The Bombay High Court has delivered a decisive clarification on the limits of arbitral discretion in stockbroker-investor disputes, holding that brokerage earned on authorized trades cannot be refunded merely to achieve equitable outcomes. This judgment reinforces the principle that arbitral tribunals must adhere strictly to contractual terms and cannot invoke equity to override clear findings of investor consent.
Background & Facts
The Dispute
The dispute arose from trading activities conducted by Mateen, an unregistered individual who gained access to the trading account of Shashi Mehra HUF, a senior citizen and Chartered Accountant. Mateen, posing as an Authorized Person (AP) of Nirmal Bang Securities Pvt. Ltd., executed over 1,000 crore rupees worth of trades across Equity, F&O, and Currency Derivatives segments in just 57 days. The trades resulted in losses of approximately Rs. 2.06 crores and generated brokerage of Rs. 78.66 lakhs. The Respondent later claimed the trades were unauthorized and sought return of shares or their value, along with compensation.
Procedural History
The case progressed through multiple forums:
- April 2021: Respondent filed complaint with NSE’s Investor Grievance Redressal Committee (IGRC), alleging unauthorized trades and excessive brokerage.
- January 2022: IGRC held both parties responsible and ordered refund of 75% of brokerage.
- October 2022: Lower Arbitral Tribunal enhanced the refund to 100% of brokerage, citing equitable principles and brokerage as the primary motive behind trades.
- March 2023: Appellate Arbitral Tribunal upheld the 100% refund order.
- April 2024: Petitioner filed Section 34 petition before the Bombay High Court challenging the awards.
Relief Sought
The Respondent sought restoration of sold shares or their equivalent value, plus Rs. 10 lakhs compensation for mental harassment. He did not seek refund of brokerage as an independent claim.
The Legal Issue
The central question was whether an arbitral tribunal can direct a stockbroker to refund brokerage earned on trades that have been conclusively held as authorized by the investor, solely on grounds of equity or regulatory non-compliance.
Arguments Presented
For the Petitioner
The Petitioner argued that the trades were authorized, as confirmed by the Respondent through oral and electronic acknowledgments, contract notes, and ledger signatures. Reliance was placed on Erach Khavar v. Nirmal Bang Securities, Sharekhan Ltd. v. Monita Kisan Khade, and Ulhas Dandekar v. Sushil Financial Services to establish that once trades are confirmed, losses cannot be shifted to the broker. It was contended that the arbitral awards ignored material evidence of Respondent’s consent and engaged in impermissible equitable intervention.
For the Respondent
The Respondent argued that the Petitioner colluded with Mateen to generate excessive brokerage, citing irregularities such as trading before AP registration, sharing brokerage with unregistered persons, and failure to verify KYC documents. He relied on Kotak Securities Ltd. v. Bipin Heerachand Jain and Batliboi Environmental Engineers v. Hindustan Petroleum to argue that arbitral tribunals may apply equitable principles to prevent unjust enrichment. He emphasized the Respondent’s vulnerability as a senior citizen with hearing impairment.
The Court's Analysis
The Court undertook a rigorous doctrinal review of Section 28 of the Arbitration and Conciliation Act, 1996, and established that arbitral tribunals lack inherent power to award relief not prayed for or not grounded in contractual breach.
"The arbitral tribunal is bound to decide the dispute strictly in accordance with the terms of the contract... unless the parties have expressly authorized it to decide ex aequo et bono."
The Court found that the IGRC and both Arbitral Tribunals had correctly held the trades as authorized, based on the Respondent’s repeated confirmations, failure to object for months, and continued association with Mateen even after transferring his account to Tradebulls. The Court emphasized that the Respondent’s conduct demonstrated consent, not coercion.
The Court rejected the notion that high brokerage volume implied fraudulent intent, noting that Rs. 66.66 lakhs on a turnover of Rs. 1,057 crores was commercially reasonable. The conclusion that trades were executed solely for brokerage generation was deemed speculative and unsupported by evidence.
The Court further held that invoking equity to refund brokerage was a violation of Section 28(3), which mandates adherence to contractual terms. The awards amounted to a form of "panchayati justice" - a 50:50 compromise in the absence of legal basis - explicitly condemned in Prakash Atlanta v. NHAI and Dhwaja Shares v. Sunita Khatod.
The Court also dismissed the relevance of regulatory lapses, citing Erach Khavar and Sharekhan Ltd., holding that such lapses may attract SEBI/NSE penalties but cannot create civil liability for losses where no breach of contract is established.
"If the trades are valid, charging of brokerage is also automatically valid. If the Respondent is liable to bear losses arising out of trades, he must also bear the brokerage on the said amount."
The Court noted that the Respondent’s status as a senior citizen did not override his professional competence as a Chartered Accountant, nor did it justify circumventing contractual principles.
The Verdict
The Petitioner won. The Court held that brokerage cannot be refunded for authorized trades, even if regulatory irregularities exist or equitable considerations appear compelling. The arbitral awards directing refund of brokerage were set aside as contrary to the fundamental policy of Indian law under Section 34(2)(b) of the Arbitration Act.
What This Means For Similar Cases
Arbitral Tribunals Cannot Invent Relief
- Practitioners must ensure claims are precisely pleaded; tribunals cannot grant relief not sought, even if it seems "fair."
- A claim for return of securities cannot be converted into a claim for brokerage refund through judicial creativity.
- Any attempt to award damages based on equity without express contractual authorization is void under Section 28(2).
Regulatory Non-Compliance ≠ Civil Liability
- Brokers may face SEBI/NSE penalties for KYC failures, pre-trade confirmation lapses, or AP registration delays - but these do not automatically trigger liability for client losses.
- Investors cannot use regulatory breaches as a backdoor to recover losses from authorized trades.
- Courts will not permit "regulatory arbitrage" where investors seek to disown trades after losses occur.
Consent Is Paramount in Trading Disputes
- Oral confirmations, electronic contract notes, ledger signatures, and silence over extended periods constitute valid consent.
- Continued association with the same third party after losses (e.g., transferring account to another broker but retaining the same advisor) is a clinching factor against claims of unauthorized trading.
- Investors who voluntarily hand over login credentials and confirm trades cannot later claim ignorance.
