The Court ruled that failure to maintain pre-trade confirmations does not automatically render stockbrokers liable for clients' trading losses, setting aside previous awards.
In a significant decision, the Bombay High Court has set aside an arbitral tribunal's award which held Sharekhan Limited, a registered stockbroker, liable for trading losses incurred by clients Monita Kisan Khade and Kisan Rajaram Khade. The court determined that the absence of pre-trade and post-trade confirmations, as mandated by the Securities and Exchange Board of India (SEBI) Circular dated March 22, 2018, does not automatically impose liability on stockbrokers to compensate clients for losses suffered in trades.
The case concerned trades executed by Siddhi Pandurang Jagade, an authorized person for Sharekhan, on behalf of Monita and Kisan Khade. The couple claimed losses of over Rs. 50 lakh due to unauthorized trading activities. Both the Investors Grievance Redressal Committee (IGRC) and an arbitral tribunal had previously ruled in favor of the Khades, awarding them 50% of the claimed losses.
However, Justice Sandeep V. Marne, in his judgment, emphasized that the SEBI Circular's guidelines are directory rather than mandatory. The court highlighted that mere non-compliance with these guidelines does not automatically entitle clients to claim losses, especially when there is no evidence of blatantly unauthorized trades. The judgment further criticized the arbitrary methodology of awarding 50% of the losses without conducting a proper inquiry into the actual damages.
The court's decision aligns with prior judgments, including those in the cases of Ulhas Dandekar v. Sushil Financial Services Pvt. Ltd. and Erach Khavar v. Nirmal Bang Securities Pvt. Ltd., affirming that failure to adhere to regulatory directives may result in disciplinary actions but does not create an automatic right for clients to claim damages.
The ruling underscores the importance of clients actively monitoring their trades and raising timely objections in cases of unauthorized transactions. The court ultimately found that the Khades, having authorized Siddhi to manage their trades, could not later disown the transactions due to incurred losses.
Bottom Line:
Arbitration - Liability of stockbroker for losses incurred by client due to trading activities undertaken by an authorized person - Mere failure of stockbroker to maintain pre-trade and post-trade confirmations as per SEBI Circular does not automatically create liability on stockbroker to compensate client for losses suffered in trades.
Statutory provision(s): Arbitration and Conciliation Act, 1996 Section 34, SEBI Circular dated 22 March 2018.
Sharekhan Limited v. Monita Kisan Khade, (Bombay) : Law Finder Doc Id # 2827281
