The Bombay High Court has set aside earlier arbitral awards and ruled that a broker cannot be held automatically liable for losses incurred in Futures & Options (F&O) trading solely due to failure to maintain SEBI-mandated trade confirmations, if such losses arise from procedural lapses.
In a judgment delivered on December 24, Justice Sandeep V. Marne overturned awards that had directed Sharekhan to bear 50% of speculative losses suffered by two clients. The court held that investors who silently delegate trading authority must also bear the risks associated with speculative transactions.
“This is yet another case of investors seeking to recover from stockbrokers losses incurred in trades executed by their trusted person taking advantage of the stockbroker’s failure to maintain pre and post-trade confirmations,” the court observed.
Background of the case
The ruling came in response to two arbitration petitions filed by Sharekhan challenging awards passed in favour of clients who alleged unauthorised F&O trades by an authorised person. The clients had relied on a 2018 SEBI circular that requires brokers to maintain evidence of order placement, such as call recordings or written instructions.
While the Investors Grievance Redressal Committee acknowledged that Sharekhan had failed to maintain pre- and post-trade confirmations, it also noted investor negligence due to lack of monitoring. The committee had awarded a reversal of brokerage charges and directed the broker to absorb 50% of the trading losses, a decision later upheld by an appellate arbitral tribunal.
Court’s observations
Setting aside the awards, the Bombay High Court agreed with Sharekhan’s argument that the SEBI circular is directory, not mandatory, and that its violation alone cannot automatically fasten liability on the broker.
The court relied on earlier rulings, including Ulhas Dandekar v. Sushil Financial Services and Erach Khavar v. Nirmal Bang Securities, noting that absence of documented authorisation does not necessarily imply absence of investor consent or knowledge.
“There cannot be an absolute proposition that the absence of evidence of authorisation is evidence of absence of authorisation,” the court said, quoting from the Ulhas Dandekar judgment.
Related ruling
The decision follows another recent Bombay High Court order that set aside an arbitral award directing Sharekhan to refund ₹4.87 lakh in brokerage, holding that the tribunal had taken an inconsistent and legally unsustainable view of the underlying contract.
