Anoop V. Mohta, J.@mdashThe 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 Bye-laws, Rules and Regulations of the NSEIL. 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.
2. As per the Petitioner, the basic events are as under:-
In the month of July 2008, the Respondent approached the Petitioner to open trading account in NSEIL Cash and Future option Segments. After compliance 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.
3. 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 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 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.
4. 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.
5. 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 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.
6. The Petitioner filed the counter-claim of Rs. 2,01,129.65 against the Respondent. On 29 August 2009, the impugned Award passed.
7. 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 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 exchange for the concerned settlement period. Loss on the transactions, if any, shall be deductible from the margin money of the constituent.
8. Clause 10 of Member Client Agreement 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 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.
9. 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).
10. 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 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 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 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.
11. 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 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 from 20 October 2008 to 23 October 2008, to avoid losses by hedging the open positions with the knowledge of the Applicant.
12. 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.
13. 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 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.
14. 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.
15. 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 Rs. 1352.15 paise, as taken and calculated and accordingly figures were arrived at in para 13.
16. 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 reasoning''s 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.
17. 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 action and/or inaction on the part of the Petitioner. There is nothing on record to justify even the same.
18. 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.
19. 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.
20. The case is made out to remand the whole matter for rehearing. 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 u/s 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.
