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ORDINARY ORIGINAL CIVIL JURISDICTION
ARBITRATION PETITION NO.1424 OF 2019
Dhwaja Shares And Securities Private Limited ….Petitioner
Sunita A. Khatod ....Respondent
IN
ARBITRATION PETITION NO.1415 OF 2019
Krishnadevi G Khatod ....Respondent
IN
ARBITRATION PETITION NO.1413 OF 2019
Dropadidevi Khatod ....Respondent
Gopallal B Khatod HUF ....Respondent
Mr. Kunal Katariya a/w. Ashmita Goradia & Priyanka Dadpe i/b. Aagam Doshi, Advocates for Petitioner in all Petitions.
Mr. Mayank Bagla a/w. Mr. Swapan Samdani & Ms Siddhi
Bhutada i/b. Swapan Samdani, Advocates for Respondent in all
Petitions.
Aarti Palkar
ORAL JUDGMENT
1. This is a bunch of Petitions under Section 34 of the Arbitration and Conciliation Act, 1996 (“the Act”) challenging a set of arbitral awards (for purposes of this judgement, “Impugned Award”) passed at the second and appellate stage under the statutory arbitration conducted pursuant to the National Stock Exchange of India’s (“NSE”) Bye-Laws. The Petitions are filed by multiple members of the same family that had engaged the same stock broker.
2. By consent of the parties, Arbitration Petition No.1413 of 2019 was marked as the lead Petition with all dates and page numbers that are referred to, being adopted from the lead Petition. Learned Counsel for the parties agree that resolution of the issues raised in the lead Petition would answer issues involved in the remaining three Petitions as well. Consequently, with the consent of the parties, all four Petitions were taken up for final disposal. All references to the Impugned Award too are references to the Impugned Award in the lead Petition.
3. Essentially, disputes and differences between the parties centre around dealings on the stock market between the Khatod Family and the Petitioner, Dhwaja Shares and Securities Private Limited (“Dhwaja”). Four different trading accounts are involved in the transactions between the Khatod Family and Dhwaja, the trades on the NSE being executed between 2013 and 2018. In the lead Petition, the current Respondents are legal heirs of one Mrs. Dropadidevi Khatod. The Respondents in the other Petitions are members of the same Khatod Family.
4. One Ms. Sunita Khatod is a Respondent in Arbitration Petition No.1424 of 2019 (“Sunita”). Sunita is the daughter in law of Mrs. Dropadidevi Khatod. The role of Sunita would be a little important since it is her e-mail id which is recorded as the e-mail id to which communications were to be sent by Dhwaja in respect of trades under all four trading accounts. While it is the case of the Petitioner that the e-mail id sunitakhatod1@gmail.com is Sunita’s e-mail id, the members of the Khatod family contest that it is her e-mail id. Strangely, Sunita herself has not filed any reply to the Petition filed in her case whereas all the other members of the Khatod family have filed replies in the respective Petitions challenging the awards in their favour.
5. The Arbitral Awards have been passed on three different dates, the details of which are not necessary to articulate. Suffice it to say that all the Impugned Awards are Appellate Awards challenging the decision by an earlier Arbitral Tribunal of the NSE which upheld an earlier decision by the Investor Grievance Resolution Panel (“IGRP”).
6. The Khatod Family appears to have been introduced to Dhwaja by one Mr. Jatin Bhatt, a neighbour of the Khatod Family (“Jatin Bhatt”). Jatin Bhatt, in terms of the official record, is an “Authorized Person” of Dhwaja. However, the Know Your Customer (“KYC”) documents executed in respect of the four trading accounts does identify Jatin Bhatt as “AP”. There is some dispute about whether Jatin Bhatt was a de facto AP in 2013 when the KYC documentation was executed and only became a de jure AP later. That would be alluded to a little later in this judgment.
7. It is a matter of record that prior to the relationship with Dhwaja, the Khatod Family was trading with another broker called M/s India Nivesh. The introducing party that introduced M/s India Nivesh to the Khatod Family, and the person whose e-mail id was designated by the Khatod Family for receipt of all contract notes from M/s India Nivesh also appears to be the e-mail id of Jatin Bhatt.
8. The Impugned Award squarely holds in favour of Dhwaja on a number of issues but finds fault with Dhwaja for not conducting itself in an appropriate manner, violating requirements of the Circulars issued by SEBI and indulging in unethical conduct by allegedly not disclosing its relationship with Jatin Bhatt adequately to the Khatod Family. Towards this end, the Learned Arbitral Tribunal has chosen to simply halve the amount awarded by the IGRP and the first Arbitral Tribunal, taking a position that an award of 50% of the amount awarded by the arbitral tribunal of the first instance, would meet the ends of justice.
9. Such an approach is assailed on behalf of Dhwaja stating that the Impugned Award represents a Panchayati approach of doing common law justice rather than dealing with rules and regulations and the provisions of the contract governing the relationship between the parties.
10. The Khatod Family would strongly contend that Dhwaja is in fundamental violation of requirements of law in dealing with clients. Specifically, attention of the Court is drawn to the four Circulars issued by SEBI dated August 2, 2011, October 4, 2012, August 12, 2014 and August 18, 2014. These Circulars are referred to in the Impugned Award to find fault with Dhwaja in the nature of its dealings with the Khatod Family. However, since the Learned Arbitral Tribunal has found entirely in Dhwaja’s favour on all other counts, the approach of a 50% discount on the amounts awarded in the earlier round, was adopted.
11. The upshot of this submission by the Khatod Family is that brokers were required to ensure that electronic contract notes executed pursuant to instructions received from clients, must necessarily be sent to the e-mail id designated by the client and to no one else. That apart, these Circulars would point to a prohibition on incorporating the e-mail id of sub-brokers and APs as the e-mail id to which electronic contract notes may be sent. The Khatod Family would contend that these Circulars would demonstrate that they were potentially unaware of the transactions that were executed, which led to the balances in accounts, which form subject matter of the dispute to the arbitration. Analysis and Findings:
12. I have heard Mr. Kunal Katariya, Learned Counsel for Dhwaja and Mr. Mayank Bagla, Learned Counsel on behalf of the Khatod Family constituents who have participated in the proceedings. With their assistance, I have examined the material on record.
13. It is apparent from the record that the Khatod Family opened accounts with Dhwaja, with KYC documentation being executed sometime in 2013 and commenced trading through Dhwaja.The initial stance of the Khatod Family while denying the trades executed by Dhwaja on their behalf, was that the KYC documentation is entirely fraudulent; they were unaware of the contents set out therein; and Jatin Bhatt appears to have taken them for a ride by creating an account in their names and foisting a liability on them. Changing Goal Posts:
14. Equally, the initial stance of the Khatod Family was that they indeed effected pay-ins and received pay-outs from these transactions, but that such activity was purely at the behest and under the instructions of Jatin Bhatt. Consequently, not being parties whose sovereign decisions have driven the transactions, they would deny the execution of the trades.
15. However, as the proceedings moved on through the IGRP, the First Arbitral Tribunal and the Second Arbitral Tribunal, it became clear that the Khatod Family has not denied all the trades executed over the four-year period, seeking the annulment of recognition to all the trades throughout this period. What they were essentially seeking, was a refund of the net amount between the pay-ins made and the pay-outs received – somewhat in the region of Rs.50,000/- in the lead matter. In the proceedings underlying each Petition, the value of the securities provided by constituents of the Khatod Family as margin for the trades, are purported to be valued as of the date of the claim and that value, they would submit, should be returned to them. Impugned Award Rightly Rejects Khatod Family Claim:
16. The Learned Arbitral Tribunal, which has passed the Impugned Award, examined the matter in detail and has come to a reasonable, logical and eminently plausible finding that the contentions of the Khatod Family that they were unaware of the trades, or of Jatin Bhatt having colluded with Dhwaja to effect fraudulent trades is not believable.
17. The Learned Arbitral Tribunal has noticed that the Khatod Family took a stance that “it was revealed that unauthorized transactions had taken place, inflicting huge losses” on the Khatod Family, and therefore, a sum of Rs.[2] Crores was claimed. This amount was modified over time to make a claim for a sum equivalent to the aggregate of the net amount between the pay-outs and the pay-ins coupled with the value of the security provided towards margin as of the date of the claim.
18. The Learned Arbitral Tribunal found that the Circulars governing Maintenance of Voice Recordings was made effective only on April 1, 2018 and therefore, for the transactions in question, those Circulars were not applicable. However, having examined the overall evidence emanating from the material on record, the Learned Arbitral Tribunal found that it was apparent that the Khatod Family was in receipt of physical delivery of all the account statements and the contract notes which related to the transactions executed by Dhwaja.
19. That apart, it is pertinent to note that year after year, the tax returns of the Khatod Family incorporated the earnings from these trades and the income therefrom was offered for tax. The trading accounts yielded returns to the Khatod Family and it is only when they suffered a loss, that the stance of all trades being unauthorized was adopted.
20. Even while the Learned Arbitral Tribunal has noted the contention that the electronic contract notes, e-mails and SMS messages confirming the trades were indeed sent to the e-mail id and phone number of Jatin Bhatt (which were in fact offered by the Khatod Family as alternate contact detail), it is apparent that the Learned Arbitral Tribunal has also returned a finding that physical delivery of the account statements and the related documentation to the Khatod Family is true. In these circumstances, the Learned Arbitral Tribunal has written explicitly that the trades could not be regarded as unauthorized. Inexplicable Right About Turn:
21. To my mind, this should have put an end to the matter. However, the Learned Arbitral Tribunal took a right about turn after arriving at such a finding, to say that Dhwaja had not taken due care in ensuring compliance with the SEBI Circulars referred to above, and that Dhwaja has displayd a casual approach in allowing the name of the AP in the KYC documentation of the client, without concurrence of the Respondent. The Learned Arbitral Tribunal has stated that while Jatin Bhatt was engaged as a jobber by Dhwaja between 2014 and 2016 and thereafter, as an AP, Jatin Bhatt simultaneously continued to trade on behalf of the Khatod Family based on the authority given to him by the Khatod Family way back in 2013.
22. This, according to the Learned Arbitral Tribunal is unethical and not in conformity with the Code of Conduct governing stock brokers. The Impugned Award leaves one none the wiser about which provision of the Code of Conduct is alleged to have been violated and the basis of such a finding.
23. Be that as it may, the Learned Arbitral Tribunal has simply adopted a measure of providing half the amount granted in the very Arbitral Awards that it was upturning, to the respective constituents of the Khatod Family.
24. It is abundantly clear that the stance of the Khatod Family has undergone a change from time to time in the course of the underlying proceedings. It began with denying all transactions at the threshold, and moved on to claiming the value of the net amount i.e the difference between pay-ins and pay-outs in the course of the transactions, and also claiming the value of the securities provided as margin, as of the date of the claims. If the transactions on the stock market had been unauthorized, the benefit of the pay-outs could not have gone to the Khatod Family. Likewise, the very securities, the value of which is claimed as of the date of the claim, were securities held in the demat account of the respective members of the Khatod Family. Therefore, it took a conscious action of putting pen to paper and signing out the securities for being sent to Dhwaja, that only the holders of the demat accounts could have done. It is by their conscious decision that the securities were transferred.
25. In a nutshell, the Khatod Family has been happy to receive proceeds of trades; has been happy to post securities towards margin requirements; and has been happy to file tax returns dealing with all the transactions that took place on the stock exchange, offering the profits to tax. With that backdrop, to have taken a stance that none of the trades were at all authorized, and that the entire period of transaction was a scam, would demonstrate that they have not come to the Learned Arbitral Tribunal with clean hands and that they shifted the goal post to modify the claim. This kind of stance being accepted by the IGRP and the First Arbitral Tribunal is totally irrational, arbitrary and perverse. Therefore, the Learned Arbitral Tribunal that conducted the appellate arbitral proceedings was completely right in returning its findings on fact, that the earlier two rounds, despite having concurrent outcomes, deserved to be quashed and set aside. Arbitrary Panchayati Justice:
26. Having quashed and set aside such arbitrary and untenable findings of the IGRP and the First Arbitral Tribunal, the Learned Arbitral Tribunal has provided its contribution of arbitrariness by taking its own arbitrary turn by simply halving the amount claimed and awarded in the earlier two rounds and placing that burden at the doorstep of Dhwaja. There is no basis in law whatsoever to make such an irrational, unreasoned and arbitrary intervention. The allegation of collusion between Jatin Bhatt and Dhwaja by the Khatod Family not having been accepted, it was not open for the Learned Arbitral Tribunal to adopt its own equity judgement in making vague findings of unethical conduct and that too effectively awarding damages without findings of violation to base the damages on. There is no assessment of damages too. The Learned Arbitral Tribunal has simply halved whatever was provided by the IGRP and the First Arbitral Tribunal. This is indeed akin to a panchayati approach where the provisions of contract and the law is dispensed with, to address self-perceived notions of justice.
27. Whatever was the value awarded in each case by the IGRP and the First Arbitral Tribunal, has been simply halved by the Learned Arbitral Tribunal in its perception of doing justice. If the IGRP had taken the value of the securities as on the date they were provided towards margin, or the value of the securities as on the date the IGRP decision was made, the Learned Arbitral Tribunal would have given half of that value. Therefore, the finding by the Learned Arbitral Tribunal that half the amount awarded in the earlier rounds must be paid by Dhwaja to the members of the Khatod Family is totally perverse, untenable and cannot be sustained.
28. The judgment by a Learned Division Bench of the Delhi High Court in the case of Prakash Atlanta[1] has expressed the position aptly when dealing with a similar 50:50 solution in another arbitration proceedings. The same is extracted below:- “18. The 50: 50 solution find by the learned Arbitrators is on the reasoning that the tender made known to Prakash that there was a reinforcing element in the works and there was some hiatus between clause 703(A) and item No. 5.41(a) of the Technical Specifications. Putting the blame on Prakash for not having got the matter resolved i.e. the conflict resolved, the learned Arbitrators held that it could not be overlooked that NHAI was equally responsible for this because it was the author of the tender documents. Therefore, both parties had to share the blame 50: 50.
1 Prakash Atlanta (JV) vs. National Highways Authority of India – 2016 SCC OnLine Del 1648
19. The learned Single Judge has held that this was a ‘Panchayati Solution’. The learned Single Judge is absolutely correct. As per the Arbitration and Conciliation Act, 1996, the mandate of an Arbitral Tribunal is to decide a dispute in terms of a written agreement between the parties, if the dispute relates to the written agreement. If the language of the written agreement is clear, the Arbitral Tribunal has to give effect to the language. If the language is unclear, giving reasons to justify what was held to be unclear, the Arbitral Tribunal would have the mandate to give a meaning to the clause in question. Sub-Section (2) of Section 28 of the Arbitration and Conciliation Act, 1996 reads as under: - “28.(2) The arbitral tribunal shall decide ex aequo et bono or as amiable compositeur only if the parties have expressly authorised it to do so.” [Emphasis Supplied]
29. This narration to which Mr. Katariya draws my attention lends itself to application to the matter in hand. Transactions on the stock market are conducted with an element of not just the contract between the parties, but also in terms of regulations governing the conduct of the stock broker and dealings on the stock exchange. There can emerge situations where stock broker violates the regulations, in which stipulations would have been made with the objective of investor protection in mind. Violating such requirements would subject the stock broker to penal action at the hands of the Securities and Exchange Board of India or the relevant stock exchange. It may even lead to issuance of remedial directions under Section 11(4) and Section 11B of the Securities and Exchange Board of India Act, 1992.
30. However, that would not mean that a violation of regulatory compliance requirements would automatically translate into trades carried out with full consciousness by a client, becoming unauthorized and somehow through some abstruse formula, resulting in an award of 50% of the damages claimed against the stock broker.
31. This facet of the matter came up for consideration in an earlier matter handled by this Bench in Jagadeesa G. Chary[2]. The following extracts would be appropriate and would squarely apply to the matters at hand:-
32. Applying the aforesaid articulation to the facts of this case, it is clear that the Petitioners traded on the market; put pen to paper and transferred securities towards margin; accepted the pay-outs; took cognisance of the trades; accepted them and even filed tax returns on the basis of the trades; and when they suffered losses, disclaimed all trades initially claiming that everything around the trades was a scam, and then went on to demand the difference between the pay-outs and pay-ins. Sunita who appears to have been the designated youngster in the Khatod Family alone has refrained from filing a reply and making statements on oath before this Court in defence of the Impugned Awards.
33. The Learned Arbitral Tribunal has actually held in favour of Dhwaja in a wholesome manner. However, as a consolation prize, it has chosen to award 50% of the amount covered in the earlier arbitral award. The ostensible reason being regulatory non-compliance, the observations in Jagadeesa Chary would be apt – there could be regulatory consequences for the stock broker, but there cannot be an outcome detrimental to the stock broker on the commercial claim made by the client. Merely discounting the amount wrongly awarded by 50% would not lead to the Impugned Award being just and proper.
34. Therefore, in my opinion, the Impugned Awards simply cannot be sustained for their inherent contradiction. I find completely plausible and reasonable analysis in the findings that the Khatod Family participated in the trades on the stock exchange with full awareness of their trades. Yet, the Impugned Awards turning away from the logical extension i.e. to hold in favour of Dhwaja, has attempted to give vent to its own notions of justice by awarding half the amount awarded in the earlier round by discounting the awards challenged by 50%. This is untenable and leads to the Impugned Awards collapsing on their own contradictions.
35. The outcome in the Impugned Award is in conflict with the most basic notions of justice. A perception that a regulatory violation has taken place by the Code of Conduct being allegedly violated, and that too without articulating which provision of the Code of Conduct was violated, cannot lead to a random allocation of 50:50 of the amount awarded. Once it was found that the Khatod Family had not come to court with clean hands, their claim ought to have been rejected outright. That apart, the inherent contradictions in the Impugned Award render it perverse. Once it is found that the Khatod Family had traded consciously and was yet staking a claim for rejecting the trades, there was no question of granting 50% of the amount claimed on the very premise of the transactions being unauthorised. Such an approach is patently illegal and perverse. Therefore, under the provisions of both Section 34(2)(b)(ii) and Section 34(2A) of the Act, the Impugned Award deserves to be quashed and set aside.
36. All the four captioned Petitions are hereby allowed and the Impugned Awards are set aside. For the avoidance of doubt, it is clarified that the IGRP decision and the First Arbitral Awards having merged into the Impugned Awards, the setting aside of the Impugned Awards brings to naught all these three rounds.
37. Since the Petition stands finally disposed of, nothing survives in the Interim Applications pending therein and the same are also disposed of accordingly.
38. Any amounts that may have been deposited in this Court in the course of these proceedings shall be released to the Petitioner within a period of four weeks for the upload of this Judgment on the Court’s website.
39. All actions required to be taken pursuant to this order shall be taken upon receipt of a downloaded copy as available on this Court’s website. [ SOMASEKHAR SUNDARESAN, J.]