Ulhas Dandekar v. Sushil Financial Services Pvt. Ltd.

16. The undisputed fact is that payment instructions have been issued by Dandekar from time to time without which monies could not move from Dandekar’s bank account to Sushil’s bank account. Likewise, Dandekar has issued delivery instructions for movement of securities from his demat account to Sushil’s demat account. Those actions are contemporaneous with the receipt of contract notes on emails, SMS alerts on the mobile number, and alerts from the stock exchange about transactions on his account. All of this would show his autonomous and conscious choice of dealing in securities for which securities have to be delivered and payments have to be received or paid. Therefore, it is not at all unreasonable for the Impugned Award to contain a finding that Dandekar was well aware of the trades he sought to later assail as being unauthorised.

17. The explanation sought to be given on Dandekar’s behalf – that “due to some technical glitch, his email address was blocked and he did not have any access to the emails” does not at all inspire confidence. Even if this were true, Dandekar would have to be cut off and marooned from all electronic communication including SMS alerts and alerts from the NSE about his trades, apart from being cut off from his email ID. Moreover, it is also apparent that Dandekar’s son-in-law Mr. Amit Ruia (“Ruia”) has communicated with Sushil, showing evidence of Dandekar having transferred securities, enclosing scanned copies of depository transfer instructions personally executed by Dandekar.

18. Whether Ruia was authorised to engage with Sushil is a digression. However, what is clear is that Ruia did communicate with Sushil to show that Dandekar has transferred securities. Mr. Purohit would point to Sushil’s pleadings from the record to indicate that Ruia is the designated contact person for trading with another stock broker, after the relationship with Sushil came to an end. Mr. Rajadhyaksha submits that such evidence is extraneous to assessing whether the Impugned Award is sustainable or amenable to being set aside. He would assert that Ruia was not authorised to transact on Dandekar’s behalf. It may be possible that Ruia was enlisted to negotiate with Sushil and bail out his father-in-law from choices made while consciously trading on the market. It may also be possible that Ruia was actively taking trading decisions while Dandekar was only cutting the cheques, receiving and paying funds. All that would be in the realm of speculation. Restricting oneself to the material on record and the consideration of such record in the Impugned Award, it is writ large that emails dated April 3, 2018 and April 6, 2018 have been sent by Ruia (and not by Dandekar) to Sushil, but the attachment to those emails are scanned images of depository transfer instruction slips, each of which is personally executed and signed by Dandekar. The explanation that shares had indeed been transferred to Sushil by Dandekar, but they were sent for being retained by Sushil, awaiting instructions to sell them, also appears contrived.

19. Taking all these attendant circumstantial pieces of evidence together, the Arbitral Tribunal, which is the master of the arbitral proceedings and is entitled to take a plausible view upon assessment of evidence, has come to a plausible view that Dandekar cannot disclaim knowledge or autonomy over the transactions executed through Sushil. There is no basis for me to question or revisit such a plausible view, which I indeed find is reasonable, logical and well borne out by the material on record.

20. Considering the contours of the jurisdiction under Section 34 of the Act, I cannot re-assess the evidence and weigh it afresh. I have examined the record solely to see if the view taken in the Impugned Award is so manifestly arbitrary or implausible that it would meet the threshold of being perverse for me to interfere with it. I am unable to agree with Mr. Rajadhyaksha that such threshold has been met.

21. In fact, the sole ground for the challenge is that the admitted absence of prior written or recorded instructions for each trade is fatal to the legitimacy of the trades, and their impact on the statement of account ought to be ignored. I am unable to agree with Dandekar’s case that a finding of admitted absence of prior authorisation would wash away all the evidence of participation with knowledge in the trades executed on Dandekar’s behalf by Sushil. It would not be possible for me to come to a reasonable view that the assessment in the Impugned Award is implausible, or perverse, or against the most basic notions of law and justice. Authorisation and Participation:

22. The requirement to ensure that there is a record of prior authorisation for every trade is safety measure that is important. Nothing contained in this judgement is meant to have an impact of eroding the significance of this policy measure. Failure to comply with this requirement can visit a broker with regulatory penalties. However, whether non-compliance with this measure would mean that the client need not pay up at all for the trades executed by him is a different matter. The absence of evidence of preauthorisation is not evidence of absence of instructing the trades. Whether a constituent of a stock broker has actively participated in the trades is still a question that the jurisdictional arbitral tribunal must answer upon assessment of the evidence at hand in each case. The proposition canvassed on Dandekar’s behalf is a blanket and absolute proposition and is suggested as a principle strong enough to stack up against all the other pointers to his active knowledge and participation in the trades – receiving and remitting monies, and effecting transfers of securities from a distinct demat account that only Dandekar would have agency over.

23. Mr. Rajadhyaksha has sought to place reliance on decisions of the Jharkhand High Court in the case of Motilal Oswal[1] and the Delhi High Court Motilal Oswal Financial Services Ltd. Vs. Chandrabhushan Kumar – 2024 SCC OnLine in the case of First Global[2] to submit that the proposition of law is absolute – that the absence of prior authorisation would acquit the client of the obligation to pay for the trades that are not backed by evidence of prior authorisation. With the greatest respect to the Learned Judges who rendered these decisions, in my opinion, there cannot be an absolute proposition that the absence of evidence of an authorisation is evidence of absence of authorisation. The thick line sought to be drawn between authorisation of a trade and knowledge of a trade does not resonate with me. When a person has knowledge of a trade, if such trade were not authorised by him, it would stand to reason that the knowledge would trigger a protest and lead to a challenge to the trade. If there is no such challenge until the debit balance runs up to a level where the stock broker is forced to make a claim in arbitration, it would be incumbent on the Learned Arbitral Tribunal to assess all the attendant evidence from a commercial and commonsensical perspective and return a finding that relates to the facts of the case.

24. In my opinion, it is vital to examine the commercial conduct of the parties and assess who is speaking the truth, rather than rely on a binary proposition to hold that absence of recorded prior authorisation would automatically lead to an absolute immunity to the client of the stock broker First Global Stock Broking Pvt. Ltd. Vs. Tarun Gupta – 2024 SCC OnLine Del 4631 from paying up for the very trades that he consciously participated in with full knowledge. In my opinion, the absence of a prior written or recorded authorisation would not be fatal to the broker’s right to be paid for the client’s trade. SEBI Circular of March 22, 2018:

25. My reading of the circular issued by SEBI on March 22, 2018 (“SEBI Circular”), which is extensively referred to in Motilal Oswal, and alluded to in First Global, Paragraph III of the SEBI Circular underlines the fact that the requirement is directory and not mandatory from the perspective of evidentiary standard for determining if a client traded. Paragraph III of the SEBI Circular is extracted below: “To further strengthen regulatory provisions against un-authorized trades and also to harmonise the requirements across markets, it has now been decided that all brokers shall execute trades of clients only after keeping evidence of the client placing such order, which could be, inter alia, in the form of: a. Physical record written & signed by client, b. Telephone recording, c. Email from authorized email id, d. Log for internet transactions, e. Record of messages through mobile phones, f. Any other legally verifiable record. When a dispute arises, the broker shall produce the above mentioned records for the disputed trades. However for exceptional cases such as technical failure etc. where broker fails to produce order placing evidences, the broker shall justify with reasons for the same and depending upon merit of the same, other appropriate evidences like post trade confirmation by client, receipt / payment of funds / securities by client in respect of disputed trade etc. shall also be considered. [Emphasis Supplied]

26. Even a plain reading of the foregoing would show that it would not be possible to take a view that record of prior authorisation is an absolute mandatory requirement of substantive law and not a directory requirement of procedural law of evidence. The very Paragraph III of the SEBI Circular extracted above would show that when a dispute arises, the broker is expected to produce the record of authorisation for the disputed trades. However, for exceptional cases where the broker fails to produce evidence of placement of order, the SEBI Circular envisages that “other appropriate” evidence such as post-trade confirmations, receipt and payment of funds and securities shall also be considered. The very enabling framework of alluding to other appropriate evidence points to an inexorable position in law – there can be other evidence, which means that the prior written or recorded authorisation would not be the sole determinant of whether the client should be protected from being called to account for the disputed trades.

27. Mr. Rajadhyaksha too depends on the SEBI Circular and its interpretation by the Division Bench of Jharkhand High Court in Motilal Oswal. He would fairly state that the SEBI Circular came after the Dispute Period but he would equally submit that the SEBI Circular only stated what was always the law on the subject. I agree with him. The SEBI Circular is not a substantive new law but an indication of how one must deal with disputed trades. The need to keep a record of authorisation is a safety provision. It protects the stock broker from disputes and indeed the client from being taken for a ride. It is akin to a traffic safety provision such as the need to wear a helmet when riding a two-wheeler. However, it would not follow that the absence of compliance with such a procedural safeguard would visit the stock broker with a consequence of letting the client who consciously and knowingly transacts in securities being completely let off the hook when the client chooses to invoke this requirement – obviously, only when the going is not good. Such an outcome would be inequitable, unjust and arbitrary.

28. The production of prior authorisation is obviously an evidentiary requirement i.e. a procedural requirement. In the event of inability to produce prior evidence of order placement, if the client were to be let off the hook completely to pay for the trades, there would be no question of the SEBI Circular enabling consideration of other appropriate evidence. The very evidentiary elements alluded to in the SEBI Circular, are post-trade confirmation, receipt and payment of funds, as indeed receipt and delivery of securities. These are precisely the facets of evidence on which the Impugned Award is based, to give credence to the trades executed by Sushil during the Dispute Period having been trades within the conscious autonomy and knowledge of Dandekar.

29. It is trite law that one must have regard to the overall legislative intent and framework to determine if a provision is mandatory of directory. The mere use of the words “shall” or “may” (or indeed, use of the word “mandatory”) would not determinative of whether the requirement is mandatory. One must have regard to the purpose of the legislative stipulation, not just the phraseology of the provision, and indeed the consequences that would follow by treating a provision as being mandatory or directory[3]. To state that the trades could be totally disowned by Dandekar in the teeth of funds transfers between Sushil and Dandekar, and indeed, securities transfers between them, would lead to extreme and disproportionate outcomes. One would need to hold that an Arbitral Tribunal would necessarily be obligated to shut its eyes to evidence of a client of a stock broker merrily trading without raising any grievance when the See State of UP vs. Manbodhan Lal Srivastava – AIR 1957 SC 912; and Raza Buland Sugar Co. Ltd. Vs. Municipal Board, Rampur – AIR 1965 SC 895 going is good, only to turn around and purport to invoke the regulatory framework to disown trades where he incurs a loss. In my opinion, adopting such an extreme and disproportionate outcome is what would have been in conflict with the most basic notions of morality and justice. The Impugned Award has avoided falling into such an error.

30. There are other extreme and illogical consequences if one were to let a person who trades in securities get away on the mere premise that there is no written or recorded prior authorisation of the trades. Take a case of a violative trade – say a trade that constitutes market manipulation or violative insider trading. Evidently, evidence in investigations may prove that a person who had not issued prior written authorisation would have been the mastermind behind those trades. If the proposition that only when there is a prior written or recorded authorisation, the mastermind would be accountable, would be absurd and untenable. In a trade that is later held to be violative, where it is found that the stock broker was not a conspirator to the device or scheme that rendered the trade to be held as manipulative or violative, it would be unjust to hold the broker financially liable even when the client has been held to be guilty of the violation. Although the trade is declared to be violative from the wider regulatory perspective, monies owed by the client for such trade to a stock broker who has not colluded in the manipulation or violation would be have to be held to be an invalid claim. Such a logical progression of the binary and mandatory reading of the SEBI Circular, I must state with the greatest respect, would be absurd. It is for the jurisdictional arbitral tribunal, which is the master of the evidence, to assess upon examination and weighing of the evidence on record to arrive at whether the client consciously exercised his autonomy to effect the trades. If it were to be an absolute proposition that the absence of prior recorded authorisation is evidence of non-participation in the trade, unintended consequences that would be at odds with the very foundation of the regulatory design and the overall scheme of ensuring market integrity would come about.

31. In any case, one must also note that in both, Motilal Oswal and First Global, the respective High Courts were considering a view taken by the arbitral tribunal in the award impugned before them. On facts, in the case of Motilal Oswal, there was absence of authorisation for specific trades while in First Global, a factual finding that the stock broker was providing discretionary portfolio management found favour with the tribunals. On facts, and based on the evidence considered by the arbitral tribunal, the view taken was that, within the confines of the jurisdiction under Section 34, refusal to interfere was appropriate. In the instant case, the Impugned Award has held, based on evidence, there has been participation by Dandekar in the trades that led to the running debit balance, which has been held to be payable by Dandekar. In my opinion, in exercise of the Section 34 jurisdiction, for the reasons spelt out above, no case has been made out to interfere with this conclusion.

32. It should also be remembered that the trades in question in First Global were in the derivatives segment of the securities market, where there is no transfer of securities and only settlement of differences leads to the balances in the accounts. Therefore, that case can be differentiated from the case at hand, where Dandekar has not only transacted in money and seeks to explain it away as account maintenance charges (paid at varying intervals in varying amounts) but also has consciously executed securities transfer instructions to move securities from his independently-held demat account. This is different from the case of Motilal Oswal too where a bank account was said to have been fraudulently opened in the name of the client by the stock broker. Supreme Court in Chokshi:

33. In sharp contrast, the observations of the Supreme Court in the case of Chokshi[4] are noteworthy. In this case, a married couple traded through a AC Chokshi Share Broker Private Limited vs. Jatin Pratap Desai & Another – 2025 INSC 174 stock broker. Indeed, each spouse had a separate broker-client agreement. Although each had a distinct and separate client agreement, a separate client code and a separate account in the respective name. Arbitration was invoked against both in a composite manner, based on an oral contract that they would be jointly and severally liable for the trades by them through both accounts. According to the stock broker, the balances in one spouse’s account was meant to bolster the balance in the other spouse’s account balance was with oral authorisation by the parties. Arbitration was invoked against both spouses, with the trades across both accounts being treated in a composite manner. The Arbitral Tribunal held that the spouses were jointly and severally liable. The Arbitral Tribunal had found that despite having a credit balance of Rs. 7 lakhs in the husband’s account, he paid in a further Rs. 2 lakhs and never demanded it, until he made a Counter-Claim. A Learned Single Judge of this Court exercising jurisdiction under Section 34 of the Act upheld the Arbitral Award but a Learned Division Bench of this Court took a diametrically contrary view. It was held under Section 37 of the Act, that the arbitration agreement between the broker and each of the spouses could not be inter-mingled to return findings on the basis of an oral understanding of joint and several liability and therefore the award was held to be without jurisdiction.

34. The Learned Division Bench ruled that each trade of each spouse was a distinct and separate transaction and governed by a distinct broker-client agreement, disabling them from being mingled. It was ruled that each was governed by a distinct arbitration agreement with distinct privity. Bye-law 247A of the Bombay Stock Exchange was invoked to state that a stock broker is prohibited from making payments from one client’s account to another and that a common arbitration could never have been invoked.

35. The Supreme Court rejected such an approach and upheld the Arbitral Award, ruling that the oral agreement would be discerned from the evidence and the composite arbitration could not have been held to be without jurisdiction. The Supreme Court ruled that if the Arbitral Award returned a reasonable conclusion based on evidence, the Section 34 Court and the Section 37 Court ought not to interfere. Holding that the view adopted by the Section 37 Court was a hyper-technical approach, the Supreme Court invoked Cox and Kings[5] to rule that while interpreting contracts, Courts must acknowledge the practicalities of how parties execute and participate in transactions and how they understand and perform mutual obligations under the contract. Specifically, the Supreme Court held:- “To facilitate ease of contract and to prevent respondent no. 1 from mischievously wriggling out of his liability for the transactions, it is necessary Cox and Kings v. SAP India Pvt. Ltd. – (2024) 4 SCC 1 – Paragraphs 97,132 and 133 (Chandrachud J) to take into account the reality of the situation. The appellant conducted the transactions in each their accounts based on an oral agreement among all the parties that the respondents will jointly operate and manage both accounts and undertake liability for the same.”

36. The principles enunciated by the Supreme Court underline the approach that ought to be adopted by commercial courts that are presented with challenges to arbitral awards that are well reasoned and point to an assessment of evidence that leads to a commercially sensible and a commonsensical conclusion. I have sought to adopt the same principles in the instant case. Mr. Rajadhyaksha is right in stating that Chokshi is specifically not a case of absence of authorisation of a trade and whether it is fatal to a claim made in relation to the trade. However, Chokshi is about another provision of a bye-law of a stock exchange which would appear to prohibit inter-mingling of two distinct and different client accounts. When evidence points to the parties having agreed to inter-mingle them, the Supreme Court has effectively held that the prohibition on inter-mingling of two spouses’ distinct accounts, treating them as one composite whole, is not mandatory in character. The same approach commends itself for interpreting Regulation 3.2.[1] of the NSE Regulations.

37. I must mention that the observations in Chokshi are also statutorily rooted in codification of arbitration law in Section 28(3) of the Act, which is extracted below:- While deciding and making an award, the arbitral tribunal shall, in all cases, take into account the terms of the contract and trade usages applicable to the transaction.

38. The SEBI Circular that provides for a carve-out for situations where evidence of prior recorded or written authorisation is unavailable, is in fact a demonstration of the deference to trade usages. The payment and receipt of funds, and the conscious and autonomous receipt and delivery of securities are trade usages in the securities market. To be unmindful of them and to read the SEBI Circular as if it were a piece of fiscal statute would be contrary to the statutory mandate of Section 28(3) of the Act, which must be adopted in all cases by the arbitral tribunal.

39. Against this backdrop, a word about the First Award would be in order. The Impugned Award is a product of a full-blown appeal statutorily provided for in the NSE Bye-Laws. In my opinion, the Impugned Award rightly reversed the First Award, which contains inherently contradictory findings. The First Award rejected the contention of Dandekar that he was unaware of the trades or that he had no knowledge of the sales. This was the basis of rejecting Dandekar’s Counter-Claim against Sushil. The First Award, however, entered into a speculation about potential collusion between Ruia and Sushil as if they could have had a common objective of defrauding Dandekar, and left that strand of thought hanging (without a firm finding), to yet latch on to the absence of prior authorisation to wholly reject Sushil’s claim that Dandekar ought to pay up his dues. The Impugned Award, instead, has objectively looked at the First Award, accepted the admitted position of an absence of prior authorisation and with assessment of evidence, held that the absence of authorisation alone would not be adequate to enable Dandekar to disclaim liability from the sale transactions consciously executed by him. Summary of Conclusions:

40. It would be useful to summarise the conclusions drawn in this judgement as follows:a) Maintenance of prior written or recorded authorisation of trades given to a stock broker by the client is an important safety feature to protect against disputes between brokers and clients, but the same is not the exclusive and only means of demonstrating that the client exercised his own agency and autonomy to approve of trades; b) When disputes arise, the arbitral tribunal would be entitled to examine other appropriate evidence to return a finding as to what actually transpired – a feature prominently set out in the SEBI Circular; c) The reference to situations such as “technical failure” in which a stock broker may be unable to produce evidence of order placement, to allow reliance on other appropriate evidence is not meant to be a limiting factor for consideration of evidence, but is meant to ensure that the requirement to secure prior trade authorisation is important but not determinative in absolute terms of whether the client traded; d) Failure to keep prior written or recorded authorisation can lead to regulatory sanction but that would in itself not change the directory nature of the implications of non-availability of such evidence; e) Absurd, unintended and chaotic consequences can arise if the absence of prior written or recorded authorisation would let the party transacting in the stock market off the hook and permit such party to disown the trades in question; f) In every case, it is for the jurisdictional arbitral tribunal to assess the evidence at hand, and take an informed, reasoned and nonarbitrary view as to whether the client of the stock broker exercised his conscious and autonomous choice in effecting the trades under dispute; and g) The evidence has to be purposively interpreted bearing in mind the overall regulatory objective and not in a mechanical and literal manner as if Regulation 3.2.[1] of the NSE Regulations were a provision in fiscal statute. Costs – Commercial Dispute:

41. In these premise, these Petitions deserve to fail and are dismissed. The Impugned Award is upheld in favour of Sushil – upholding its claim and rejecting Dandekar’s Counter-Claim.

42. Since this is a commercial dispute, and a third round of litigation, it would be imperative to consider costs having to follow the event. I am inclined to temper the costs, considering that as a stock broker, Sushil could have taken insurance to cover such risk, and therefore, I restrict the costs awarded to a sum of Rs. 1,00,000, which shall be payable by Dandekar to Sushil within a period of four weeks from today.

43. 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. ]