TMI Blog2015 (4) TMI 1192X X X X Extracts X X X X X X X X Extracts X X X X ..... e any claim against the respondent constituent for such unauthorised transactions carried out by the petitioner in the account of the respondent. Considering the said bye-law which provided a liberty to the broker to close out the transactions by selling the securities, in case the clients failed to make the full payment to the broker for the execution of the contract, this court held that the said provision was not mandatory but was discretionary. In view thereof the said byelaw considered by this court and bye-laws which are the subject matter of this petition are totally different. Under bye-laws 8.6.5 to 8.6.6 of the Multi Commodity Exchange, the broker is under an obligation to liquidate/close out any of the position of the constituent if the constituent default in paying the daily margin. Those bye-laws have been interpreted by this court at length in the judgment delivered by this court in case of M/s.BMA Commodities Pvt. Ltd. (2014 (12) TMI 1291 - BOMBAY HIGH COURT) which squarely applies to the facts of this case. The findings rendered by the learned arbitrator are also based on the interpretation of the agreement entered into between the parties which interpretation is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioner that the respondent issued a cheque dated 14th August, 2012 in favour of the respondent for a sum of ₹ 3 lacs towards the margin deposit. The petitioner gave credit of the said amount in the ledger account of the respondent. The respondent thereafter started execution of transactions for sale and purchase of various commodities w.e.f. 16th August, 2012 by using internet trading facility provided by the petitioner. It is the case of the petitioner that during the said period of transaction, the respondent had made another three payments for an aggregate amount of ₹ 95 lacs on different dates as per her obligations towards the margin and MTM losses. 5. According to the petitioner as on 30th March, 2013 the ledger account of the respondent in the books of the petitioner was showing a credit balance of ₹ 35,53,150.63 and her margin ledger was showing debit balance of ₹ 88,38,060/- and thereby the respondent had net debit of ₹ 52,82,909.40 in MCX and there was margin shortfall. It is the case of the petitioner that the respondent had opened position of purchase of 110 lots of silver F040513. On the previous trading date i.e. 28th March, 2013 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res of Reliance Industries Ltd. and 16000 shares of Steel Authority of India Ltd. 9. It is the case of the petitioner that since the respondent did not make payment against the consolidated debit, the petitioner's group company BPL had retained the delivery of 2000 shares of Reliance Industries Ltd. and 16000 shares of Steel Authority of India Ltd. It is the case of the petitioner that on 7th May, 2013, 9th May, 2013 and 13th May, 2013 there was telephonic communication between the officer of the petitioner and the respondent or her representative wherein the respondent made a proposal that the petitioner's group company BPL would release ₹ 5 lacs to the respondent out of her credit balance with BPL against NSE transactions and immediately the respondent will transfer the same amount to the petitioner's bank account by RTGS against her debit balance. It is the case of the petitioner that on the basis of such telephonic communication and the assurance given by the respondent for online transfer of funds to the petitioner's bank account against her debit balance, the petitioner's group company BPL transferred ₹ 5 lacs to the respondent's bank ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the margin statement by the petitioner. The respondent also did not object to the petitioner squaring up the transaction on 30th March, 2013. Learned counsel submits that the respondent had also not disputed the receipt of the SMS sent by the petitioner from time to time regarding payment of shortfall of margin money. 13. Learned counsel for the petitioner submits that the petitioner had sent electronic contract note for the trade dated 30th March, 2013 for a debit of ₹ 69,33,254.49 which specifically provided for raising objection if any, to the trade shown in the said contract note within 24 hours from the receipt of the contract note. The respondent however disputed the validity of the said transaction for the first time in her reply filed before the arbitral tribunal. 14. The petitioner had also sent one SMS to the respondent on 30th March, 2013 intimating her about the debit bill of ₹ 69,33,254.49 and ledger debit of ₹ 33,80,103.86. He submits that the respondent did not dispute even in the arbitral proceedings about closing out of the open position of 110 lots of silver. Learned counsel invited my attention to the averments made by the petitioner in p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the requirement of collecting margin by a trading member from the clients is only meant to secure the smooth compliance of the trades executed on the Exchange. 16. Learned counsel for the petitioner also placed reliance on the judgment of this court delivered on 28th March, 2005, in case of Pankaj Goshar vs. Fortune Equity Brokers(I) Ltd . in Arbitration Petition No.368 of 2003 and in particular paragraph (10) and would submit that once the petitioner had sent a statement of shortfall in margin to the respondent which showed that there was a shortfall in the margin in the account of the respondent, the same constituted a demand for payment of shortfall of margin money. 17. Learned counsel for the petitioner also placed reliance on the judgment of this court delivered on 25th March, 2011 in case of Amit Bharadwaj vs.M/s.Marwadi Shares and Finance Ltd . in Arbitration Petition No.563 of 2009 and in particular paragraph (1) in which it is held by the learned Single Judge of this court that the action of the respondent stock broker of commencing transaction without taking margin money was not only contrary to the contract between the parties but was contrary to the statutory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced reliance on the observations of the Division Bench in paragraph (10) observing that the Division Bench was not suggesting that only because a trading member bought/sold shares and/or entered into derivative contracts with its constituent without the minimum percentage of margin money, the contracts entered into would be illegal and/or void. The Division Bench had observed that since there was no factual basis in the present case for deciding the said question, they were not going into the same and leave it open to be decided in an appropriate case. The Division Bench has set aside the said judgment of the learned Single Judge and remanded the matter back for the purpose of deciding all other grounds raised by the respondent in the arbitration petition in accordance with law. Paragraphs 9 and 10 of the said judgment of the Division Bench read thus :- 9. It would not be out of place to mention that Chapter X applies generally and there are special Regulations known as the National Stock Exchange (Future and Option Segment) Regulations for trading in Futures and Options. Since the contracts / transactions in the present case relate to Derivative Contracts, it would be necessary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchased, unless the constituent already has an equivalent credit with the trading member. The said Regulation also permits the trading member to collect a higher margin from the constituent as he deems fit. In the present case, neither from the reply filed before the learned Arbitrator by the Respondent or in the Arbitration Petition No.563 of 2009, there appears to be any factual basis and/or evidence led as to what was the minimum percentage of margin required under Regulation 3.10 of the said Regulations. It is only when the factual basis for the same was laid by the Respondent in his reply before the Arbitrator, could the Respondent have even sought to contend that the contracts / transactions entered into by the Respondent with the Appellant were rendered illegal and/or unauthorised in view of the fact that they violated Regulation No.3.10. If the Respondent had led evidence to the effect that a certain amount was payable as margin under Regulation No.3.10 and the same was not paid, then maybe the Respondent could have contended that the contracts entered into with the Appellant were illegal and/or unauthorized. However, in the present case, we do not find any such factual bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that the said byelaw gives a discretion to the member broker to close out the transaction by selling the securities within two days or seven days as the case may be in case the purchaser commits default in making full payment to the member broker. The said bye-law is not mandatory. Paragraph 17 of the said judgment of this court in case of Shankarlal V.Keswani (supra ) read thus :- 17. On reading of bye-law 247A(5) I am of the view that it gives a discretion to the member broker to close out the transaction by selling the securities within two days or seven days as the case may be in case of the purchaser s committed default in making full payment to the member broker. The said bye-law is not mandatory. There may be a situation where a client may assure the broker of payment at the earliest with a request not to close the transaction or may be in genuine difficulty. In this case, the respondent has been able to demonstrate before the Appellate arbitral tribunal that there were three meetings held between the petitioner and office bearers of the respondent in which the request was made by the petitioner not to close the transaction and the assurance was made to pay the bala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 32,31,319.37 as on 27th March, 2013 and of ₹ 37,23,679.37 as on 28th March, 2013. He submits that the petitioner thus in any event ought to have closed out the open position immediately after such margin shortfall continued in respect of the payment of ₹ 20 lacs made by the respondent i.e. either on 27th March, 2013 or 28th March, 2013. The petitioner however illegally carried out the transaction only on 30th March, 2013. 22. The learned counsel for the respondent submits that in the impugned award, the arbitral tribunal has rendered a finding of fact that if due to the volatility, there was a shortfall in the margin, the petitioner could not have squared of the position of the respondent without first having made a demand on the respondent to deposit the additional money within the stipulated time framed which was not done by the petitioner. The arbitral tribunal has held that the petitioner was not justified in squaring of the open position of the respondent and has rightly rejected the claims made by the petitioner. He submits that the arbitral tribunal has interpreted the bye-law 8.2 to 8.6.6 of the Multi Commodity Exchange which interpretation is a poss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ange with the designated Clearing bank of the Exchange. 8.6.5 An Exchange member may close out an open position of a client when the call for further margin or any other payment due is not complied with by the client; 8.6.6 A clearing member may close out an open position of a constituent member when the call for further margin or any other payment due is not complied with by the constituent member; 33] It is submitted by the learned Counsel that no a single call was made by the respondent for payment of any margin money. Pursuant to the directions of the arbitral tribunal, the respondent had filed statement showing the account of the claimant before the arbitral tribunal. Learned counsel invited my attention to the said statement which was on record before the arbitral tribunal for the period 7th March 2009 to 26th November 2011. It is submitted that there was credit balance in the account of the claimant, except on 3 dates i.e. 13th July 2011, 19th July 2011 and 1st August 2011, when the claimant was admittedly out of India. The respondent was not in a position to produce any record before the arbitral tribunal as to when the respondent had made any calls for deposi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... margin may lead to the exchange members being deactivated/suspended and declared as defaulters by the exchange. The relevant authority may also take such other measures including disciplinary actions, against the defaulting members as it may deem fit. Bye-law 8.6.1 provides that no clearing member shall directly or indirectly enter into any arrangement or adopt any procedure for the purpose of evading or assisting in the evasion of the margin requirements prescribed under the bye-laws, rules and regulations or any orders issued thereunder. The clearing member has to account for the margin deposits received from the constituent. 56] Bye-law 8.6.5 clearly provides that an exchange broker may close out an open position of a client when the call for further margin or any other payment due is not complied with by the client. Bye-law 8.6.6 provides that a clearing member may close out an open position of a constituent member when the call for further margin or any other payment due is not complied with by the constituent member. Bye-law 8.7 provides that every clearing member shall collect from constituent members, with whom he has an agreement to provide clearing and settlement serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes in her account, without any margin, which indicates that the allegations about trading in her account without her consent, can hardly be brushed aside. The arbitral tribunal also rendered a finding after perusal of the copy of the passport, showing that claimant was out of India from 5th July 2011 till 24th August 2011 and there had been no communication between the parties and the respondent was not able to make out a case that the claimant had carried out online trading from abroad. The respondent had carried out 332 transactions during the concerned period out of which 116 were new sauda and remaining were sale of transactions, either before or after expiry date. REASONS AND CONCLUSIONS 25. I have heard the learned counsel appearing for the parties at length and have considered the rival submissions. A perusal of the record indicates that on 20th March, 2013 even according to the petitioner, there was a shortfall in margin money in the sum of ₹ 37,01,659.37 in respect of open position of 110 lots of silver mini. The said open position continued till 29th March, 2013. The shortfall in margin money according to the petitioner as on 25th March, 2013 was at ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her position. It was alleged that the respondent always deposited part margin on her position and promised to deposit remaining amount in coming days, but never complied on it. 28. A perusal of the reply filed by the respondent in the arbitral proceedings indicates that it was her case that on 26th March, 2013, there was a shortfall due to fall in the price of silver and the petitioner therefore required to deposit ₹ 20 lacs in the account which was immediately paid by the respondent. The respondent had always kept making payment as and when required by the petitioner. It was the case of the respondent that she was never informed or was called upon by the petitioner to make payment of any amounts at any point of time and the petitioner had squared up her position at ₹ 69 lacs clubbing in her equity account without any intimation. It was also the case of the respondent that at no point of time, the respondent had authorised the petitioner to adjust margins or debits for any exchange. The respondent also denied all the allegations which were contrary to and/or inconsistent with whatever was stated in the said reply. 29. A perusal of the arbitral award indicates that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough even according to the petitioner there was a shortfall continuously in the account of the respondent since 20th March, 2013 which continued till 29th March, 2013. The judgment of this court in case of Pankaj Goshar (supra ) thus does not assist the petitioner in any manner whatsoever. 31. Insofar as judgment of this court in case of Amit Bharadwaj (supra ) relied upon by Mr.Narula, learned counsel for the petitioner is concerned, this court in the said judgment while dealing with the provisions of the bye-laws of the National Stock Exchange held that the statutory regulations had been framed by the Stock Exchange for protecting the system under which the Stock Exchange operates and the requirement had been included in the regulations for taking margin money from the constituent to protect the system and the brokers from any loss that may be suffered on account of the transactions that may be undertaken. It is held that if the brokers are permitted to carry on transactions contrary to the regulations framed by which they were bound, it would endanger the system itself. This court in the said judgment has set aside the arbitral award by which the constituent was directed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e petitioner is concerned, in that matter, the constituent had admitted that the trades were executed by the broker at his instance. It was also admitted that there was adequate margin money for the transactions to be carried out on behalf of the constituent with the broker. Considering this position, this court held that since the learned arbitrator had rendered a finding that there was sufficient margin in the account of the constituent and in view of the admitted position that the trades were executed at the instance of the constituent, no interference with the arbitral award under section 34 of the Arbitration Act was warranted. In my view the said judgment does not apply to the facts of this case at all. In this case even according to the petitioner, there was huge shortfall in the margin money and it was not the case of the petitioner that the square up of the transaction on 30th March, 2013 carried out by the petitioner was at the instance of the respondent. The judgment of this case in case of Uttam Chand Garg (supra) does not assist the case of the petitioner. 34. Insofar as judgment of this court in case of Shreepalkumar Pukharaj (supra ) relied upon by the learned co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the broker to square off the transactions immediately upon there being a shortfall which according to the broker had not been paid by the constituent inspite of demand. If the petitioner would have squared off the open position when there was shortfall of margin money prior to 30th March, 2013, the petitioner would not have faced the volatility in the market on 30th March, 2013. In my view since the petitioner had not carried out their obligation by squaring up the transactions when there was a shortfall in the margin money and which according to the petitioner was not paid by the respondent though demanded, the petitioner cannot be allowed to make any claim against the respondent constituent for such unauthorised transactions carried out by the petitioner in the account of the respondent. In my view the bye-laws referred to aforesaid are mandatory and the transactions carried out in violation of such mandatory bye-laws would not make the broker entitled to make any claim against the constituent based on such unauthorised trade effected by the broker. 37. Insofar as judgment of this court in case of Shankarlal V.Keswani (supra ) relied upon by the learned counsel for the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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