2016 (7) TMI 1354 - HC - Indian Laws

Arbitrial proceedings - mandatory duty and obligation upon the trading member to demand margin money - Held that - The onus was on the respondent to prove that the demand for amount of margin money as required under Regulation 3.10(a) was actually made by the respondent from the constituent and was not paid by the petitioner. Admittedly, the respondent had the e-mail ID of the petitioner. Not a single document was produced by the respondent before the arbitral tribunal to show that any demand for the margin money was made by the respondent member upon the petitioner of the amount which was demanded but not paid by the petitioner. In my view, the impugned award is without any evidence and thus deserves to be set aside. A perusal of the Regulation 3.10 framed by the Stock Exchange clearly indicates that the intent and purpose of demanding margin money in the event of any debit balance in the account of the constituent or if the security provided by the constituent is not sufficient for the purpose of carrying out the derivatives contract and in case of such default to close out the transaction with a view to mitigate the loss, if any, which may be suffered by the trading member in case of any volatile market condition or otherwise. If the trading member has chosen not to demand margin money through it is mandatory in compliance with Regulation 3.10 and permits the constituent to carry out further transaction, the same would be at the risk and cost of the trading member and in such a situation, the trading member cannot be allowed to recover any alleged loss suffered by the trading member from the constituent or cannot make the constituent suffer any loss due to the non-compliance of such mandatory provisions by the trading member. In my view Mr.Purohit, learned counsel for the petitioner is right in his alternate submission that under Regulation 3.10(b), the respondent broker could not have closed out the transaction on 22nd January, 2008 in respect of the alleged shortfall of the margin money in the account of the petitioner on 22 nd January, 2008 without giving an opportunity to the constituent to make the payment on the next trading day on F&O segment of the Exchange for the concerned settlement period. It is not in dispute that the respondent broker had closed out the transaction in the account of the petitioner in the morning trading hours on 22nd January, 2008 itself. The arbitral tribunal has totally overlooked these mandatory provisions of Regulation 3.10 in the impugned award and has committed patent illegality. Though the petitioner was carrying on transaction with the Chembur Office of the respondent, without any knowledge of the petitioner and without any intimation, the head office of the respondent had closed out the transaction allegedly based on the instruction received from the respondent from the Stock Exchange. No such instruction alleged to have been received by the respondent from the Stock Exchange were produced on record by the respondent before the arbitral tribunal. Insofar as counter claim made by the petitioner before the arbitral tribunal is concerned, the arbitral tribunal has rejected the counter claim on the ground that the petitioner had alleged to have accepted the position as on end of the day on 21st January, 2008. In my view this part of the award also shows patent illegality. Since the arbitral tribunal has committed patent illegality in allowing the claims made by the respondent broker for the reasons recorded aforesaid, the rejection of counter claim made by the petitioner by the arbitral tribunal on the same basis also shows patent illegality and deserves to be set aside. Insofar as other four petitions are concerned, since the parties have agreed that the reasons and conclusions drawn by this court in Arbitration Petition No.47 of 2009 would apply to those four petitions and have not addressed this court separately in respect of other four arbitration petitions, this court has not dealt with the facts in each of these four petitions separately. This court has proceeded on the basis of the statement made by the learned counsel appearing for the parties and have rendered a common judgment.

Summary

Issues Involved:
1. Impugned arbitral awards.
2. Margin shortfall and payment.
3. Squaring off transactions.
4. Compliance with National Stock Exchange (NSE) regulations.
5. Discretion under Stock Broker-Client Agreement.
6. Admissibility of evidence and findings of the arbitral tribunal.
7. Counterclaims by the petitioner.

Detailed Analysis:

1. Impugned Arbitral Awards:
The petitioners challenged five separate arbitral awards rendered by the arbitral tribunal under the NSE bye-laws, rules, and regulations. The tribunal allowed the respondent's claims and rejected the petitioners' counterclaims. The High Court heard all five petitions together and based its judgment on Arbitration Petition No. 47 of 2009.

2. Margin Shortfall and Payment:
The petitioner claimed to have been informed of a shortfall of ?3,50,000/- on 16th January 2008 and issued a cheque for ?4,00,000/-. Another cheque for ?4,00,000/- was issued on 18th January 2008 after the first was misplaced. On 18th January 2008, the petitioner was informed of an additional margin shortfall of ?5,00,000/-, which was paid the same day. On 22nd January 2008, the petitioner was informed of a margin shortfall of ?15,00,000/-, which was paid immediately. The petitioner argued that no further shortfall was communicated, and the respondent's subsequent squaring off of the petitioner's positions was unauthorized.

3. Squaring Off Transactions:
The petitioner protested the squaring off of her positions on 22nd January 2008 by the respondent's head office, allegedly on instructions from the Stock Exchange. The petitioner requested proof of such instructions, which the respondent did not provide. The respondent argued that the market volatility necessitated the squaring off to mitigate losses due to margin violations.

4. Compliance with NSE Regulations:
The petitioner contended that the respondent violated Regulation 3.10 of the NSE, which mandates that trading members demand margin deposits from constituents. The regulation allows closing out transactions only if the constituent fails to pay the daily settlement by the next trading day. The petitioner argued that the respondent did not follow this procedure and squared off the transactions prematurely.

5. Discretion Under Stock Broker-Client Agreement:
Clause 29 of the Stock Broker-Client Agreement allowed the respondent to demand margin money and liquidate positions at its discretion. However, the petitioner argued that this discretion should be exercised reasonably and in compliance with NSE regulations. The arbitral tribunal's reliance on Clause 29 was deemed perverse and contrary to the mandatory provisions of Regulation 3.10.

6. Admissibility of Evidence and Findings of the Arbitral Tribunal:
The arbitral tribunal's findings were based on presumptions and lacked evidence. The respondent could not prove that demands for margin money exceeding ?15,00,000/- were made and not paid by the petitioner. The tribunal's adverse inference against the petitioner was found to be without basis.

7. Counterclaims by the Petitioner:
The tribunal rejected the petitioner's counterclaims, which sought recovery of losses due to the respondent's unauthorized squaring off of transactions. The High Court found this rejection to be patently illegal, given the tribunal's failure to consider the mandatory NSE regulations and the lack of evidence supporting the respondent's claims.

Conclusion:
The High Court set aside the impugned arbitral awards, finding that the tribunal's decisions were perverse, based on no evidence, and violated mandatory NSE regulations. The court emphasized the importance of compliance with statutory regulations over discretionary clauses in agreements. The judgments in all five petitions were aligned with the reasoning in Arbitration Petition No. 47 of 2009.