BEFORE THE SOLE ARBITRATOR JUSTICE K.

SAMPATH
IN THE MATTER OF ARBITRATION UNDER THE BYELAWS RULES AND REGULATIONS OF NATIONAL STOCK EXCHANGE OF INDIA LIMITED

ARBITRATION MATTER A.M.NO. CM/C 0016 /2011 BETWEEN Umapathy S, 537. Main Road, Shevapet, Salem PAN AAFPO 0298M AND Networth Stock Broking Ltd. Greenways Road, Fairlands Salem 16 Head Office:#5,II Floor, Church Gate House 32/34 Veer Nariman Road, Fort Mumbai 400 001 Trading Member /Respondent
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Constituent/ Applicant

1. Applicants case: 1.1 2005 He opened a demat and trading account with the respondent in April

mainly for dematerialising the shares which were in physical form and for

cash market segment. He did not transact any business from 2005 to 2009. He also did not give any order for sale/purchase. Suddenly in October 2009, the applicant started receiving contract notes from the respondent in printed form that too in segments like futures and options for which he had not opted nor did he have any knowledge about. He approached the respondents branch office at Salem on 4.11.09 and informed them of his suspicion and instructed them not to transact any business in his account. In June 2010 he received a phone call from the respondent for verification of his address and his landline phone number. He enquired about his holdings and their then value. The information he got was not in conformity with his original holding. He had also not received any contract from the respondent after his initial complaint in November 2009. Mr. Lakshmanan the Officer in charge at that time showed the applicant a set of holdings in the compute screen and also gave a print out duly signed by him. The respondent had traded in F&O segments in the applicants account using POA given by the applicant and to compensate the loss that had resulted, the respondent sold the shares from the applicants account. There is a
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shortage of shares as set out in the application. The applicant wrote to the respondent and there being no response he wrote NSEIL Investor Grievance Cell. IGC held two meetings. As the respondent gave vague and evasive replies IGC could not resolve the matter. The applicant has therefore filed the present application for replacement of (1) the shortfall in shares, (2) benefit of dividends and (3) bonus rights in KVB after adjusting the premium from the applicants claim. The applicant has quantified his claim in money terms the details are given at the end of the award. 1.2. 2. follows: 2.1 The mere fact that the applicant had applied for dematerializing his shares, it cannot mean that he did not want to trade. He had opened the account in the cash segment, NSE F&O and BSE F&O. He had bought and sold shares in the NSE cash segment during the financial years 2006-2007 and 2007-2008. He had also made cheque payment of He made a payment of 2012 on 24.7.07 and squaring of the account to zero. 4883 on 11.12.07 towards his 6,52,000/- on 15.12.07 and The applicant has filed 12 documents along with the application. They On notice being served on it the respondent filed its counter stating as are numbered as Exhibits A1 to A12.

purchases. The respondent had sent physical contract notes and ledger statements to the applicants registered address. The applicant has admitted trades and confirmed the receipt of contract notes prior till October 2009. 2.2 After obtaining ECN consent from the applicant on 23.11.2009, the respondent had sent digital contract notes to the email id provided by the applicant. According to the applicant only from the phone call from the respondent in June 2010 for verifying his address and landline number that he came to know about the shortage in his holdings. But then he had stated that he was shocked to receive the contract note in October 2009. He however kept quiet about the same. Though he put forward a complaint to the branch on 4.11.09, any prudent person in his place would always make heaven and earth together and would have reached personally to the branch office and would have insisted in getting the details and to make sure that no further damage is done till the matter is resolved. It is also possible t hat the applicant could have been advised to and impressed upon to trade in futures at a later stage and in the process made losses which the applicant is trying to put the onus on the broker. The respondent in the above circumstances denies any unauthorised trading in the applicants account.
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2.3

Along with the counter/defence statement the respondent has filed

three annexures as documents. They are marked as Exhibits R1 to R3. 3. Hearings: 3.1 The first hearing was fixed for May 27. On that day arguments were heard in part. The applicants authorised representative Mr. U. Manikandan sought certain documents from the respondent. He was asked to send a requisition to the respondent through NSEIL. In the course of the arguments Mr. Manikandan relied on the minutes of the inspection meeting at the Salem branch of the respondent on 17.4.2010 in support of the applicants case that there was clear admission on the part of the respondent that there was unauthorised trading in the account of the applicant at the Salem branch of the respondent. The respondents representative Mr. S. Magesh Senior Manager was asked to respond. I adjourned the case to 14.6.11. 3.2 On 14.6.11, Mr. Magesh sought further time for production of documents. I adjourned the matter to 11.7.11 which I subsequently changed to 14.7.11. On 14.7.11, I reserved orders however directing the respondent to produce within a week POD for ECN and proof of deposit of cheque. The representatives concluded their arguments. 4. Points for determination 1) Whether there was unauthorised trading in the account of the applicant by the respondent? 2) If so what is the relief that can be granted to the applicant? 5. 5.1 5.1.1 Discussion and findings: Before proceeding further in the present case, it is eminently necessary The applicant has filed 12 documents. The first document Ex.A1 dated

to have a look at the contents of the documents filed on either side. 4.11.09 is his letter to the Salem branch of the respondent stating that he entertains a doubt that without his knowledge transactions are taking place in his account an d that the respondent should not make any transaction without delivery slip. He gives his mobile number as 9842967126 and wants the respondent to send message to his mobile whenever transactions are made. Ex.A2 dated 17.6.10 is the next letter from the applicant to the complaint department of the respondent at Mumbai. This letter says that after Mr.Lakshmanan took over as area head of the respondent, the applicant received a statement on 28.10.09 giving the applicants stockholding as follows: IOB 300 shares; KVB 1863 shares; R Power 27 shares; SBI 67 shares and
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Syndicate bank 200 shares. The applicant was receiving contract cum bill regularly. As the applicant entertained a doubt he gave a complaint to Mr. Laxman. After that the applicant did not receive the contract cum bill. The statement received now shows shortages as follows: KVB 568; R Power 7 and SBI 67. The letter requests the respondent to clear our shortages of shares and report us as quick as possible. To applicant enclosed copies of the statement and the complaint letter to Ex.A2. Ex.A3 is the email complaint dated 9.7.10 to the head office with the same contents as Ex.A2. This email further says that the applicant has also given a complaint to the respondent, Salem branch on 17.6.10. The letter calls upon the respondent to credit the shortage shares to the applicants demat account as otherwise the applicant would take legal steps. Under Ex.A4 dated 14.7.10 the applicant writes to the Regional Manager, SEBI Chennai tracing the history relating to his opening the account with the respondent, how till 2009 September he had no problem with the respondent, how from October 09 he started receiving contract notes from the respondent when he had not placed any orders with the respondent, how the respondent had unauthorisedly been trading in Futures and Options in the applicants account and how to compensate for the loss the broker had sold the applicants shares in his DP account without his knowledge and consent using the POA given to the respondent resulting in the depletion of the applicants share holding. The letter gives details of the shortage and also mentions that the applicant had not been made any payment during the said period. The letter mentions about the written complaint given by the applicant on 4.11.09 to the respondent and the further complaint on 17.6.10 and the reminder dated 9.7.10. The letter makes a pointed reference to the applicant not having an email id at the time of opening the account or at any time subsequently and hence he had no knowledge of the transactions in his account since he had no intention to sell his shares. The letter requests SEBI to take up the matter and arrange for replacement of his shares illegally taken by the respondent. The next exhibit Ex.A5 is undated. It has for reference the communication from NSEIL Chennai region dated 19.8.10. Apparently SEBI had forwarded the complaint sent to it to NSEIL. NSEIL had invited the comments from the respondent and forwarded it to the applicant and invited his response. Ex.A5 mentions the above communications and states further as follows: The KYC form copy given to the applicant at the time of opening the account did not give any email id and there could never have been any consent given by the applicant
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for ECN. A perusal of the ledger account for the period 28.5.05 to 30.8.06 would show payment entries by the applicant relating only to demat charges. The ledger account showing credit of 6,52,000/- by cheque on 5.12.07, later reversed on 12.12.07 and again given credit on 15.12.07 are all false entries not pertaining to the applicants bank at all as would be evident from the xerox copy of the bank pass book for the said period enclosed. The idea in opening the account with the respondent was only to demat his holdings. Since 5.10.09 there were transactions done in his account without his knowledge. When the applicant met the area head Mr.Lakshmanan and complained, the latter conceded that there had been a mistake and that it would be corrected. He also gave the applicant a statement of holding duly stamped and signed by him which correctly showed the applicants holding, copy of which is enclosed to the letter. When the company found out that there were irregularities in the Salem branch, there was a meeting in the presence of the respondents officers Mr. Magesh and Mr. Ravikumar and the minutes clearly showed that there were unauthorised trading in the accounts of their clients, naked debits and off market transfer in about 20 accounts including the accounts of the applicant and his wife Mrs Rajalakshmi and it was in conclusion decided that the accounts of the applicant and his wife could be taken as convenient to resume further trading with NBFC support to recover losses incurred. The respondent had also sent a copy of a cheque issued by one Mr. Premanand on HDFC Bank for 520 which had no relevance to the applicant or his complaint. The next document Ex.A6 dated 20.10.10 is the minutes of the resolution meeting held at the Exchange premises between the complainant and the respondent. The respondent was asked to submit the following documents on or before October 27,2010.
1. Provide more details on the pay in of details 2. Provide contract notes for the purchase of shares of IOB, KVB, Reliance Power and Syndicate Bank, as it is reflected in transaction statement as on 22.3.10 3. ECN mandate provided by the applicant 4. Proof of dispatch of welcome kit sent to the applicant intimating his login and P/w to login to online portal N GRIP 5. Provide justification for issuing a wrong holding statement to the complainant as on 28.10.09 6,52,000/- in the account of the applicant on December 05,2007, vide cheque number 196242 along with copy of cheque and bank

6. Confirm if any action has been taken by the respondents Salem branch on receipt of
letter dated November 04, 2009 from the applicant

Ex.A7 dated 2.11.10 is the respondents reply to Ex.A6.

1. The amount of 6,52,000/- credited to client id 143027 is on the basis of the then information forwarded by the branch. Since this is related to 2007, the proof in terms of information forwarded is not traceable at the moment 2. Copy of contract notes for purchase of IOB,KVB, Reliance Power and Syndicate Bank on 22.03.10 is enclosed 3. ECN mandate enclosed 4. Proof of dispatch of welcome kit-The respondent has a practice of outsourcing the ware house activity and also relates to the time of account opening 2005- in the process of receiving 5. The difference in holding statement cannot be ascertained as the client has taken copy from the RM for 28.10.09, whereas the statement submitted by the head office is the correct statement. 6. As the complaint was given to the Salem branch the head office had not received the same and after enquiring with the branch the same is not traceable

Ex.A8 is undated and is the alleged consent for delivery of electronic contract notes/bills/confirmation notes through email. Email Id is given as Umapth572@gmail.com and mobile number is given as 9500949631. ( The applicant has disputed his signature in the document.) Ex.A9 dated 24.11.10 is the response from the applicant to Ex.A8. Ex.A9 expresses total dissatisfaction to the contents of Ex.A8 and in particular to items 1, 4 and 6. As regards point 2, when he had not placed any order how could they buy shares in his account particularly ignoring the complaint dated 4.11.09(Ex.A1). In fact there was no response to Ex.A1.There was also no demand for money or payment to the applicant. As regards ECN consent (item3), email id had been generated as an after thought since the mobile number is not applicants. The signature had not been obtained from the applicant and no confirmation letter was sent to him. The reason given for the holding statements being different is unacceptable Ex.A10 is the minutes of the branch visit held on 17.04.10. It was a fact finding mission on client account losses (Unauthorised transaction done in client codes). The substance of what is recorded is as follows: There were unauthorised transactions in the accounts of several clients including the applicant and his wife Mrs. Rajalakshmi and that they were done for the development of the business in the branch at the instance of Mr.Lakshmanan Area Head and it was in conclusion decided that the accounts of the applicant and his wife could be taken as convenient to resume further trading with NBFC support to recover losses incurred. Ex.A11 contains two sheets.
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The first sheet is the holding statement of the applicant given by the head office of the respondent while the second sheet is given by the Salem branch. Both sheets are dated 28.10.09. There is a discrepancy seen with regard KVB holding. Ex.A12 is the copy of the complaint dated 16.7.10 given by the applicant to the Salem branch. The complaint is acknowledged and it is further stated that it was being sent to the head office for further proceedings. 5.1.2 Coming to the respondents documents they are three in number. Ex.R1 is the KYC. It is to be noted that the mobile number given in this is 9445521058 while the mobile number given in the disputed consent document (Ex.A8) for sending contract notes in electronic form is 9500949631. Even in the letter dated 4.11.09(Ex.A1) the mobile number given is different from this one 9842967126. Ex.R2 series are the copies of the bills of transactions pertaining to the financial years 2006-2007 and 2007-2008. Ex.R3 is the copy of the ECN consent and it is the same as Ex.A8. 5.2 The contents of the exhibits filed in the proceedings set out above give the lie direct to the respondents case. Many of the documents required to be produced both in the conciliation proceedings and in the present arbitration proceedings were not produced by the respondent citing wholly untenable reasons. In law we are entitled to draw adverse inference against the respondent for non production of the documents. The respondent has taken a stand that the applicant had given a cheque for 6,52,000/-. The amount was credited in the applicants account then reversed and then again credited. The applicant had taken a definite stand that he had not traded at all and that at no point of time did he give a cheque for such a large sum. To further substantiate his stand he produced his bank statement. But when called upon to disprove the applicants case with particulars the respondent failed miserably. It is not a small sum. It runs to several lakhs. Again when it came to production of POD the respondent cited a lame excuse that the job was outsourced and that details were awaited. 5.3 In the present proceedings also after taking permission the applicant served a notice dated 28.5.11 through NSEIL on the respondent calling for particulars. The documents called for have not been produced. 5.4 In my considered view the applicant is entitled to relief on the basis of the minutes of the branch visit by Mr. Magesh {who incidentally represents the respondent in the present proceedings} and Mr. Ravikumar if not on anything else..
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It was a fact finding mission on client account losses-unauthorised transactions done in client codes of the branch. There are codes of 13 clients given. Admittedly the codes of the applicant and his wife Rajalakshmi who has filed an independent arbitration matter against the present respondent in A.M.No. CM/C 0017/2011, are there in those 13 accounts. A reading of the minutes clearly shows that the area head Mr.Lakshmanan and the branch staff had indulged in unauthorised trading resulting in substantial number of shares being lost to the clients. There was also a strange suggestion floated that the staff could further trade with the consent of the account holders with NBFC support to recoup the losses. The minutes are telltale. The representative of the respondent submitted that action was being taken against those responsible for the leaking out of the minutes. We are not at all concerned with that. What the minutes tell us is more important. They show that there had been large scale unauthorised dealing in the accounts of the clients of the respondent by the staff of the respondent. 5.5 Again what is particularly disturbing is that the applicant was furnished with a signed copy of his holding position by the branch on 28.10.09 which tallies with the applicants record while the one furnished by the head office at the same time is different. Apparently the branch had been playing a double game giving different pictures one to the applicant and the other to the head office. However the head office cannot disown responsibility for what had happened in the branch. 5.6 The branch had been put on notice by the applicant as early as 4.11.09 that he had a doubt that without his knowledge transactions had taken place in his account that henceforth no transaction in his account should be done in his account without delivery slip. The applicant gives his mobile number and asks the branch to send message to him if any transactions were made. The receipt of this letter is not disputed in the counter by the respondent. But a queer point is made that the applicant should have moved heaven and earth and personally visited the branch obtained the details and made sure that no further damage was done till the matter was resolved. Does this mean that notwithstanding the applicants warning under the letter dated 4.11.09, the respondents staff members at Salem branch could continue to indulge in indiscriminate trading in the applicants account because th e applicant did not personally visit the branch and take steps to stem the rot? After the applicant smelt a rat and wrote to the respondent on 4.11.09 there is lull. Then in June 2010, the applicant received a statement of his stockholding and on noticing
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depletion in his shares, wrote to the head office on 17.6.10. There was no response. He sent an email on 9.7.10. It does not appear that the respondent sent any reply to this. On 14.7.10 the applicant addressed SEBI. Apparently SEBI forwarded the complaint to NSEIL Chennai 5.6 According to the respondent the applicant had bought and sold shares 2012/- This allegation is not substantiated with in the NSE cash segment during the financial years 2006-2007 and 2007-2008 and that he had made a payment of documents. The whole defence is wishy washy. Crucial documents called for were not produced on the ground that there was outsourcing and therefore not traceable. According to the respondent the amount of 6,52,000/- credited to the applicants id 143027 was on the basis of the then information forwarded by the branch and since this was related to 2007, the proof in terms of information forwarded was not traceable at that moment.(Ex.A7). That was in 2010. Even after nearly a year the respondent has not been able to furnish details particularly when the applicant has taken a definite stand that at no time did he give a cheque for the said amount. The applicant also produced his bank statement discrediting the respondents claim. The signature in the ECN mandate (Ex.A8) is disputed. There is no date given. There is discrepancy with regard to the mobile number. It is at variance with what was originally given by the applicant and subsequently under Ex.A1 dated 4.11.09. The difference in holding statements- the one given by the branch vis a vis the one given by the head office has not been convincingly explained. Letters and complaints sent by the applicant to the respondent went unresponded. The warnings were ignored and the staff members at Salem branch indulged in unauthorised trading in the clients accounts. There is nothing on record to show as what action the respondent had taken after the minutes of the fact finding visit on 17.4.10 had come to its notice Perhaps some action had been taken against the staff. But that does not in any way help the applicants cause. In the above circumstances I have no hesitation in accepting the applicants case that there was unauthorised trading in his account by the respondent. The respondent cannot disown responsibility for what had happened in the applicants account. 5.7 The next question relates to the relief to be granted to the applicant. In the application he has set out the details of his claim as follows:

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LIST A Securities taken out of his account without his consent 1. Karur Vysya Bank 2. State Bank of India 3. Reliance Power 568 Shares @ 67 Shares @ 7 Shares @ 406/share 2525/share 110/Share 2,30,608 1,69, 175 770 4,00,553

LIST B Corporate Benefits 1. 2:5 Bonus on 568 Karur Vysya Bank-227 shares @ 406/share 256/share 12/ share 92162 81408 6816 2010 1,82,396 5,82949

2.2:5 Rights on the total (568+227)795 shares-318 shares@ 3. Dividend on KVB for 2009-10 financial year 568 shares@

4. Dividend for 67 shares of State Bank of India for 2009-10 financial Year 670 @ 10 (R.D 9.2.2010) and 1340 @ 20(R.D 11.6.2010) TOTAL ( A+B)

In their counter statement the respondent have not disputed the details given in the application regarding the securities taken out of the applicants account without h is consent, the corporate benefits he would be entitled to, and the quantum or the manner in which it has been arrived at. The applicant has sent a communication dated 18.7.2011 to NSEIL stating that the details have been taken from the NSE official website. In such a state of affairs the applicant is entitled to relief 6. Consequently ARBITRATION MATTER A.M.NO. CM/C 0016 /2011 is allowed and an award is passed in the following terms The respondent shall replace 1. Karur Vysya Bank 568 Shares 2. State Bank of India 67 Shares 3. Reliance Power 7 Shares in favour of the applicant and give corporate benefits- bonus of 227 shares on 568 shares of Karur Vysya Bank, Rights of 318shares on 795 KVB shares after adjusting the premium from the applicants claim, pay dividend on KVB in a sum of 2010 for 2009-10 financial year OR In the alternative pay a total sum of 5,82949 with interest at 12% per annum from the date of the application till payment. Dated at Chennai this the 25th day of July 2011 (Justice K.Sampath) Sole Arbitrator 6816, and State Bank of India in a sum of

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