2024.

Clause 5.3.2 of the CDSL Bye-laws, a Depository Participant, while conducting any business with the beneficial owner, acts as an agent of CDSL.

However, the question was whether the respondent no.2 has acted as a broker or DP in the fraudulent acts.

HELD that the transfer of share into first account and then to second account of respondent no.2 is not in pursuance of any trades effected on the Stock Exchange.

Judgment dated 1.12.2025 of the High Court of Bombay in Commercial Arbitration Petition No.311 of 2024 of Central Depository Services (India) Limited  Vs. Daksha Narendra Bhavsar and Another

 

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