Summary: The arbitration panel of the Multi Commodity Exchange of India Limited (MCX) in the case of Arjav Chakravarti v. M/S Sharekhan Commodities Pvt Ltd. emphasized that investors must be vigilant about their trading activities and cannot claim ignorance regarding unauthorized trades in their demat accounts. The panel noted that complaints arise primarily when investors incur losses, highlighting the need for better investor education. The case of Sriram Krishnamoorthy v. M/S Angel One Limited illustrates this, where the investor lost money after disclosing sensitive information to an impersonator, leading to the dismissal of his claim against Angel One. Similarly, in Bhavana Chauhan v. ICICI Securities Limited, an investor’s claim was rejected because she was informed of the auto square-off policy that resulted in her losses. These cases reveal a troubling trend where investors may wrongly attribute market losses to trading members (TMs), confusing them with wrongful losses, which is defined under the Indian Penal Code and related statutes as losses incurred through unlawful means. The need for investor education is critical to prevent frivolous arbitration claims. Ultimately, the law recognizes that market fluctuations can cause losses, and not all losses are attributable to wrongful actions by TMs. Investors must understand the inherent risks in trading to avoid misunderstandings and wrongful claims against their brokers.
Introduction
In Arjav Chakravarti v. M/S Sharekhan Commodities Pvt Ltd., the arbitration panel of Multi Commodity Exchange of India Limited. (MCX) settled an appeal in which they stated that, “In the financial world one has to be alert and cautious otherwise he has to blame himself for the outcome.” The case dealt with the naivety of the investor in not knowing whether he received the Electronic Contract Notes (ECN) for the disputed unauthorized trades. The panel asserted that investors cannot plead ignorance regarding the trading activity in their demat accounts. They have to be aware of the market situation too as it is their money that is invested. If one examines the arbitration awards passed by the National Stock Exchange (NSE), Bombay Stock Exchange (BSE) and MCX, it can be seen that whenever there is a loss reflecting in the demat accounts investors have initiated arbitration proceedings against the trading members.
This case and many others show that investors need to be made aware about the difference between market loss and wrongful loss. This benightedness of investors is becoming an occupational hazard for Trading Members (TMs). This post clarifies the need for investor education and awareness as well as prohibiting fatuous arbitration proceedings against TMs.
Arbitration Proceedings in Stock Exchanges
NSE provides investors with three kinds of Dispute Redressal Mechanisms (DRMs) which are, a) Investor Services Cell, b) Arbitration, and, c) Appeal Mechanism. These are initially handled by the Investor Services Cell (ISC) of the exchange. If the complainant is dissatisfied with the order of the Grievance Redressal Committee (GRC) he can approach the exchange for arbitration, similarly if the TM or listed company is aggrieved by the decision they can go for arbitration. NSE entertains complaints against exchange members and listed companies. NSE has set up Regional Arbitration Centres (RACs) in India and also has a mechanism for online hearings.
In Sriram Krishnamoorthy v. M/S Angel One Limited., a person impersonated an employee of Angel One Limited, a broking company in which Mr. Krishnamoorthy opened his trading account. The impersonator asked for Mr. Krishnamoorthy’s One Time Password (OTP) to log into his trading account to solve the technical issue. Subsequently, the problem was solved, however, the next day Mr. Krishnamoorthy was dumbfounded when he saw the trades executed for the amount of Rupees 5.20 Lakhs resulting in losses of Rupees 5.14 Lakhs. Mr. Krishnamoorthy initiated a complaint against Angel One claiming compensation for the unauthorized trades. He was unsuccessful in persuading the GRC. The GRC held that since the constituent i.e. Mr Krishnamoorthy had voluntarily provided the OTP to the alleged employee of the TM, he himself is responsible for the unauthorized trades as OTP is sensitive information that should not be circulated to third parties. The sole arbitrator upheld the decision of the GRC highlighting the responsibilities of constituents. Angel One referred to the “Rights and Obligation of Stock Brokers, Sub-Brokers and Clients” , a circular published by the Securities Exchange Board of India (SEBI). It is stated clearly in the circular that the clients are responsible for the confidentiality of their usernames and passwords. Since Mr. Krishnamoorthy believed the impersonators to be the employees of Angel One, he cannot implicate Angel One for the unauthorized trades. The arbitrator in the award dismissed the claim of Mr. Krishnamoorthy.
In Bhavana Chauhan v. ICICI Securities Limited, the client claimed that ICICI Securities had no authority to square off her position before 11:30 PM. Squaring off at 4:30 PM. resulted in a loss of Rupees 33,812/-. The same amount was claimed by the client against ICICI Securities. It is a standard procedure for online customers that the TM will auto square off all open positions at 4:30 PM i.e. expiry day. The same was displayed on the website of ICICI Securities and was also intimated to the client. Various text messages and emails were sent to the client regarding the auto square-off mechanism. The sole arbitrator considering the facts held that the client was an informed investor and that she had knowledge of the risks involved in the Futures and Options (F&O) segment. It was also observed that the client requested the extension of time for squaring off because she wanted to make more profit, however, this could have made the TM vulnerable to market loss. The arbitrator noted that the loss suffered by the client was notional and was also subsequently recovered by profits on the same undisputed trades later on. The arbitrator dismissed the claim of the client.
The abovementioned awards show that investors plead ignorance only when their accounts reflect losses. Investors are oblivious to the fact that segments such as F&O are high-risk segments. These segments cannot generate profit constantly and TM cannot be held responsible for each and every loss.
Market Loss or Wrongful Loss?
Section 23 of the Indian Penal Code, 1860 (IPC) defines wrongful loss as “the loss by unlawful means of property to which the person losing it is legally entitled.” It is important to note that wrongful loss should be accompanied by wrongful gain thus this is a two-fold test. The same position is inserted in the Maharashtra Protection of Interest of Depositors Act, 2000 (MPID Act). Section 3 of the MPID Act also lays down the combined requirement of wrongful loss and wrongful gain. Both acts also emphasized the intent to cause wrongful loss or wrongful gain. TMs have no intention to cause loss to the investors. Sometimes the market is so volatile that every investor suffers a loss.
The recent Lok Sabha exit polls result can be a great example of market loss. On June 3rd, 2024 the equity index was at an all-time high. However, on the result day, the market crashed, wiping out almost Rupees 33,36,284 Crores. In these kinds of situations, loss is inevitable. In almost all the arbitration awards of the NSE, BSE, and MCX it is seen that the clients claim the trades to be unauthorized when they see a loss in their demat account.
Conclusion
A modus operandi of investors is becoming popular in the exchanges to lodge complaints even for losses as low as Rupees 10,000. Investor education should be encouraged by not only the exchanges but also the financial establishments providing broking services. TMs can take the example of Zerodha’s Varsity platform which is a free financial education resource. The law is very clear on the point of wrongful loss that it has to be accompanied by wrongful gain. It is to be noted that brokerage is a right of the broker irrespective of loss suffered by the investor hence brokerage cannot be categorized into wrongful gain. This post suggests that not all losses are caused with a wrongful intent and the same has to be kept in mind by the exchanges while entertaining complaints of investors.
Sources:
https://www.mcxindia.com/docs/default-source/investor-grievance-arbitration/arbitration-awards/2016/December/app_mum_02_30dec16.pdf?sfvrsn=196de690_0
https://nsearchives.nseindia.com/invest/resources/download/Investor_guide_complaint.pdf
https://nsearchives.nseindia.com/content/assist/arbitration/arb_NSECRO00077602324ISCIGRPARB.pdf
https://www.mcxindia.com/docs/default-source/default-document-library/mcx-sb-2023-10-770543_14-03-2024.pdf?sfvrsn=44ed779e_0
https://www.sebi.gov.in/sebi_data/commondocs/ann4rights_p.pdf
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