T.APPA RAO vs MERFIN (INDIA) LIMITED

IT is the case of the Petitioner (Complainant), T. Appa Rao, that he had purchased 200 scrips of Satyam Computers Ltd. on 19.3.1998 through Opposite Party No.2, T. Sridhar, sub-broker of Opposite Party No.1, M/s. Merfin India Ltd. An amount of Rs.62,000/- was paid through Opposite Party No.2 for which receipt dated 26.3.1998 was issued by Sri Guru Datta Share Consultants, the firm of Opposite Party No.2. The Complainant waited for 15 days for receipt of the share certificates, but the Respondent No.2 did not deliver the shares to Respondent No.1. Hence, the Complainant approached the District Forum, Khammam, by filing CD No. 158 of 1998. The District Forum, after appreciating the evidence which was brought on record, arrived at the conclusion that there was deficiency in service on the part of the Opposite Parties, hence directed them to pay Rs.1,17,360/- representing the price of 200 scrips of Satyam Computers Ltd. at the rate of Rs.586.80 per scrip, which was prevailing at the relevant time, with interest at the rate of 12% p.a., together with damages of Rs.5,000/- and costs of Rs.500/-. Opposite Party No.2 has not filed any appeal and has accepted the judgment and order passed by the District Forum.

AGAINST that order, Opposite Party No.1, M/s. Merfin India Ltd., preferred First Appeal No.243 of 1999 before the State Consumer Disputes Redressal Commission, Andhra Pradesh. The State Commission by its judgment and order dated 29.1.2003 arrived at the conclusion that Opposite Party No.2 was not the sub-broker of the Opposite Party No.1, but was only a constituent/client of Opposite Party No.1. Hence, there was no privity of contract between the Complainant and the Opposite Party No.1. Therefore, Opposite Party No.1 was not liable and answerable for the transaction carried out by the Complainant through Opposite Party No.2. The State Commission also held that the Complainant was having remedy only against the Opposite Party No.2, and hence, the order passed by the District Forum was modified accordingly by holding that Opposite Party No.1 was not liable to pay any compensation to the Complainant. Against that judgment, this Revision Petition has been filed by the Complainant. Submissions: Learned Counsel for the Complainant submitted that it is brought on record that Opposite Party No.2 has forwarded the value of 200 shares of Satyam Computers Ltd. to Opposite Party No.1. Further, there is no dispute that Opposite Party No.1 received the said amount and has also purchased 200 scrips. For this purpose, the learned Counsel for the Complainant has relied upon the order form dated 19.3.1998 for purchase of 200 shares of Satyam Computers Ltd. at the rate of Rs.210.60. Thereafter, there is a receipt, as stated above, for the said amount issued by Opposite Party No.2, for Sri Guru Datta Share Consultants. He has also referred to letter dated 15.6.1998 written by the Officer of the Securities and Exchange Board of India (SEBI) wherein the officer of the SEBI at Mumbai was informed that a complaint was filed by the Complainant against T. Sridhar, Sub-Borker of M/s. Merfin India Ltd., Vijayawada, a member of National Stock Exchange (NSE) and from Dr. S. Baphna against the NSE. In the said complaint necessary action be taken. Further, the SEBI wrote to T. Sridhar that as per Rule 3 of SEBI (Stock Brokers and Sub-Brokers) Rule and Regulations 1992 no stock broker or sub-broker shall buy, sell or deal in securities unless he holds a certificate granted by the board under the regulations. Copy was sent to the Complainant by following advice:

"You are advised not to deal with unregistered sub-brokers only." Similarly, copy was sent to M/s.Merfin (India) Ltd. (Opposite Party No.1) with an endorsement : "You are advised not to deal with unregistered sub-broker and ensure redress of grievance and confirm to us within one month".

Further, he also referred to the letter dated 28.9.1999 written by the Under Secretary to the Government of India to the Complainant that the Department cannot take any action against the borker, M/s. Merfin (India) Ltd. and sub-broker. It appears that after passing of the order by the District Forum, SEBI wrote a letter dated 13.10.1999 to the Under Secretary to the Government of India, that no action could be initiated against the NSE broker (M/s. Merfin (India) Ltd.) in view of the stay granted by the A.P. State Commission. By referring to the aforesaid documents, learned Counsel for the Petitioner submitted that Opposite Party No.2 was acting as sub-broker/agent on behalf of the Opposite Party No.1, and, therefore, Opposite Party No.1 is liable to compensate for the loss suffered by the Complainant. He submitted that Opposite Party No.1 had purchased 200 shares on the basis of the amount sent by the Complainant. However, those shares were sold unjustifiably by Opposite Party No.1. Findings:

THEREFORE , the sole question is whether the Opposite Party No.2 was a sub-broker/agent of the Opposite Party No.1 and whether Opposite Party No.1 was entitled to retain the 200 shares purchased at the instance of Opposite Party No.2 for and on behalf of the Complainant. There is no dispute that there was an agreement dated 29.5.1997 between the Opposite Parties No. 1 and 2. Question is of its interpretation. Learned Counsel for the Respondent No.1 relied upon the rules framed by the SEBI and contended that the judgment and order passed by the State Commission is justified, as Respondent No.2 was a ''Constituent'' Member. He was not the registered sub-broker nor he was authorized to deal on behalf of the Respondent No.1 - M/s Merfin (India) Limited.

FOR deciding this question, we would refer to relevant part of the Agreement executed between the Merfin (India) Limited, member of N.S.E., and the Opposite Party No.2. It is a Member and Constituent Agreement. However, preamble of the said document makes it clear that Respondent No.2 was entitled to deal on behalf of the Respondent No.1. As such, it appears to be in the nature of an agency agreement. The relevant part of the said preamble is as under:- "Whereas the Member is registered as a ''Trading Member'' of National Stock Exchange'' (NSE) on the Capital Market Segment. Whereas the constituent is investing/trading in the Securities admitted for dealing on the Capital Market Segment of NSE as defined in the Bye-laws of N.S.E. Whereas the constituent has satisfied himself of the capability of the Member to deal in ''Official List of N.S.E. Securities'' as defined in the NSE Bye-Laws and has offered to transact through the Member by executing his orders through it. Whereas the Member has satisfied himself about the genuineness and financial soundness of the constituent as he has been recommended and approved by M/s Vijayawada Share Brokers Ltd., a Limited Company incorporated under the Companies Act of 1956 for the purpose of acting as constituent in shares. Whereas the said company also agreed to stand as guarantor for the due performance of all the obligations by the constituent arising out of this agreement and the said company also agreed to furnish a Bank Guarantee for the said purpose to the Member. Whereas the Member has accepted the offer of the constituent and both the parties hereto have agreed with their Mutual consent to do the following acts in accordance with the Rules By-Laws and the Regulations of the Exchange or any such Laws that may be made by the exchange in future."

The relevant terms of the Agreement are as under:- 1) All Trades, Transactions and Contracts are subject to the Rules and Regulations of the N S E and shall be deemed to be and shall take effect as wholly made, entered into and to be performed in the city of Vijayawada. 2) The constituent has been transacting the business in respect of the securities permitted by the NSE through the Member of the NSE. 3) The Member shall process and execute the orders of the constituents at the Central Trading System of the NSE. 4) The Member shall charge and the constituent shall pay a brokerage on all transactions that take place between them at the rates of 0.12 per cent. However, the brokerage shall be charged @ 0.04 per cent for square up transactions at the time of squaring up in the same settlement. It shall be rounded off to next highest paisa. 5) The constituent shall ensure that third party guarantee preferably by his introducer V.S.B.L. be executed for the settlement of commitments made by himself from time to time.

7). Both the parties agree and covenant that in the event of the death or insolvency of the constituent or his otherwise becoming incapable of receiving and paying for or delivering in transferring securities which the constituent has ordered to be bought or sold, the trading Member may with the approval of the Exchange close out the Transaction of the constituent and the constituent or his legal representatives and V.S.B.L. shall be liable for any consequent losses costs and surplus etc. 8). The constituent shall made a minimum deposit of Rs.25,000/- (Rupees twenty five thousand only) with the member which amount shall be returned by the member without interest after settlement of all dues upon termination of this agreement. 10) At the request of the constituent, the Member has agreed to receive the orders over telephone and execute the same. The constituent has agreed to obtain telephonic confirmations and also the constituent is responsible for order executed against telephone orders. From this Agreement, it is established that : (a) Respondent No.2 was introduced by M/s Vijayawada Share Brokers Ltd. to Respondent No.1, which is a Public Limited Company. (b) Respondent No.2 was required to give security deposit of Rs.25,000. (c) M/s Vijayawada Share Brokers Ltd. also became the surety of Respondent No.2. (d) M/s Vijayawada Share Brokers Ltd. has not only became the guarantor but also agreed to furnish the Bank Guarantee for the said purpose to the Member so that there is a due performance of all the obligations by the constituent. (e) From this agreement it is clear that the constituent (Opposite Party No.2) was investing and trading in securities on the capital market segment of NSE; (f) As per the agreement, he was to transact through the Member (Opposite Party No.1); (g) As per the agreement all Trades, Transactions and Contracts were subject to the Rules and Regulations of the NSE; (h) The Member (Opposite Party No.1) was to execute the orders of the constituent (Opposite Party No.12) as per the Central Trading System of the NSE. For this, the constituent was required to pay brokerage at the rate specified therein.

THE aforesaid terms of the agreement reveal that it is not a simpliciter agreement of a client and member. It is an agreement by a Member of the NSE with Opposite Party No.2 that he acts as agent of the Opposite Party No.1 for the segment of Vijayawada in investing and trading in securities. It is, therefore, rightly pointed out by the learned Counsel for the Petitioner that on the basis of the said agreement, Opposite Party No.2 was permitted to act as an agent (may be an unregistered sub-broker) of the Opposite Party No.2. This was done after obtaining clarification that Opposite Party No.2 shall not be a Member or a Sub-Broker of any recognised stock exchange. However, the learned Counsel for the Respondent vehemently referred to the rules of the SEBI. Learned Counsel for the Opposite Party No.1 submitted that the Opposite Party No.2 cannot be held to be a sub-broker because there was no registration as required under the SEBI''s (Stock Brokers and Sub-Brokers) Rules, 1992.

IN our view, this contention is misconceived because Opposite Party No.2 was not acting as a sub-broker by selling or dealing in securities as contemplated under Rule 3 of the said rules. He was merely forwarding the offer of purchase or sale in securities to the Opposite Party No.1. Rule 3 provides that: "No stock-broker or sub-broker shall buy, sell, deal in securities, unless he holds a certificate granted by the Board under the Regulations.''In the present case, buying, selling or dealing in securities were not done by the Opposite Party No.2. It was left to Opposite Party No.1, on the orders which have been placed by Opposite Party No.2. In any case, Complainant would not be knowing that the Opposite Party No.2 was not registered as a sub-broker, and he is not entitled to forward the transaction to the Opposite Party No.1. There is no prohibition under the rules in forwarding the offer of purchase or sale of shares by an agent of the Opposite Party No.1.

Learned counsel for the Opposite Party No.1 as also produced on record SEBI (Stock Brokers and Sub-Brokers) Rule, 1992. Rule 2(f) defines sub-broker which reads as under: "(f) ''sub-broker'' means any person not being a member of a stock exchange who acts on behalf of a stock-broker as an agent or otherwise for assisting the investors in buying, selling or dealing in securities through such stock brokers. Thereafter Rule 3 provides"

"Not to act as stock-broker or sub-broker without registration. No stock-broker or sub-broker buy, sell, deal in securities, unless he holds a certificate granted by the Board under the regulations: Provided that such person may continue to buy, sell or deal in securities if he has made an application for such registration till the disposal of such application. Model Agreement Form between the broker and the sub-broker is provided as per Annexure 4 of the SEBI''s(Stock-brokers and Sub-brokers) Regulations, 1992 and clause 2 thereof reads as under: "The sub-broker may conduct business on behalf of his client with the member broker as may be mutually agreed upon and subject to such conditions, as may be agreed to mutually between the member broker and the sub-broker. Such agreement shall not contravene any provisions of this agreement and said rules and regulation."

The aforesaid rule defines sub-broker to mean any person, not being a member of the stock exchange who acts on behalf of the stock broker as an agent or otherwise for assisting the investors in paying, selling or dealing in securities through such stock brokers. That means Opposite Party No. 2 was entitled to be an agent of Opposite Party No.1. No doubt, as per Rules 3 he cannot buy, sell, deal in securities unless he holds a certificate granted by the Board under the SEBI Regulations. In the present case, that question does not arise because Opposite Party NO.2 has only forwarded the offer made by the Complainant to the Opposite Party No.1 to purchase 200 Satyam shares, as Opposite Party No.2, to be an unregistered sub-agent, was not entitled to purchase directly the shares and, hence he has not done that. The learned Counsel for the Opposite Party NO.1 next referred to bye-laws framed by the National Stock Exchange of India Ltd. (June, 2000) wherein the Constituent is defined as under: "1.3.7: Constituent: A constituent means a person, on whose instructions and, on whose account, the Trading Member enters into any contract for the purchase or sale of any security or does any act in relation thereto. Explanation: For the purpoes of these regulations, the term Constituent includes a Participant as defined under the Byelaws of the Exchange unless expressly stated otherwise ". He also relied upon the meaning given to client/constituent in Item 1.2A which reads as under: "1.2A Client/Constituent: A Client/Constituent means a person, on whose instructions and on whose account the clearing member clears and settles deals. For this purpose, the term ''Client'' shall include all registered constituents of trading members of Specified Exchange".

Explanation: 1:

THE terms ''Constituent'' and ''Client'' are used interchangeably in these Byelaws. Rules and Regulations and shall have the same meaning assigned herein". And, thereafter, he submitted that as per Byelaw .1.5 (b), in case of default by the Constituent, the procedure prescribed is as under: "(b) Constituent(s) in default: "In case of purchase on behalf of constituents, the Trading Members shall be at liberty to close out transactions by selling securities, in case the constituent fails to make the full payment to the Trading Member for the execution of the full contract within two days of the contract note having been delivered for the cash shares or before the pay-in-day (as fixed by the Exchange for the concerned settlement period), whichever is earlier, unless the constituent already has an equivalent credit with the Trading Member. The loss incurred in this regard, if any, will be met form the margin money of the constituent".

IN our view, the aforesaid byelaw would not mean that a Member is entitled to forfeit the amount that is due to him from the constituent of a different transaction. Admittedly, in this specific transaction, there is no default by the Constituent in making the full payment for purchase of 200 Satyam Shares. The amount was forwarded in advance. The defence that the Opposite Party No.2 failed to pay some amount for some other transaction cannot be the basis for withholding 200 Satyam shares and, thereafter selling it, and utilizing its funds for non-payment of some previous transactions would amount to deficiency in service. The District Forum has also arrived at the conclusion that as per the SEBI Regulations once conformation is given, its scrips cannot be sold without authorization in writing from the purchaser of the scrips, and in the present case Opposite Party No.1 has admitted that he sold away the scrips on 15.5.1998. In this view of the matter, we hold that the Opposite Party No.2 was either unregistered sub-broker of Opposite Party No.1 or agent who was acting on behalf of the Opposite Party No.1 for purchase and sale of securities through Opposite Party No.1 (may be that he was an unregistered sub-broker with SEBI) and he was acting as per the agreement dated 29.5.1997, which is, by and large, in the nature of an agency agreement. In any case, the third party would not come to know that Opposite Party No.2 was not authorized registered sub-broker and, therefore, he was not authorized to forward the offer of purchase or sale of scripts to Opposite Party No.1. In the result, the Revision Petition is allowed. The impugned order passed by the State Commission modifying the order of the District Forum is set aside. The order passed by the District Forum is affirmed. It is directed that Opposite Parties No. 1 and 2 are jointly and severally liable for the amount of Rs.1,17,360/- with interest at the rate of 12% p.a. as directed by the District Forum. There shall be no order as to costs.