Introduction:
The share trading disputes are dealt with by the Stock Exchanges under the regulatory framework designed by the Securities and Exchange Board of India (SEBI). The law of limitation plays a crucial role in the setup. The Investor Grievance Redressal Mechanism (IGRM), which consists of the Investor Grievance Resolution Panel (IGRP) or Investor Grievances Redressal Committee (GRC) and Arbitration often has to face the question as to whether a dispute is barred by limitation. The issue, however, is: since when should the limitation period be calculated while deciding whether a particular matter is time-barred? This paper presents a discussion as to how the question of limitation is settled in the share trading disputes. The paper is divided into four parts. The first part presents the legal framework, the second part presents the issues, the third part discusses when a matter shall be dealt with under Article 1 of the Limitation Act 1963, and the fourth part discusses when a matter shall be dealt with under Article 137 of the Limitation Act 1963.
Legal Framework:
Section 43(1) of the Arbitration and Conciliation Act 1996 states that “the Limitation Act, 1963 (36 of 1963), shall apply to arbitrations as it applies to proceedings in court.” Article 1 of the Limitation Act 1963 states that a limitation period of 3 years shall be applicable in relation to “balance due on a mutual, open, and current account, where there have been reciprocal demands between the parties, to be counted from the close of the year in which the last item admitted or proved is entered in the account.” Further, Article 137 of the Limitation Act 1963 provides that the limitation period shall be three years in relation to other applications for which no period of limitation is provided elsewhere in the Third Division to be counted from the date “when the right to apply accrues.”
The applicability of the provisions of the Limitation Act 1963 to the IGRM, particularly the arbitration, is provided by Clause 5.1 of the SEBI Circular CIR/MRD/DSA/24/2010, dated August 11, 2010. Further, SEBI circular SEBI/HO/OIAE/IGRD/P/CIR/2022/0150 provides that “the limitation period for filing an arbitration reference with stock exchanges is one year from the date of “cause of complaint”, where; the investor has approached the listed company or registered intermediary for redressal of the complaint and, the concerned listed company or registered intermediary rejected the complaint or, the complainant does not receive any communication from the listed company or intermediary concerned or, the complainant is not satisfied with the reply given to him or redressal action taken by the listed company or an intermediary.”
The Issues:
There are three major issues related to the commencement of the limitation period for making arbitration reference with the stock exchanges: a) whether the limitation period shall be counted from the close of the year in which the last item admitted or proved is entered in the account in the case of the future and options trades and, if yes, in what circumstances; b) whether the right to apply shall accrue when the claimant became aware of the unauthorised trades in his account; and c) whether the right to apply accrues from the date of the last disputed trade.
Mutual, Open, and Current Accounts:
In the cases involving future and options segments in which a claimant accepts that he had the knowledge of the trades in his account, it has been seen that the limitation period is determined based on the provisions of Article 1 of the Limitation Act 1963. This is primarily because such accounts are categorised as mutual, open, and current accounts, as seen in the case of Motilal Oswal Securities Ltd. vs Rakshak Kapoor O.M.P. (COMM) 169/2016. However, where an investor denies having the knowledge of such trades in his account or having given the authorisation to trade in the future and option segment itself, the applicability of Article 1 of the Limitation Act 1963 becomes doubtful.
It would be difficult to establish the existence of a mutual, open, and current account in the absence of any specific authorisation given by the claimant to trade in the future and option segment. The factors that may work in favour of the investor are those that make the existence of reciprocal demands between the parties questionable, i.e., non-receipt of trade confirmations or the existence of an incorrect email address and mobile number of the claimant (trader) in the intermediary’s system. In other words, if the claimant is able to establish that there was no mutual, open, and current account, the limitation period as prescribed under Article 1 of the Limitation Act 1963 is less likely to apply.
Further, the case of Motilal Oswal Securities Ltd. vs Rakshak Kapoor O.M.P. (COMM) 169/2016 also says that a “unilateral entry made in the account would not be sufficient to extend the period of limitation.” An entry shall ideally be regarded as unilateral if it is made at the instance of only one of the parties to a transaction. In the event of unauthorised trades, the intermediaries tend to make such unilateral entries, which ultimately give rise to disputes. Accordingly, it would be difficult to deal with the cases involving unauthorised trades based on the case of Motilal Oswal Securities Ltd. vs Rakshak Kapoor O.M.P. (COMM) 169/2016 where a substantial time has elapsed in making arbitrator reference.
Based on the above, if the trades concern future and options segments, where it is established that there was a mutual, open, and current account between the parties, it shall be dealt with by the provisions of Article 1 of the Limitation Act 1963. However, where it is shown by either of the parties that there was no such mutual, open, and current account, the limitation period as provided under Article 1 of the Limitation Act 1963 is less likely to apply. The factors such as non-receipt of contract notes, ledger and bills, SMS, and other communication, including lack of specific instruction from the claimant to deal in the future and option segment may rule out the existence of a mutual, open, and current account. In such cases, it would be ideal to resort to some other provisions such as Article 137 of the Limitation Act 1963 or SEBI circulars, which have been discussed in the following section of this paper.
Rights to Apply:
The preceding section of this paper has shown that the limitation period shall be counted from the close of the year in which the last item admitted or proved is entered in the account in the disputes concerning future and options trades where the existence of a mutual, open, and current account is established. Now, this section covers the second and third issues based on the provisions of Article 137 of the Limitation Act 1963 and SEBI circulars.
Article 137 of the Limitation Act 1963 provides that the limitation period of 3 years would be counted from the date when the “right to apply accrues” to a party. Regarding the issue as to when the “right to apply” accrue to a party, the case of Motilal Oswal Securities Ltd vs Bhargav Jayantilal Bhatt (Arbitration Petition NO.258 OF 2015) shows that the arbitral tribunals often accept the date on which the claimant became aware of the disputed trades in his account relevant for the determination of limitation. Similarly, the case of Nitiyananda Rahavan vs Way 2 Wealth Brokers Private (Original Petition No.176 of 2013) shows that the knowledge of the existence of a disputed trade in the account is considered relevant for the determination of the limitation period.
Further, in the case of Smt. Shivamma Halaswamy vs M/S. ICICI Securities (A.S.NO:34/2013), the argument of the claimant that she was unaware of the trades in her account because she never placed “any order of instructions to buy or sell shares from her trading account,” could not sustain because both the arbitral tribunal and the appellate arbitral tribunal observed that the claimant did not receive the “assured return,” which itself gave rise to a “cause of action.” It is worth mentioning that the claimant had not mentioned that she had failed to receive any contract note and other trade-related documents, which was construed as something that indicates that the claimant was aware of the disputed trades in her account.
In all the aforementioned cases, the knowledge of the disputed trade has been an important element in the determination of the commencement of the limitation period. In general, it is expected that once a claimant becomes aware of unauthorised trades in his account, he shall bring a suit or commence the arbitrator proceedings without much delay, and if he fails to do so, he shall be subject to the maxim “vigilantibus non dormientibus jura subveniunt.” This is something in line with the legal principle developed in the case of Inder Singh Rekhi v Delhi Development Authority (1988) 2 SCC 338, which says that the existence of a dispute is one of the most important requirements for the appointment of an arbitrator, and a dispute arises when a claim is asserted by one party and is denied by the other.
The case of Inder Singh Rekhi v Delhi Development Authority (1988) 2 SCC 338 indicates that the right to apply shall accrue once a dispute has arisen, and accordingly, the limitation period shall commence from such date. If the legal principle developed in the case of Inder Singh Rekhi v Delhi Development Authority (1988) 2 SCC 338 is applied to the share trading disputes, the knowledge of a claimant with respect to the disputed trades becomes crucial for the determination of the limitation period. Unless a claimant was aware that some unauthorised trades were being executed in his account, he shall not be able to assert a claim. An assertion if denied by an intermediary gives rise to a dispute between the parties, which is finally taken as a start of the limitation period.
The provisions of the SEBI circular SEBI/HO/OIAE/IGRD/P/CIR/2022/0150 also reflect the same principles by saying that the limitation period shall be one year from the date of cause of complaint where the claimant has approached the registered intermediary for redressal of the complaint and the same was either rejected by the intermediary or redressal was not up to the satisfaction of the claimant (among others). The cause of complaint, which is synonymous with the terms such as “cause of action” and “right to apply” is, therefore, nothing but the date on which a claimant becomes aware of the unauthorised trades in his account.
The above interpretation is in accordance with the legal principle developed in Inder Singh Rekhi v Delhi Development Authority (1988) 2 SCC 338 because there would be no dispute unless the claimant comes to know about the existence of unauthorised trade in his account. In the absence of a dispute, it would be absurd to hold that the limitation period shall run from; for example, the date of the last disputed trade or from some other dates. This position would be valid for both cash segment trades as well as the future and options trades in which the claimants have been able to show that there was no existence of a mutual, open, and current account because of the absence of instruction from them to trade in such a segment or because of the failure of an intermediary to supply trade confirmations, viz., contract notes, ledgers, bills, and SMS (among others).
Conclusion:
In conclusion, this paper presents a discussion on how the question of limitation is settled in share trading disputes. The paper identifies three issues: a) whether the limitation period shall be counted from the close of the year in which the last item admitted or proved is entered in the account in the case of the future and options trades and, if yes, in what circumstances; b) whether the right to apply shall accrue from the date when the claimant became aware of the unauthorised trades in his account; and c) whether the right to apply accrues from the date of the last disputed trade. In response to these issues, the paper finds that in the case of future and options trades in which the existence of a mutual, open, and current account is established, the limitation period may be calculated based on the provisions of Article 1 of the Limitation Act 1963. Further, regarding the second and third issues, the paper finds that the right to apply shall accrue from the date when the claimant became aware of the unauthorised trades in his account and that the date of the last disputed trade has no relevance either from the perspective of the law of limitation or SEBI circular for the determination of limitation period.
Disclaimer: This is not professional advice. You may not rely on the opinion expressed in this article to make a business or regulatory compliance-related decision. If you are looking for professional advice, please consult a company secretary. Any comments and/or suggestions concerning this article may be sent to [email protected].
