BEFORE THE PANEL OF ARBITRATORS

Transcription

1 BEFORE THE PANEL OF ARBITRATORS COMPRISING OF JUSTICE DR PRATIBHA UPASANI (RETD) JUSTICE MR. S. K. SHAH Mr. S. SRINIVASAN In the matter of Arbitration under Bye-Laws, Rules & Regulations of National Stock Exchange of India Ltd. Arbitration Matter No. : F&O/M-0075/2011 BETWEEN

2 2 Mr. Manoj Kantilal Mandavia.. Applicant / 7, Dwarika, 18 Dagabhai Road, Constituent Vile Parle (W), Mumbai (PAN No. AAAPM 7637 F) AND Edelweiss Broking Limited, 14 th Floor, Express Towers, Nariman Point, Mumbai.. Respondents / Trading Member Appearances : Mr. Manoj Mandavia present in person Mr. Rohit Pateria, Authorized Representative of the Applicant Mr. Praful S. Dalvi, Assistant Vice President of the Respondents Ms Ankita Choudharey, Management Trainee Mr. M. N. Ramalingaih, Advocate A W A R D 1) These Arbitration proceedings are initiated by the Applicant / Constituent Mr. Manoj Mandavia praying that award be passed in his favour directing the Respondents / Trading Member Edelweiss Broking Limited, to pay him Rs.43,33, which was the amount of loss caused to him due to the misconduct and unauthorized transactions by the Respondents. Rs.90,000/- are also claimed towards cost of arbitration and legal fees. 2) The case of the Applicant as stated by him in the Statement of Case can be briefly stated as follows :

3 3 a. The Applicant is the Constituent of the Respondents who is the member of the National Stock Exchange registered with SEBI vide Registration No. INF The Applicant has a Trading and Demat Account with the Respondents Sion (E) Branch. He was operating his Trading Account No. UCC EB and Demat Account No with the Respondents since 28 th April, 2009 and was trading in both NSE Cash and NSE F&O segments. He was a regular trader and he had provided Power of Attorney along with his Demat Account with the Respondents to make his regular F&O and Cash Trading hassle free. The Respondents were maintaining 3 Accounts of their clients viz., Collateral Account, Hold Account and Client Demat Account allowing combined exposure against stocks lying in all these 3 Accounts in F&O trading. b. The Applicant s story is that he first time transferred shareholding worth Rs.11,23,555/- on 20 th May, 2009 and zero Cash to provide margin against his trading exposure and began trading from 21 st May, The Applicant had been provided online trading platform by the Respondents and the Applicant used to trade by his own using online terminal at his place. He maintained running Account with the Respondents and used to replenish additional margin as and when required against his fresh or open positions. c. The Applicant s story further is that on 8 th December his total position was Rs.59,70, and the margin requirement for that was Rs.8,68,665 and M TM was Rs.3,80,066/-. The total value of his securities lying with the Respondents was Rs.24,40,459/- before haircut and Rs.21,31,990/- after haircut. Hence the Applicant was keeping positive margin with the Respondents. Annexure B to the Statement of Case shows this position. The cause of action for filing Arbitration Application arose on 9 th December, The Respondents arbitrarily liquidated open positions of the Applicant without his consent and without any intimation to him and thereby caused whopping loss of Rs.72,10,030/- to

4 4 the Applicant. On 9 th December also the Applicant had sufficient margin of Rs.20,62,220/- in his Account which was enough to cover margin requirement of Rs.14,20,156/- on open positions. Annexure C is the document in support of this statement. d. The Applicant s contention is that Respondents, due to their faulty and inappropriate Accounting system misrepresented margin statements to the Applicant. Several times in the past Respondents had forced the Applicant to sell his positions despite availability of adequate margin in his Account. According to him due to misrepresentation of margin statement the statement would show shortfall of margin inspite of having margins in the Applicant s Account. The Respondents would then create panic and force the Applicant to square off position for short margin. Contention of the Applicant is that in this way, in November and December, 2010 the Applicant had suffered a whopping loss of Rs.68,00, Annexure D is the document supporting this statement. e. The Applicant s further case is that in the past whenever he was required to replenish required margin he would do so without fail. Now also the Applicant provided additional securities margin on 23/11/2010 valued at Rs.11,42,360/- to roll over position from November, 2010 series to December, 2010 series. To support this statement the Applicant has annexed Annexure E to the Statement of Case. f. The Applicant has stated that he raised his complaint for the forceful liquidation of his position on 9 th December with the Respondents on 9 th, 10 th and 11 th December, 2010 with Mr. Rakesh Bhatt and Mr. Krishna at the Sion Office. He also had meeting with Mr. Ladiwala on 13 th and 14 th December, 2010 at the Respondents Nariman Point Office. He was also discussing the matter with Mr. Ladiwala on telephone till 24 th December, When he was dissatisfied with their responses the Applicant insisted meeting Respondents M.D.

5 5 Mr. Rajesh Shah but Mr. Ladiwala threatened him that he would file complaint of trespass against him. He also refused to allow rollover balance open positions to January, 11 series. He also rejected the Applicant s request to release his securities lying in the Applicant s beneficiary Account by saying that the Applicant had debit balance and hence they would not release the security. Grievance of the Applicant is that despite having adequate margin in his Account he was not able to rollover his positions to January, 2011 series due to the arbitrary behaviour of the Respondents and that caused him loss of Rs.10,59, Annexure F is the document to substantiate this statement. He also offered his bank s fixed deposits to the Respondents to cover up Applicant s debit position and requested to release securities till his complaint was resolved. However, when complaint to the Investors Grievance Committee of NSE was made the Respondents deliberately protracted the proceedings there for three months and finally received all the documents only on 7/04/2011 through ISC. It is the grievance of the Applicant that Respondents failed severely in his duties to safeguard the interest of the Applicant and held back his shares valued at Rs.25,14,331/- without any reason and released them after 96 days and that too when the Applicant sought intervention of NSE. According to the Applicant he thus lost not only his regular income but all possible market opportunities because of the misconduct of the Respondents. He has further stated that he is a regular trader and the act of the Respondents put him out of job of trading and therefore, he lost his regular income and also had huge opportunity loss amounting to Rs.19,95,896/- He, therefore, filed complaint with the NSE and SEBI immediately on 1/01/2011 but the Respondents failed to address his grievances. His main grievance are as follows : (a) That the Respondents mismanaged Applicant s securities lying with them and on various occasions assigned only part

6 6 exposure against the underline margins which caused unwanted harassment and forceful square off causing huge loss to the Applicant. (b) That the Respondents, out of 192 days of trading provided zero exposure on 54 occasions (28%) against the securities provided by the Applicant and arbitrarily moved securities between Applicant s DP Account and Collateral Account. (Annexure H ). (c) That the Respondents misled the Applicants by providing contradictory reports on online terminal and in margin statement. (d) That in the month of May, 2010 between 1 st May to 30 th May, on several occasions, the Respondents moved back Applicant s securities from Collateral Account to DP Account that caused Applicant s open position without margins inspite of having sufficient securities. The Respondents forced to square off the Applicant s position that caused loss of Rs.830, to the Applicant. g. According to the Applicant the Respondents misled the Applicant by providing false, inappropriate and manipulative reports / documents and deprived him from use of his own securities / collateral value. It is also his grievance that the misdeeds of the Respondents is in gross violation of NSE Bye-Laws, Rules and Regulations. It is, therefore, prayed that the Respondents should be directed to pay back to him the loss caused to him amounting to Rs.43,33, as the loss was caused due to their misconduct and unauthorized transactions.

7 7 3) The Respondents have filed their Statement of Defence dated 28 th July, 2011 and also a counter-claim of Rs.8,08, At the outset they have submitted that the alleged claim of the Applicant is false, frivolous, vexatious, misconceived and bad in law and is liable to be dismissed with compensatory costs. They have further submitted that the Applicant has not approached the Tribunal with clean hands and that he has concealed material facts of the case. Without prejudice to these submissions, they have reproduced various and relevant clauses of the Member Client Agreement executed by and between the parties, SEBI guidelines and terms of website through which the internet based trading service is provided. Firstly they have reproduced clause 2(d) which states that the Constituent is liable to pay initial margins, withholding margins, special margins or such other margins as are considered necessary by the stock broker or the exchange or as may be directed by SEBI from time to time as applicable to the segment in which the client trades. It is further mentioned that stock broker is permitted by this clause to collect additional margins in his sole discretion even though it is not required by the exchange, clearing house / clearing corporation or SEBI and that the client shall be obliged to pay such margins within the stipulated time. The Respondents have also reproduced Clause 4 of the Member Client Agreement whereby the client has agreed to abide by exposure limits, if any, set by the stock broker or by the exchange or by clearing corporation or SEBI from time to time. Clause 5 also is reproduced which permits the stock broker to liquidate / close out all or any of the client s position on non payment of margins or other amounts, outstanding debts, etc. and adjust the proceeds of such liquidation / close out, if any, against the Client s liabilities / obligations. The Respondents have also produced Clause 4 of the trading facilities on page 4 of the Statement of Defence which is reproduced below for the sake of convenience.

8 8 (a) The Client shall comply with the Stock Broker s requirement of Payment of Margin immediately failing which the Stock Broker may sell, dispose or transfer the securities already placed with it as Margin or square-off / liquidate all or some of the outstanding positions of the Client, as it deems fit in its discretion, without further reference to the Client and any resultant or associated losses that may be occurred due to such square-off / liquidation / sale shall be borne by the Client, and the Stock Broker shall be fully indemnified and held harmless by the Client in this behalf. (b) The Stock Broker, in its absolute discretion, would decide the eligble securities, which could be deposited by the Client for meeting current or future margin obligations and continuously review the eligibility of securities already deposited by the Client. The Stock Broker is entitled to determine the market value of Securities placed as Margin after applying a haircut that the Stock Broker deems appropriate. The client shall minitor the adequacy of the collateral and the material value of such securities on a continuous basis. If due to price fluctuations, there is erosion in the value of the margin, the Client shall replenish any shortfall in the value fo the Margin immediately, whether or not the Stock Broker intimates such shortfall. If any security is not found to be of Good delivery at any time after the deposit with the Stock broker, the Stock Broker is entitled to reduce the amount attributable to such security in the Client account and the Client shall immediately replace the same, failing which the Stock Broker is entitled to revise the limits fo the Client and / or square-off any outstanding position. (c) Any securities placed / pledged by the Client as Margin may be used by the Stock Broker to discharge the Client s obligations towards the Stock Broker, whether on account of margin, settlement obligation or any other account. The Stock Broker shall be entitled to adjust the surplus amount available on any segment against the dues to the Stock Broker on any other segment or across all segments of the Exchange.

9 9 The Respondents have also reproduced clauses with respect to margin in Internet trading. The said clause entitles the Stock Broker to require the client to deposit with the Stock Broker a higher margin than that prescribed by the Exchange. The said clause also entitles the Stock Broker to require the client to keep with the Stock Broker a margin of a value specified by the Stock Broker so long as the client desires to avail of the Stocker Broker s Internet Trading website. Citing these relevant clauses the Respondents have submitted that admittedly, the Applicant himself was trading on the Stock Exchange from his place through the aforesaid Online Trading System. Contract notes in respect of the trades executed by the Applicant personally were duly prepared and sent to the Applicant at his given ID mandavia@vsnl.net by the Respondents in a usual course of business and the same were duly received, retained and accepted by the Applicant from time to time who had no dispute or objection in respect of the trades mentioned in the Contract Notes as the Trades were carried out by none other than the Applicant himself at his place through the Online Trading facility. The Respondents have further stated that they have maintained separate Account of the Applicant in their Books of Accounts with respect to the transactions at cash and F&O market segment of NSE and another with respect to BSE. The Respondents have further submitted that Applicant was given a limit as per the value of the approved list of securities for the purpose of trading and he was allowed to trade only within his allotted limits. As and when the Applicant crossed his limits, the Respondents took necessary risk containment measures inter-alia, including allowing the Applicant only to square off outstanding position. He was himself executing the trades and taking positions in NSE F&O segments as well as cash market segments. According to the Respondents the Applicant with an anxiety to make more profits / money by trading incurred losses / profits while carrying out the trades himself for which he alone is liable as he was taking and holding the positions. It is further

10 10 stated that the Applicant used to transfer the required shares to collateral Account from his Demat Account. It is submitted that the Applicant maintained running Account with the Respondents. When additional margin was not provided / replenished by the Applicant, in case of margin shortfall, some outstanding position was being squared off by the Respondents in terms of Member-Client Agreement in order to keep the positions within the applicable margin in the Account of the Applicant. It is stated that the Applicant s position was never squared off when there was sufficient margin in the Account of the Applicant to meet the daily margin requirement. It is pointed out that the Applicant had been trading in NSE F&O segments for about 18 months after transferring his holdings without any grievance or dispute of any nature whatsoever. The Respondents have denied all the allegations which the Applicant has made in para 10(a) of the Statement of Case. They have submitted that on 8 th December, 2010, against the total open position of the Applicant of Rs.61,42,313/- at the beginning of the day, in NSE F&O segment, there was a margin requirement of Rs.8,87,904/- (i.e. span margin of Rs.5,80,788/- and exposure margin of Rs.3,07.116/-) at the end of the day against asset available of Rs.5,74,692/- (this included debit ledger of Rs.3,80,066/- post haircut stocks of Rs.10,95,521/- and M T M Loss for the day of Rs.1,40,763/-) resulting into margin shortfall of Rs.3,13,212/- in the Applicant s Account who was informed about the debits in his Account. The Applicant assured the Respondent that he would pay the amount of shortfall by 9 th December, 2010 to the Respondent which he failed to pay. On 8 th December, 2010 the Ledger Outstanding balance was Rs.3,80,066/- which the Applicant failed to meet. The Applicant was informed about the debits in his Account and requirements of margin vide daily client margin information. It is categorically denied by the Respondents that on 8 th December, 2010 the total value of the Applicant s securities lying with the Respondents was Rs.21,31,990/- after haircut, as alleged or otherwise and they have denied that Applicant was keeping positive margins with the Respondents. They have alleged that

11 11 on 8 th December, 2010 the Applicant s collateral stocks were worth approximately Rs Lakhs only, after applying haircut in accordance with the list of approved securities as prescribed by the Respondents as on date the details of which were furnished by them on page no. 13 of the Statement of Defence. The Respondents have given a chart in paragraph no. 13 on page 13 of the Statement of Defence which shows that the value of Rs.11,30,437/- was at the beginning of 8 th December, 2010 (valued at the rate of closing price of 7 th December, 2010). They have denied that on 9 th December, 2010 the Respondents arbitrarily liquidated open positions of the Applicant without any consent or intimation to him and caused a whopping loss of Rs.7,21,030/- or any other amount to the Applicant. It is pointed out that the Applicant also alleged loss of Rs.6,80,032/- during November December, 2010, thus, contradicting himself. According to the Respondents no loss was caused to the Applicant which was in any way attributable to the Respondents. They have submitted that whenever there was a margin shortfall the Applicant was kept informed about the same and yet he did not clear the same and, therefore, after intimating the Applicant some of the positions were liquidated on 9 th December, 2010 due to increase in real-time MTM owing to adverse market movement. The liquidation was done at about hours when NLV ratio (i.e. Asset available to margin) was about 21% whereas the ratio should have been ideally equal to about 100%. The Respondents have stated that they liquidated the position to the extent of regularizing the real-time shortfall and to the extent of making the available assets at least 50% to the margin requirement including losses. The Respondents have given a chart in para 14 on page 14 on their Statement of Defence showing open positions as on 9 th December, 2010 preliquidation and have submitted that as on that day, against the total open position of Rs.59,70,888/- ~ start of market hours) in NSE F&O segments in respect of Applicant s Account there was a margin shortfall of Rs.3,43,004/- before market hours which further deteriorated to the extent of becoming almost of ~ 2.00 and the available asset was worth Rs.1,72,312/- There was a total margin

12 12 requirement of Rs.8,22,180/- (exposure margin Rs.2,82,479/- and span margin Rs.5,39,701/-) on 9 th December, 2010 which the Applicant failed to meet and the NLV percent (asset to margin ratio) was just about 21%. There was also Ledger balance (debit) of Rs.5,51,491/- in his Account for past MTM Losses due to which the asset availability had fallen to Rs.1,72,312/-. The value of collateral post haircut was worth about Rs.10,19,748/- on 9 th December, th December, 2010 closing prices). The Respondents have relied upon Client margin reported statement / position and time line position monitoring statement as on 9 th December, 2010 in Applicant s Account in NSE F&O, copy of which is annexed at Exhibit R/2 Collectively. It is submitted by the Respondents that on 9 th December, 2010 the Applicant did not pay any amount to the Respondents to accumulated MTM M losses. Market witnessed a fall which resulted into a further MTM loss amounting to Rs.3,06,725/- on account of the outstanding F&O contract of the Applicant. The span margin was Rs.5,39,701 and the exposure margin was Rs.2,82,479/- The Applicant was being updated about the outstanding positions and he was also having Online system, however, the Applicant failed to meet his additional margin requirement on 9 th December, 2010 and the Respondent had no alternative but to liquidate some of the outstanding F&O positions / contract in the Account of the Applicant. The Respondents prepared and issued the contract note and bill in respect of the transactions effected by the Applicant on 9 th December, 2010 which was sent by as an electronic contract note (ECN) which the Applicant received. The Respondents have also stated that subsequent to 9 th December, 2010 the daily MTM of the other open positions was happening till expiry date of 30 th December, They have given in a chart in para 18 the open positions as on 10 th December, 2010 (post liquidation).

13 13 The Respondents have strongly denied that due to their faulty and inappropriate Accounting system there was a misrepresentation as far as margin statements were concerned. They have further pointed out that Applicant had never disputed the margin statement during the trading and that he himself was squaring off the positions at the end for short margin as and when there was margin shortfall of which the Applicant was himself aware who was watching his computer screen from his place. It is, therefore, denied that Applicant suffered loss due to the actions of the Respondents. According to the Respondents the Applicant had a liability of Rs.7,70,930/- (as on 1 st April, 2011) and that he is still liable to pay to the Respondents a sum of Rs.8,08, as on 11 th July, 2011 for which they have filed counter-claim against him and have prayed that the counter-claim be allowed with costs. The Statement of Defence and counter claim are quite exhaustive. Rejoinder was filed by the Applicant but the counter-claim was admitted by him and he declined to file any reply to the counter-claim. 4) The Panel of Arbitrators entered reference on 11 th August, 2011 and heard the parties for some time. Thereafter the matter was adjourned to 25 th August, 2011 when the parties were heard fully and exhaustively for about 4 hours. It was on this day, that the Applicant made a statement that he did not want to file reply to the counter claim as it was admitted by him. The said statement of the Applicant was recorded by the Panel in the Roznama of 25/08/ ) The Panel has heard the parties patiently and fully. All the pleadings and documents were also carefully perused and scrutinized. Having heard the parties and having gone through the pleadings we have come to the conclusion that the Applicant has failed to come out with a convincing case while the Respondents have satisfactorily justified their position / case. The Respondents reliance upon the relevant clauses of the

14 14 Member Client Agreement and Internet trading, margin requirement cannot be questioned at all. Their Statement of Defence is not simply exhaustive. It is fully satisfactory and is full of all the required particulars. We are especially pointing out para no. 13, 14, 15, 16, 18, 19 and 22 of the Statement of Defence which speak for themselves. We are in full agreement with the submissions contained in these in these paras. The Statements are supported by documentary evidence, including Rules, Regulations and Bye-Laws of NSE and clauses of the Member Client Agreement executed by and between the parties. Needless to say that these clauses agreed upon by both the parties are binding upon them. It is stated at random by the Applicant that Respondents, in the past also by their misleading Ledger Statement and Margin Statement forced the Applicant to liquidate his positions. It is, however, surprising that when he is referring to the past inappropriate conduct of the Respondents he is not able to point out any complaint, either oral or in writing, mentioning the alleged conduct of the Respondents. Moreover, if the Applicant was not happy with the situation, he was at liberty to go to some other broker instead of continuing trading with the Respondents. Since the Applicant was trading through Internet facility provided by the Respondents at his own place he cannot say that he was not aware about what was happening in his Account and that the Respondents, without there being a margin shortfall and without his consent and any intimation, liquidated his open position. He cannot say so that he was not aware as he himself was watching computer screen, and hence cannot feign ignorance. On this very point there is a Division Bench Judgment of the High Court of Judicature at Bombay dated 27 th July, 2011 (Coram : D. K. Deshmukh and R.G. Ketkar JJ). This was in Appeal No. 341 of 2011 in Arbitration Petition No. 297 of 2010 in NSE Arbitration Reference No. F&O /M 0374 of 2008 in the case of Shreepalkumar Pukhraj Vs Edelweiss Securities Limited. In this case the DB of the Hon ble High Court noted that admittedly the transactions were carried out Online. The

15 15 Appellant / Constituent was having access to the Account, and therefore he was aware about every transaction in his Account. The High Court further observed that not a single transaction which was carried out by the broker was without knowledge and without authorization of the Appellant and, therefore, the Appellant / Constituent could not raise any objection now. Observing this the High Court rejected the Appeal. The facts of this case were identical with the facts of the present case at hand also. In the High Court Appeal initially Arbitration Petition was lodged in NSE by the Trading Member against the Constituent and the Panel of Arbitrators of NSE upheld the claim of the trading member and directed the Respondent / Constituent to pay the sum claimed by the Trading Member with interest thereon. Against this award passed by the Panel of Arbitrators of NSE, the Respondent approached single Judge of the High Court u/s 34 of the Arbitration and Conciliation Act, The single Judge, however, (Coram : S. C. Dharmadhikari J) in his order dated 28 th February, 2011 in Arbitration Petition No. 297 of 2010 upheld the award passed by the NSE Panel of Arbitrators and dismissed the Arbitration Petition. Thereafter the matter came before a Division Bench of the High Court who dismissed the Appeal and confirmed the concurrent findings of both the Forums below. The Division Bench Judgment of the High Court thus clinches the issue and the Arbitration Petition filed by the Applicant / Constituent Majoj Kantilal Mandavia will have to be rejected. As far as the counterclaim of the Respondents against the Applicant is concerned, the same is candidly admitted by the Applicant. It has to be, therefore, allowed. Hence following Award is passed. 6) (1) The Arbitration Application filed by the Applicant Constuent - Mr. Majoj Kantilal Mandavia against the Respondents / Trading Member, Adelweiss Broking Limited is hereby rejected. (2) The counter-claim filed by the Respondents against the Applicant is hereby allowed as prayed and the Applicant is directed to pay to the Respondents sum of Rs.8,08,

16 16 (3) Parties to bear their own costs. (4) The Award is signed and issued in 3 stamped originals. The NSEIL may retain one original and forward one stamped original to each of the Applicant / Constituent, Mr. Majoj Kantilal Mandavia and Respondents / Trading Member, Adelweiss Broking Limited. S. Srinivasan Justice Mr. S. K. Shah (Retd.) (Co-Arbitrator) (Co-Arbitrator) Justice Dr. Pratibha Upasani (Retd.) (Presiding Arbitrator) Mumbai Date : 21 st November, 2011