Mr. Rajendra Kumar Bothra vs Ventura Securities Limited

Anoop V. Mohta, J.—The Petition is u/s 34 of the Arbitration and Conciliation Act, 1996 (for short, the Act), whereby challenge is made to the Award dated 2nd September, 2008 passed by the learned Arbitral Tribunal constituted under the Bye-laws, Rules and Regulations of National Stock Exchange of India Ltd. (F & O Segment) (for short, NSEIL).

The basic facts in Arbitration Petition No. 89/2009 are as under:

The petitioner had been investing in shares through respondent since August 2004 under the client code No. R 202. All the dealing were done through a sub-broker Mr. Punit Jhaveri. The petitioner was also dealing in Futures and Options (F & O) trading through respondent. For this trading the petitioner was required to maintain certain minimum margin requirements, in form of equity shares. Accordingly, the petitioner had deposited various share with respondent towards the margin. Since inception of their relationship the respondent never insisted on clearing of any shortfall in Mark to Market on the next business day & nor made / effected payment in respect of credit in the petitioner''s account on day to day basis. There was an understanding between the respondent and the petitioner that debit if any for mark to market should be paid off within 4 to 5 days and if there is a credit then it may be paid to the petitioner as and when demanded. This arrangement was in existence since 2004 and was followed by both the parties.

On 18.01.2008, there were few transaction which were outstanding (Open positions) on behalf of the petitioner with the respondent. There was debit balance of Rs. 4,92,372 in petitioner''s accounts on 18.01.2008.

The market was closed on 19.01.2008 being Saturday and 20.01.2008 being Sunday.

On 21.01.2008, there was a fall in prices of stocks and due to that there was a debit towards mark to market in the petitioner''s account to the extent of Rs. 9,67,949/-. This was reflected in the bill issued by the respondent. Thus on evening of 21.01.2008 there was total debit balance of Rs. 14,60,321/- in petitioner''s account.

On 22.01.2008, as against the total debit of Rs. 14,60,322/- on the evening of 21.01.2008, the petitioner, on his own handed over a cheque of Rs. 15.00 lacs in early morning of January 22, 2008. Thus, the petitioner effectively had credit balance on the morning of 22.01.2008 in mark to market account. In addition to this the respondent had shares worth Rs. 24.00 lacs in the margin account with the respondent.

On 22.01.2008, there was again big fall in prices of the shares. The petitioner thought that it is a buying opportunity and therefore, contacted Mr. Punit Jhaveri, a sub-brother of the respondent, through whom the petitioner had been transacting business. However, Mr. Punit Jhaveri informed the petitioner that his terminal had been de-activated by the respondent. Mr. Jhaveri was not able to contact the respondent and therefore expressed his inability to transact any business. At about 9.30 PM, the petitioner came to know that respondent without his instruction and without any intimation to the petitioner as well as the sub-brother Mr. Punit Jhaveri, unilaterally squared off all the outstanding transactions of the petitioner resulting into a further debit of Rs. 9,04,909.15 in petitioner''s Account.

On 23.01.2008, the said cheque of Rs. 15,00,000/- was returned by the Banker of the petitioner for some technical reason stating that the signature differs and not for insufficient funds. This fact was confirmed by the banker vide their certificate dated 24.01.2008.

On 24.01.2008, the petitioner wrote a letter to the respondent objecting to unilateral squaring off the petitioner''s outstanding transaction and also submitted a certificate issued by the bank that cheque was not returned for insufficient fund. The petitioner further requested the Respondent to restore petitioner''s position immediately. However, the respondent did not give any response to the said letter.

On 29.01.2008, the petitioner again wrote a letter to the respondent stating that petitioner is ready and willing to clear all the dues provided respondent agrees to restore petitioner''s position immediately as January 31st was the settlements day. Again the respondent failed to give any reply to the petitioner''s said letter. The petitioner by his letter dated 29.01./2008, addressed to the Investors Grievances Cell of Security Exchange Board of India, referred the dispute with the respondent and requested to take necessary action against the respondent. However, till this date no response received from the SEBI.

On 30.01.2008, the petitioner approached Investors Grievance Cell of NSEIL in respect of the said act of respondent.

On 20.02.2008, the respondent through its Advocates & Solicitors M/s. Narayanan & Narayanan served a notice dated February 18, 2008 u/s 138 of the Negotiable Instruments Act, 1881 on the petitioner stating that on 25th January 2008, the respondent came to know about the return of cheque of Rs. 15.00 lacs and further called upon the petitioner to make payment of Rs. 15.00 lacs within fifteen days from the date of receipt of notice. In other words the petitioner should make payment of Rs. 15.00 lacs on or before March 06, 2008.

On 04.03.2008, the Investors Grievances Cell of NSEIL vide its letter dated March 04, 2008 forwarded a copy of the letter dated February 14, 2008 from the respondent. A copy of the said letter was handed over to the petitioner on March 04, 2008. On receipt of the copy of the said letter dated February 14, 2008 of the respondent, the petitioner addressed another letter to Senior Executive Officer of the Grievances Cell of the NSE, replying to all the points raised by the respondent. The petitioner further requested that an audit should be conducted of the transactions entered by the trading member to verify that whether trading member had conducted its business of F & O segment as per the rules and regulations framed by NSE. It is the apprehension of the petitioner that the respondent closed out all the position of the petitioner to cover up the losses of some other client or its own trading in proprietary account. The petitioner also offered to bear the expenses for the same.

On 05.03.2008, the petitioner received a contract note stating that on March 03, 2008, the respondent sold shares worth Rs. 26,08,309/- out of the shares lying in margin account. These shares were sold without any prior notice to the petitioner or petitioner''s instructions. The net debit in petitioner''s account was Rs. 24.00 (approx) the respondent sold the shares worth of Rs. 26.00 lacs. Thereby made an excess disposal of shares to the extent of Rs. 2.00 lacs.

On 12.03.2008, the respondent made a purchase of 188 shares of Glaxo Limited for a sum of Rs. 1,96,939/- without any instructions from the petitioner and debited the petitioner''s account adjust the excess recovery made on March 03, 2005.

The said dispute between the parties was referred to Arbitration under the provisions of bye-laws of NSE and Mr. Arvind A. Khanolkar was appointed as Sole Arbitrator to decide the dispute between the parties.

On 07.04.2008, the petitioner filed statement of claim dated 07.04.2008 before the Learned Sole Arbitrator raising a claim for sum of Rs. 22,88,708/- with interest at the rate of 15% p.a., which included a sum of Rs. 15,88,708/- towards actual loss caused to the petitioner and Rs. 7,00,000/- towards the compensatory cost for buying and selling shares by the respondent at their own whims and fancy. The respondent opposed the said claim by filing their reply. The further pleading and documents were filed by both the parties.

On 02.09.2008, after hearing the parties the Learned Sole Arbitrator vide Award dated 02.09.2008 rejected the petitioner entire claim for Rs. 22,88,708/-. The said Award was received by the petitioner on 10.09.2008.

Being aggrieved by the said Award dated 02.09.2008 passed by the learned Sole Arbitrator rejecting the petitioner''s claim, the petitioner approached this Court by way of present Arbitration Petition u/s 34 of the Act on various grounds enumerated in the Petition.

The relevant NSEIL Rules are as under:

3.10 (b) Constituent in Default

In case of non-payment of daily settlement by the constituents within the next trading day, the Trading Member shall be at liberty to close out transaction by selling or buying the derivatives contracts, as the case may be, unless the constituent already has an equivalent credit with the Trading Member. The loss incurred in this regard, if any, shall be met from the margin money of the constituents.

In case of open purchase position undertaken on behalf of constituents, the Trading Member shall be at liberty to close out transactions by selling derivatives contracts, in case of constituents if he fails to meet the obligations in respect of the open position within next trading day for the execution of the full contract or within next trading day of the contract note having been delivered, unless the constituents has an equivalent credit with the Trading Member. The loss incurred in this regard, if any, shall be met from the margin money of the constituents.

4.4.15 The Trading Member shall not make payment in cash to the constituents and shall not receive payment in cash from the constituents, towards the payment of Mark to Market settlement for future contracts.

4.4.16 (a ) Trading Member shall not make payment in cash to the constituents and shall not receive payment in cash from the constituents, towards the payment of Mark to Market settlement for future contracts.

(b) The Trading Member shall make or receive all payment to/or from the constituents by account payee crossed Cheques/Demand Drafts or by way of direct credit into the respective bank account through Electronic Fund Transfer Facility or any other mode allowed by the Reserve Bank of India.

Combines Risk Disclosure Document for Capital Market

2.1 A Futures Trading involves daily settlement of all positions. Every day the open positions are marked to market based on the closing level of the index. If the index has moved against you, you will be required to deposit the amount of loss (notional) resulting from such movement. This margin will have to be paid within a stipulated frame, generally before commencement of trading next day.

The basic contention raised by the learned Counsel appearing for the constituent is on the ground of Waiver by relying on Commissioner of Customs, Bombay Vs. Virgo Steels, Bombay and Another, .

The submission is that there was regular practice to grant 3 to 4 days time to meet the shortfall in the account. On 22.01.2008, the alleged arrangement read with the claim of the petitioner/constituent that a trading member/respondent had waived his default by accepting the cheque of Rs. 15 lacs which was paid before the squaring off date. Therefore, there was no dispute about the fact that on the evening of 21.01.2008, the petitioner/constituent was required to make the payment of Rs. 14,97,000/- to meet the net shortfall in his account. After going through the Rules as well as the rival contentions so raised, it is clear that the arrangement or practice so expressed and/or providing 3 to 4 days time to meet the shortfall is neither a part of NSEIL Rules nor there is anything in writing to support the same. Even if there is such practice or trading as alleged, but denied by the trading member in a volatile situation and/or unprecedented collapse of the market, the alleged practice is definitely non-workable and no party can claim right over such practice in such unprecedented situation in the market. The practice/arrangement, even if any, is meant only for day to day normal business and normal circumstances. The claim so raised by relying on the principle of waiver, in my view, is unacceptable. The judgment so relied is totally distinct and distinguishable on fact as well as on law. It is not the question of waiver of any statutory provision. The issue of waiver has to be read in the context of particular facts and circumstances and the conduct of the parties read with the relevant agreement and business which they; are dealing with. It is also a question of fact. The Court need to consider every aspect before considering it. The contesting party, if denies and/or opposes the alleged right of waiver or practice or arrangement, the person who wants the benefit out of this needs to prove the issue of waiver with supporting material. In the present case, for want of specific clause or agreement, mere understanding as alleged even if any, the constituent or such person cannot claim such right or arrangement, even in such unprecedented circumstances of collapse of market, as referred above. The respective obligations of the parties, based upon the Rules and Regulations, including the obligation of the trading member to perform his part of obligation with the concerned Authorities within the stipulated time and period just cannot be overlooked. Regulation 4.4.16 (a) and (b) itself contemplates that both the parties shall not make or receive payment in cash towards the payment of Mark to Market Settlement for future contracts. It is also obligatory for a trading member to make or receive the payment from the Constituent by Account Payee or crossed cheque or Demand Draft or by way of directing trading into their respective Bank account through electronic fund transfer facilities or any other mode allowed by the Reserve Bank of India. (RBI). In the present case, merely because the trading member accepted the cheque of Rs. 15 lacs that itself in my view, is not sufficient. The requirement is that the amount should be received and credited in the Account. Merely handing over of the cheque itself is not sufficient. It is always subject to realisation. In the present case admittedly, even that cheque was bounced, a criminal case is pending with regard to the same. Once the cheque for whatever reason, which was handed over in the morning on 22.01.2008, but as noted, bounced, it is clear case of default so far as the constituent is concerned. In an unprecedented situation like this, a trading member just cannot be compelled to wait for longer time till realisation of the cheque. Therefore, as there was admitted default in the payment, as per Rule 3.10(b) NSEIL (F & O Segment), the trading member has exercised the option to close down the transaction and squared off the same as recorded above. This action of constituent member, therefore, in my view, is well within the agreed terms and conditions, rules and regulations, as admittedly there was no equivalent credit with the trading member. The loss in fact therefore was met by squaring off of the account as done in the present case as there was no margin money also available in the account of the constituent.

There is nothing to show or pointed out that the trading member has acted beyond the Rules and Regulations except the submission of waiver and/or arranged practice. There is no denial to the fact of bounce of the cheque and the amount due/shortfall of the amount in the account so claimed. Therefore also, the petitioner cannot claim and/or entitled for any equity and/or any right based upon the principle of "waiver" as claimed and specially all the submissions so raised by the constituent also looses its importance, the moment the cheque on the basis of which cause of claim was made itself was bounced.

In my view, therefore, squaring off of open position of the petitioner by the respondent was justified and correct and also the action of selling the applicant''s securities on 3.3.2008. The pendency complaint with NSEIL is of no consequence. That itself cannot be the reason for the trading member to wait for the decision and not to recover the amount due and payable by the constituent. The demand notice, even if any made, in the facts and circumstances of the case, is also of no assistance to lodged such claim against the trading member.

The applicant''s claim for the loss suffered and for compensation of Rs. 7 lacs has been rightly answered in the following words:

6.7 The Respondent has stated that he contacted the Applicant on 21-1-2008 and 22-1-2008 after the temporary closure of the market to clear the shortfall by making payment. The Applicant denies any communication to him on either date. He has even stressed that the payment on 21-1-2008 morning was made by him on his own. While it is one party''s word against another about oral communication, the Respondent has not made it clear any time in the past nor it has claimed that the Respondent clearly told the Applicant to make payment, which will enable him to receive money in his account by the certain time. The Applicant would have had opportunity to consider making payment directly to the account of the Respondent. It would have been better if the Respondent had made it clear earlier. Unfortunately, such practice of receiving direct payment neither existed nor insisted upon by the Respondent. However, non-existence or non-insistence of such payment in past cannot be held against the broker, who has to fulfill his obligations to NSEIL under any circumstances. The situation of the 21-1-2008 and 22-2-2008 was abnormal and in view of extreme compelling circumstances, the Respondent has squared off the positions. The Respondents action is justified as per the Byelaws, Rules and Regulations of NSEIL, which require upfront payment of margin each day.

6.8 The Applicant''s claim for the loss suffered on account of the square off of open positions on 22-1-2008 and for compensation of Rs. 7,00,000/- therefore does not sustain.

The Arbitrator has also considered that the last cheque was bounced and returned on 25.01.2008. The respondent/trading member could have sold the securities in time thereafter. Therefore, the value realised on 3.3.2008 by selling securities was more than what would have been realised by selling the same at average rate on 25.01.2008. In fact, the petitioner was benefited. Therefore, the claim for compensation on the alleged arbitrary sell also unsustainable.

Even otherwise, considering the scope and purpose of Section 34 and as there is no perversity and/or any illegality and as there is also no breach of any Principle of Natural Justice committed by the Arbitrator while conducting the proceedings and as the reasonings so given are well within the frame work of law and the record and as the view so taken by the Arbitrator is well within the frame of Byelaws, Rules and Regulations, there is no case made out by the petitioner to interfere with the same.

The Petition is accordingly dismissed. The claim so rejected of the petitioner/constituent is maintained. No costs.