Angel Broking Private Limited vs Sunil Nagar
2012 Latest Caselaw 360 Bom

     ssm                                 1                              arbp1033.09

               IN THE HIGH COURT OF JUDICATURE AT BOMBAY                                




                                                                           
                ORDINARY ORIGINAL CIVIL JURISDICTION




                                                   
                ARBITRATION PETITION NO. 1033 OF 2009

     Angel Broking Private Limited,
     G-1, Akruti Trade Centre,




                                                  
     Road No. 7, MIDC,
     Andheri (E),
     Mumbai-400 093.                                        .....Petitioner. 




                                      
                  Vs.

     Sunil Nagar,
                        
     R/o. 216/1726, Road No.6,
     Motilal Nagar No.1,
                       
     New Link Road, Goregaon (W),
     Mumbai-400 104.                                        ....Respondent.

     Mr. Parikshit Desai a/w Mr. Hiren Mehta for the Petitioner.
      


     Mr. Sunil Nagar,  Respondent in Person.
                                      
   



                                   CORAM     :  ANOOP V. MOHTA, J.

JUDGMENT RESERVED ON : 22 OCTOBER 2012.

JUDGMENT PRONOUNCED ON : 19 NOVEMBER 2012

JUDGMENT :-

The Petitioner, a trading member, original-Respondent has

challenged award dated 29 August 2009 passed by the Sole

Arbitrator appointed by the National Stock Exchange of India

Limited (for short, NSEIL), in the matter of Arbitration under

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Bye-laws, Rules and Regulations of the NSEIL.

2 The operative part of the award is as under:-

1. For reasons stated under FINDINGS AND CONCLUSIONS, Paragraph 17, the

Respondent-Trading Member, Angel Capital & Debit Market Ltd., is directed to pay a net sum of Rs.6,59,634.54 (Rupees six lacs fifty nine thousand six hundred thirty four and paise fifty

four only) to the Applicant-Constituent Shri Sunil Nagar.

2. The Applicant- Constituent is liable and directed to pay to the Respondent-Trading

Member interest @ 12% p.a. on the debit balance of Rs.22,646.67 in NSE Cash Segment from 16.10.2008, i.e., the date from which the debit balance is outstanding, to the date of the

Award, i.e., 29.08.2009. The Respondent-

Trading Member will recover the amount of interest, so arrived at, from the amount of Rs.6,59,634.54 payable to the Applicant- Constituent.

3. The cost of arbitration shall be borne by the Respondent-Trading Member.

4. The Award is signed in three originals. NSE

will retain one of the stamped originals and forward one stamped original to each of the Applicant-Constituent and the Respondent- Trading Member."

3 As per the Petitioner, the basic events are as under:-

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In the month of July 2008, the Respondent approached

the Petitioner to open trading account in NSEIL Cash and Future

option Segments. After compilance of necessary formalities, the

Respondent was allotted the client code S55381. The

Respondent was net trading client of the Petitioner. The

Respondent never disputed any of the contract notes/statement

of account issued by the Petitioner to the Respondent.

4 On 17 October 2008, at the opening of the market the

Respondent had credit balance of Rs.4,08,016.21 and margin

shortage of Rs.1,92,859.52 in respect of the outstanding open

positions after the accounting for the credit balance. The

Respondent was continuously was in margin shortfall from 26

September 2008. The Respondent sold 195 lots of NIFTY Put

Option at a strike price of Rs.4500/- and earned the premium of

Rs.1,34,75,525/- and thereby exposed itself to unlimited market

risk without having the requisite margin in his account. The

Respondent also bought 1 lot of NIFTY Call Option at a strike

price of Rs.3400/- and 3 lots of NIFTY Put option at a strike

price of Rs.3200/- and paid total premium of Rs.32,425/- as a

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result of which net premium of Rs.1,33,56,933.47 was credited

to his ledger account. The trade of the Respondent accounted

for about 41% of the total NIFTY Put Option sold on the

exchange. The software was having some glitches which

allowed, the premium earned on options sold erroneously, being

taken into account for further limits. Thus, on account of this,

the limits available to the Respondent automatically increased.

The Respondent, realizing that the system was permitting

enhanced limits on premiums earned, went on selling options

without any regard to the risk exposure and in the process sold

9750 (195 lots) Nifty Puts for Rs.1,34,75,525/-. Even after

taking into account premium earned on 17 October 2008 from

the sale of NIFTY Puts for margin purpose, which is not

permissible, the Respondent was still liable to pay a margin of

Rs.49,19,952.85 at the close of the market on 17 October 008.

Against the above liability of the Respondent towards margin

payment to the tune of Rs.1,86,84,902/-, the Petitioner only had

an undated cheque issued by the Respondent for Rs.10 lacs.

This cheque was taken from the Respondent during his trades

with the Petitioner. The Respondent on request for payment of

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margin instructed the Petitioner to present the said cheque for

Rs.10 lacs which, however, bounced on presentation. The

Respondent promised to make the payment on the following

day i.e. 18 October 2008 and instructed the Petitioner to get the

cheque collected from his residence address before 6.-00 p.m.

on 18 October 2008.

On 18 October 2009, the Petitioner sent his office person

to collect the cheque. The Respondent however, defaulted on

his promise and sent away the official without making any

payment. The Respondent submits that 18 October 2008 and

19 October 2008 were trade holidays being Saturday and

Sunday.

6 On 20 October 2008 to 23 October 2008, NIFTY Put was

highly illiquid and the Petitioner found it unable to square off

the huge open positions taken by the Respondent in one go.

Continued exposure for the NIFTY Put sold by the Respondent

in an illiquid market posed grave risks and the Petitioner took

hedge positions to minimize the losses by selling 10100 NIFTY

ssm 6 arbp1033.09

Future Contracts. The open positions were then squared off

over 3 days from 20 October 2008 to 23 October 2008. Inspite

of the above conduct of the Respondent, the Respondent raised

the frivolous dispute with the Petitioner and filed the claimed

before the Arbitrator under by Laws of National Stock

Exchange.

The Petitioner filed the counter-claim of Rs.2,01,129.65

against the Respondent. On 29 August 2009, the impugned

Award passed.

8 It is relevant to note here Regulation 3.10(b) of Future

and Option Segment (for short, F & O Segment) of NSEIL.

"Regulation 10.3(b):-

In case of non-payment of daily settlement by the

constituents within the next trading day, the Trading

member shall be at liberty to close out transactions by

selling or buying the derivatives contracts, as the case

may be, unless the constituent already has an

equivalent credit with the trading Member. The loss

ssm 7 arbp1033.09

incurred in this regard, if any, shall be met from the

margin money of the constituent.

In case of open purchase position undertaken on

behalf of constituents, the trading Members shall be at

liberty to close out transactions by selling derivatives

contracts, in case the constituent fails to meet the

obligations in respect of the open position within next

trading day for the execution of the full contract or

within next trading day of the contract note having

been delivered, unless the constituent already has an

equivalent credit with the Trading Member. The loss

incurred in this regard, if any, shall be met from the

margin money of the constituent.

In case of open sale position undertaken on

behalf of the constituents, the Trading member shall be

at liberty to close out transactions by effecting

purchases of derivatives contracts if the constituent

fails to meet the obligation in respect of the open

position within the next trading day of the transaction

having been executed on the F & O segment of the

ssm 8 arbp1033.09

exchange for the concerned settlement period. Loss on

the transactions, if any, shall be deductible from the

margin money of the constituent.

9 Clause 10 of Member Client Agreement as as under:-

"10. Provisions in the event of a default:- Without

prejudice to the Stock Broker's other rights (including

the right to refer a matter to arbitration), the Stock

Broker shall be entitled to liquidate/close out all or any

of the client's positions as well as securities placed as

margin for 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. Any and all losses and financial

charges on account of such liquidation/closing-out

shall be charged to and borne by the client. Such

liquidation/close out will be without any prior

reference or notice to the client. The Stock Broker is

hereby fully indemnified and held harmless by the

ssm 9 arbp1033.09

Client in this behalf. Such liquidation or close out of

positions shall apply to any segment in which the

Client does business with the Stock Broker."

10 The Petitioner is a registered member of NSEIL in Cash

and F & O Segment and also registered Stock Broker with

Securities and Exchange Board of India (for short, SEBI).

11 The Petitioner averred with regard to the nature of

transaction and its procedural aspect in the following words,

which was not specifically denied:-

"7. That it is pertinent to mention that there are

various trades in stock market viz. Trades in Cash

Segment and Trades in Futures & Options Segment.

The Cash Segment is in relation to buying and selling

of shares. The Future & Options Segment is used in

the derivative transactions, wherein future contracts

and options are transacted. It is submitted that a

"Future Contract" is an agreement between the two

ssm 10 arbp1033.09

parties to buy or sell an asset/commodity at a future

date and at a pre-agreed price. On the other hand

"Options" are contracts and are of two kinds i.e. "Call

Option" and "Put Option". "Options" contracts written

by the Seller that conveys to the buyer the right, but

not the obligation, to buy (in the case of a call option),

or to sell (in the case of a Put Option) a particular

asset/commodity, at a particular price (Strike

price/Exchange price) in future. In return for granting

the Option, the seller collects a payment (the premium)

from the buyer. These contracts on the National Stock

Exchange (NSE) have one month, two months and

three months expiry cycle, which expires on the last

Thursday of the every month. The assets/ commodities

under Option contracts are bought and sold under the

one contract, which is referred as Lot Size.

8 That in the present case, the Respondent has sold

a Put Option. The Put Option gives the buyer, the right

to sell the underlying product, at strike price, specified

in the Option. For selling the Option, the writer of the

ssm 11 arbp1033.09

Option charges a premium. The profit/loss that the

buyer makes on the Option depends upon the spot

price of the underlying. Whatever is the buyer's profit

is the seller's loss. If upon the expiration, the spot price

happens to be below the strike price, the buyer will

exercise the option on the writer. If upon the

expiration, the spot price happens to be below the

strike price, the buyer will exercise the option on the

writer. If upon the expiration, the spot price of the

underlying is more than the strike price, the buyers let

his option unexercised and the writer gets to keep the

premium. The loss that can be incurred by the writer

of the Option is the maximum extent of the strike price

(since the worst that can happen is that the asset price

can fall to zero thus, the losses can be unlimited)

whereas the maximum profit is limited to the extent of

the upfront premium.

9. That the writer of the Put Option writes a

contract by which it sells the right to sell the

underlying at a future date to the Put Option Buyer. In

ssm 12 arbp1033.09

case of adverse market movement, the losses of the

option writer can be unlimited. Therefore, it would be

a good strategy for the Put Option writer to sell Futures

in the underlying in order to minimize the losses. This

strategy is known as Hedging."

12 The Respondent was admittedly registered as a Net

Broking Client with the Petitioner and accordingly executed the

Client Registration Form, Member Client Agreement and Risk

Disclosure Document. The Client ID was accordingly allotted to

him. The Applicant was provided with Login ID and Password

for using the software "Angel Anywhere" to access the

statements of Accounts and other records maintained by the

Petitioner on its Back Office Website. The business was

accordingly conducted by the Respondent from 4 July 2008.

There was no dispute till 16 October 2008. No objection

whatsoever raised with regard to the contract notes also and

therefore, payments were made from time to time by the

Respondent. The Respondent executed transactions on 17

October 2008 in his Account. He was in net shortfall of

ssm 13 arbp1033.09

Rs.49,19,952.85 towards margin requirement. The Branch

Manager of the Petitioner called the Respondent and informed

about the extra exposure limit which was provided by mistake

and therefore, was advised to square off the outstanding by 20

October 2008 afternoon. On 20 October 2008, the Respondent

unable to open his website as his login password was locked

and therefore, he could not carry out any transactions. It was

also informed, when inquired, by the Petitioner's officer that

Applicant's account would be squared off. Had the login

password was made available, the Respondent would have

earned profit of Rs.11,80,000.00. The market was highly

illiquid on 20 October 2008. There was technical problem with

regard to the software. As per the Petitioner, the software

"Angel Anywhere" was having some glitches, which allowed

premium earned on Options sold erroneously being taken into

account for further limits. Realizing that the system was

permitting enhanced limits on premiums earned, the Applicant

went on selling Options without any regard to the risk exposure

and in the process sold 9750 NIFTY Puts for Rs.1,33,56,933.00.

The open positions, ultimately, were squared off over 3 days

ssm 14 arbp1033.09

from 20 October 2008 to 23 October 2008, to avoid losses by

hedging the open positions with the knowledge of the

Applicant.

13 The Arbitrator has held, in my view, wrongly and has

failed to take note of such type of business transactions that it is

not always possible and accepted mode that entire outstanding

position can be squared off at one stroke. In a given case, it

took three days to square off for the open position. There is

nothing on record to deny this fact. Therefore, instead of one

stroke, the Stock Broker takes three days unless malafide and

extraneous intention shown and/or reflected, it is difficult to

accept the reasoning given by the learned Arbitrator, that the

Petitioner unable to square off the entire outstanding position

on the day.

14 So far as the brokerage charges are concerned, based

upon Circular dated 5 January 2007, the Respondent never

objected to the same at any point of time. Therefore, there was

no question of permitting the Respondent to re-agitate the issue

ssm 15 arbp1033.09

for the first time, merely because the dispute arise between the

parties. There is no question of granting some relief to the

Applicant-Respondent because it is asked for.

15 So far as the rejection of counter-claim is concerned based

upon the reasoning given in para 13 and as quantified, the

counter-claim of Rs.2,01,269.65 was not considered except the

Cash Segment of Rs.22,646.677, as there was no dispute with

regard to this claim.

16 The Arbitrator has awarded 12% interest on the amount

so arrived at. There is material placed on record by the

Petitioner to show that the Arbitrator was wrong in arriving at

the conclusion and the calculation so made in paragraph 13 of

the Award. A decision was based upon the squaring off action

on 20 October 2008. There is nothing on record to show, on

what basis, the Arbitrator has selected and/or taken the rate of

Rs.1352.15 Paise. The lowest rate of Rs.1,260.00, on 20

October 2008. There is no material on record, even the basis

and/or specific pleading about the mentioned rate of

ssm 16 arbp1033.09

Rs. 1352.15 paise, as taken and calculated and accordingly

figures were arrived at in para 13.

17 There is nothing placed on record by the Respondent that

he actually suffers some losses on 20 October 2008, basically

when the learned Arbitrator has accepted the Squaring off 147

contracts out of 195 contracts, sold by the Respondent on 17

October 2008, on 20 October 2008 @ 1354.57 Paise. The issue

was only of remaining 48 contracts, which were not squared off

on 20 October 2008. The learned Arbitrator, in my view, has

failed to consider the submissions and the material placed on

record by the Petitioner justifying their action. There is nothing

on record to show neither the reasonings are given that the

action so taken by the Petitioner was unjust, malafide and not

within the framework of Rules and Regulations and the nature

of business.

18 The Arbitrator ought to have, in my view, even in such

cases, given findings based upon the material, if any, placed by

the Respondent that he actually suffer losses because of this

ssm 17 arbp1033.09

action and/or inaction on the part of the Petitioner. There is

nothing on record to justify even the same.

19 Admittedly, the Respondent never made investment in the

trading at all and done the business entirely at the risk, and

therefore, granted award basically on the ground that 48 NIFTY

Puts should have been squared off on 20 October 2008, in my

view, is without any basis and incorrect. The Petitioner in the

Petition has admitted and given justification/calculation made

by the Arbitrator in para 13 of the Award, that the Respondent

is entitled at the most not more than Rs.2,74,265/-. But the

Arbitrator has passed the award of Rs.6,82,281.21.

20 There is nothing on record to show that why the

Arbitrator has taken opening balance of Rs.4,08,016.21 as on 17

October 2008, based upon the closing balance of Rs.4,67,904/-

on 16 October 2008, basically when the open interests in the

market and had contracted a liability at the close of the market

on 16 October 2008 was Rs.4,67,904/-. In any way, the

Arbitrator has not considered this aspect also.

      ssm                                18                            arbp1033.09




                                                                         
     21    The case is made out to remand the whole matter for re-




                                                 

hearing. I have already observed in M/s. Gulraj Engineering

Construction Co. Vs. Hotel Corporation of India Ltd.

(Arbitration Petition No. 341 of 2009 dated 7 September

2012 that the Court under Section 34 of the Arbitration Act, has

empowered to remand the matter.

Resultantly, the following order:-

ORDER

a) The impugned award dated 29 August 2009,

is quashed and set aside/modified except the

award of costs.

b) The matter is remanded for fresh hearing on

all points.

           c)    The hearing is expedited.

           d)     All points are kept open.





           e)     The parties to take steps accordingly.

           f)     There shall be no order as to costs.     


             
                                             (ANOOP V. MOHTA, J.)