9911796707
TMI Blog2004 (3) TMI 439X X X X Extracts X X X X X X X X Extracts X X X X ..... rch, 2001), the respondent No. 1 on behalf of the petitioner purchased on NSE 55,000 shares of Amar Raja Batteries Ltd. (for short ARBL ) for a total price of Rs. 1,73,81,100 and issued a contract note bearing No. GE 63/5 in respect of the said purchase to the petitioner who signed a duplicate copy thereof. The average purchase price of the said shares of ARBL works out to be Rs. 315.80 per share. The market price of the shares of ARBL touched Rs. 322 on 8th March, 2001 but started declining thereafter continuously. On 9th March, 2001, the respondent No. 1 called upon the petitioner either to square off his purchase position by sale or to pay additional margin money forthwith to cover the difference between the purchase price and the market price. As the petitioner failed to pay the additional margin required, the respondent No. 1 by its letter dated 12th March, 2001 informed the petitioner: "We are hereby squaring off your outstanding purchase position of ARBL as you have not furnished extra margin for the above position." The petitioner received this letter on 13th March, 2001 and signed the receipt on the office copy. On 13th March, 2001 which was the last day of the settle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pondent No. 1 called upon the petitioner to pay the outstanding amount and settle the account as early as possible. Again by a reply dated 23rd April, 2001, the petitioner re-iterated that as the investigation was being carried out by SEBI and till the said investigation was complete he would neither deny nor accept the debit balance in his account. The respondent No. 1 followed up its demand for payment by letters dated 22nd May, 2001, 18th June, 2001, 26th June, 2001, 4th July, 2001, 28th August, 2001 and 10th September, 2001. On 27th September, 2001, the petitioner for the first time stated that he categorically denied having done any trading from the broking firm of respondent No. 1 after 9th March, 2001 and also disputed the lability to pay. 3. In view of the denial of the liability by the petitioner, the respondent No. 1 by a letter dated 28th December, 2001 invoked arbitration of NSE in accordance with its bye-laws, which provide for resolution of the disputes between the parties by arbitration in accordance with the bye-laws. An Arbitral Tribunal consisting of three arbitrators was constituted and the arbitration proceedings were held in accordance with the bye-laws of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntracts (Regulations) Act. The Division Bench further held that to the extent to which the bye-laws of a Stock Exchange are inconsistent with the provisions of the Act, the bye-laws shall prevail over the Act. In view of the judgment of the Division Bench it has to be held that the event of inconsistency between the bye-laws of the NSE and the Limitation Act, 1963 which is made applicable by section 43 of the Act the provisions of bye-laws over the Act shall prevail. I would now proceed to consider whether the reference was made within the period prescribed under bye-law No. 3 of Chapter XI of the bye-laws of the NSE. 7. Bye-law No. 3 of Chapter XI of the bye-laws of the NSE reads as under:- "All claims, differences or disputes referred to in clause I shall be submitted to Arbitration within six months from the date on which the claim, difference or dispute arose or shall be deemed to have arisen. The time taken in conciliation proceedings, if any, initiated and conducted as per the provisions of the Act and the time taken by the Relevant Authority to administratively resolve the claim, difference or disputes shall be executed for the purpose of determining the period of six ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, would have to be counted not from the date of claim made by the respondent No. 1 but from the date on which the dispute arose between the parties. 8. The petitioner purchased the shares on 7th March, 2001. By a letter dated 9th March, 2001, the petitioner was called upon to pay the extra margin money regarding his purchase on account of fall in the price. As the petitioner did not make the payment by a letter dated 12th March, 2001 the respondent No. 1 informed the petitioner that it was squaring off the petitioner s position of ARBL. Part of the position was squared off by sale of 18,335 shares of ARBL on 13th March, 2001. Further, 7,398 shares were sold on BSE on 16th March, 2001. The payment in respect of shares sold on BSE was not received immediately on account of enquiry into the alleged large scale short selling in the shares of ARBL initiated by SEBI. Hence credit for sale price of 7,398 shares sold on BSE was not immediately given to the petitioner. By letter dated 13th March, 2001, the respondent No. 1 called upon the petitioner to pay the amount due to it after giving credit for the shares sold by the respondent No. 1 on NSE as stated earlier. The petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner submitted that the Arbitral Tribunal erred in law in rejecting the petitioner s application by not seeking the aid of the Court to issue witness summonses and call for the documents mentioned above. Rejection of the application amounts to misconduct on the part of the arbitrators and in any event, failure on the part of the Arbitral Tribunal to exercise the jurisdiction vested in it under section 27 of the Act. On account of non-production of the documents the petitioner was denied the opportunity of adducing the evidence and therefore, the award is bad in law. On being asked about the relevancy of the documents called for the learned counsel for the petitioner submitted that the documents were related to the investigation carried out by the SEBI regarding the large scale short selling of the shares of ARBL. According to the petitioner, at the relevant time, a cartel of brokers indulged in a large scale short selling of the shares of ARBL resulting in a crash of the price of the shares of ARBL. SEBI therefore, made investigations into the short selling. The petitioner wanted to know whether the respondent No. 1 was involved in short selling of the shares of ARBL and therefore w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... half of the petitioner would be subject to the bye-laws of the Stock Exchange. Bye-law No. 1 of Chapter XI of the bye-laws of the NSE provides that all claims, differences or disputes between the members and the constituents arising out of or in relation to dealings, contracts and transactions made subject to the bye-laws, rules and regulations of the Stock Exchange shall be referred to arbitration in accordance with the said bye-laws. Bye-laws of the NSE, which were incorporated in the contract between the parties, contains a provision for reference of the disputes to arbitration. Hence, there was an agreement between the parties to refer the dispute to arbitration in accordance with the Bye-laws of the Exchange and the Arbitral Tribunal had the jurisdiction to arbitrate upon the dispute. 11. Learned counsel for the petitioner secondly submitted that the case of the respondent No. 1 was that the petitioner did not pay margin money in respect of the purchase of 55,000 shares of ARBL on the stock Exchange and the respondent No. 1 therefore, was required to square off or close out the transaction and sell the shares. As the respondent No. 1 had closed out the transaction and effe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf the transaction was made. Pay-in day usually precedes the pay-out day. Thus, the petitioner was required to pay the price of 55,000 shares of ARBL purchased by him on a pay-in day. Between the day of purchase and the pay-in day, if the price had fallen, he was required to pay the additional margin money. 13. The bye-law No. 3 of Chapter X of the bye-laws of the NSE provides that a trading member would be entitled to demand from its constituent the margin money - initial margin as well as additional margin according to changes in market price. This is to prevent default. Bye-law Nos. 19 to 22 of Chapter IX make a provision for margin to be furnished by a trading member to the NSE. Bye-law No. 5 of Chapter X of the bye-laws of the NSE contains provisions for close out of a transaction. If a constituent of a trading member does not make the payment of the margin money or the price on the pay-in day, the trading member is entitled to close the transaction with the constituent. Bye-law No. 5( b ) of Chapter X of the Bye-laws of the NSE provides that on closing out the trading member would be entitled to recover the expenses incurred and the loss suffered by him from the constitue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t s account to its own account as a principal at prices which are fair and justified by conditions of the market; or ( ii )The trading member may close out the transactions made by it on client s account in the open market. 16. By writing a letter dated 12th March, 2001, the respondent No. 1 informed the petitioner that it was squaring off, i.e., closing out the purchase position of the petitioner in respect of the shares of ARBL as the petitioner had not furnished the extra margin but did not inform in which of the two ways provided under bye-law No. 5( b ) of the Bye-laws of NSE the close-out was being effected. However, claim made by the respondent No. 1 before the Arbitral Tribunal shows that the respondent No. 1 had chosen the second mode of close-out, viz., sale of the shares of ARBL in the open market. In the claim statement, the respondent No. 1 stated that he began to effect sales of 55,000 shares on 13th March, 2001 but could sell only 18,338 shares on that day; he was further able to sell 7,598 shares on BSE on 16th March, 2001 through its sister concern. It thus appears that the respondent No. 1 did not exercise the first option of assuming the transaction of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the respondent No. 1 chose to sell only part of the shares of ARBL after closing out the transaction, he continued to hold those shares at his own peril and he cannot claim the loss on account of the further fall in the price after the close-out on 13th March, 2001 or so soon thereafter when he could have sold the remaining shares. In the alternative, if after selling 18,338 shares of ARBL on 13th March, 2001 and on being unable to sell them on the day following the date of close-out, the respondent No. 1 was to hold the remaining 37,662 shares on his own account as a principal by exercising the first option under the first part of bye-law No. 5( b ), he was bound to do so at a price which was fair and justified by the conditions of the market on the date of close out, viz., 13th March, 2001. As the benchmark minimum and maximum price of the shares of ARBL on 13th March 2001 as well as on all previous and subsequent dates is available in the data sheets of trading and in the records of the NSE as well as BSE it was possible for the Arbitral Tribunal to determine the price which was fair and justified by the conditions of the market as on 13th March, 2001. The Arbitral Tribunal t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ooks of account of the respondent No. 1 on 2nd November 2001 and even till 28th December, 2001 when the reference to arbitration was made. ( ii )No contract note in respect of the alleged sale of 29,000 shares of ARBL on 2nd November, 2001 was issued to the petitioner. This must be contrasted with the fact that a contract note was issued to the petitioner on 13th March, 2001 on sale of 18,338 shares on NSE. ( iii )The rules, regulations and bye-laws of the NSE require the broker to issue a contract note in specified form with specified details on the same day of the transaction. If the respondent No. 1 had really sold 29,000 shares of ARBL on 2nd November, 2001, he would have issued such contract note as required by the rules, regulations and bye-laws of the NSE. The non-issuance of a contract note shows that either the transaction was not made or the respondent No. 1 itself was committing breach of rules, regulations and bye-laws of the NSE by not issuing the contract note. 19. The first two circumstances are in the realm of evidence - preponderance of probability - and the Arbitral Tribunal was the best judge of the evidence. However, as the Arbitral Tribunal has believed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar to have been issued and there xerox copies are at page No. tt and www of the compilation of documents. Contract note at page No. tt bears printed Sr. No. G 062364 while contract note at page No. www bears printed Sr. No. G 062391. It is not clear why two contracts notes bearing two different serial numbers containing indentical details in respect of the same transaction were issued by the respondent No. 1. The contract notes have 3 printed main vertical columns and each main column has vertical sub-columns. The first column does not bear a title. The second column bears a title Securities bought for you and third column bears a title Securities sold for you . Details of 18,338 shares sold are written in the third column. The first column has three sub-columns viz. ( i ) Order number, ( ii ) Trade number and ( iii ) Trade time. No details of orders number, trade number or trade time are written in either of the two contract notes. Regulation No. 3.5.1 of the National Stock Exchange (Capital Market) Trading Regulations, 1994 (for short Capital Market Regulations) reads as under: "3.5.1 Every trading member shall issue a contract note to his constituent for tradings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ward to that extent is contrary to the provisions of contract which incorporated the Rules, Regulations and bye-laws of the NSE. 21. In Oil Natural Gas Corpn. Ltd. v. Saw Pipes Ltd. [2003] 44 SCL 89 , the Supreme Court has laid down the grounds on which an award can be set aside. In sub-para 2( ii )( c ) of para No. 74 of the judgment, the Supreme Court has held that the award passed by the Arbitral Tribunal can be set aside if it is in contravention of the provisions of the Arbitration Act or any other substanting law governing the parties or is against the terms of the contract. The rules, regulations and bye-laws of the NSE form a part of the contract between the parties. The award passed without considering the effect of violation of the Capital Market Regulations and bye-laws of the NSE requiring the trading member to issue the contract notes with all the relevant details prescribed to the constituent, is contrary to the contract. The award is, therefore, required to be set aside. 22. Having held that the Arbitral award is not in accordance with the contract, the only question that is required to be decided now is whether the Arbitral award needs to be set aside ..... X X X X Extracts X X X X X X X X Extracts X X X X
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