The Bombay High Court has clarified that the absence of pre-trade authorization under SEBI guidelines does not, by itself, establish unauthorised trading by stock brokers. The judgment underscores that arbitral tribunals must evaluate the totality of circumstances - including conduct, capacity, and evidence of consent - to determine whether trades were genuinely authorised. This ruling reinforces the principle that regulatory compliance alone cannot override factual inquiry in arbitration.
Background & Facts
The Dispute
The dispute arose from alleged unauthorised futures and options (F&O) trades executed in the demat accounts of Vijay Vithal Sawant and Pradnya Vijay Sawant, retired senior citizens and constituents of Dealmoney Commodities P. Ltd., a registered trading member of the National Stock Exchange. The Respondents claimed their relationship manager initiated trades without consent, misrepresented the risks of F&O trading, and coached them to respond affirmatively to scripted phone calls. The entire portfolio was wiped out within months.
Procedural History
- August 2020: Respondents filed a complaint with the National Stock Exchange’s Grievance Redressal Committee (GRC), alleging unauthorised trades.
- GRC Decision: Found no conclusive evidence of unauthorised trading but noted absence of pre-trade call recordings; awarded partial compensation to Pradnya only.
- May 2024: Sole Arbitrator upheld Respondents’ claim, holding trades unauthorised and ordering reinstatement of portfolio or payment of original value with 18% interest.
- October 2024: Appellate Panel of Arbitrators modified the award, directing payment based on prevalent scrip rates as of the date of the Sole Arbitrator’s award.
- February 2026: Petitioners challenged the Appellate Panel’s award under Section 34 of the Arbitration and Conciliation Act, 1996.
Relief Sought
The Petitioners sought to set aside the Appellate Panel’s award on grounds of patent illegality: (1) failure to consider documentary evidence of consent, (2) misinterpretation of SEBI Circular 22/03/2018, and (3) granting relief not claimed by Respondents. The Respondents sought confirmation of the award, arguing the trades were blatantly unauthorised and the modification was equitable.
The Legal Issue
The central question was whether the absence of pre-trade authorization under the SEBI Circular dated 22nd March 2018 automatically renders trades unauthorised under Section 34 of the Arbitration Act, or whether arbitral tribunals may consider the broader factual context - including conduct, capacity, and evidence of deception - to determine actual consent.
Arguments Presented
For the Petitioner
The Petitioner argued that the Appellate Tribunal erred by treating non-compliance with the SEBI Circular as conclusive proof of unauthorised trading. It relied on Ulhas Dandekar v. Sushil Financial Services Pvt. Ltd., which held that the Circular’s pre-trade confirmation requirements are directory, not mandatory, and that arbitral tribunals must examine all evidence - including SMS logs, ECN records, and call transcripts - to determine actual consent. It contended that the Respondents’ repeated acknowledgment of trades via SMS and email, coupled with their own activation of the F&O segment, demonstrated implied consent. The Petitioner further argued that the Tribunal’s modification of the award to award scrip value as of the date of the original award exceeded the Respondents’ claim and violated the fundamental policy of Indian law.
For the Respondent
The Respondents countered that the trades were not merely procedurally flawed but substantively unauthorised. They presented call transcripts showing their relationship manager initiated calls from one number and instructed them to accept calls from another, where they were coached to say only “yes” or “ok.” They highlighted their lack of financial literacy, absence of any payout from trades, and failure by the Petitioner to produce an affidavit from the relationship manager. Relying on Erach Khavar v. Nirmal Bang Securities and Sharekhan Ltd. v. Monita Kisan Khade, they argued that blatant unauthorised trading - where the broker initiates trades without consent - is akin to theft and cannot be excused by post-trade confirmations or silence.
The Court's Analysis
The Court examined whether the Appellate Tribunal’s findings were perverse or based on no evidence, as required under Section 34 of the Arbitration Act. It held that the Tribunal’s conclusion was not based solely on non-compliance with the SEBI Circular, but on a cumulative assessment of multiple factors: the Respondents’ advanced age and lack of familiarity with F&O trading, the misrepresentation of risks, the scripted nature of call confirmations, and the absence of any payout or physical statements.
"The concept of pre-trade and post-trade confirmation applies where the trading is by the Respondent or by an authorised person of the Respondent. In those cases, the trading member would seek confirmation... The pre-trade/post-trade confirmations lose significance where the material on record shows initiation of the trade by the trading member’s employee."
The Court distinguished Ulhas Dandekar and Erach Khavar, noting that those cases involved clients who had actively participated in trading or had authorised representatives. Here, the trades were initiated by the broker’s employee without any express or implied authority. The Court emphasized that the Respondents’ silence could not be construed as consent, particularly given their demonstrated incapacity to understand contract notes or SMS alerts.
The Court further held that the Appellate Tribunal’s modification of the award to award scrip value as of the date of the original award, rather than the original portfolio value claimed, constituted a clear departure from the relief sought. It cited TJSB Sahakari Bank v. Amritlal Shah and John Peter Fernandes v. Saraswati Ramchandra Ghanate, affirming that arbitral tribunals cannot invoke equity to grant unclaimed relief absent express authorization under Section 28(2) of the Arbitration Act.
The Verdict
The Petitioners partially succeeded. The Bombay High Court set aside the Appellate Tribunal’s modification of the award but upheld its finding that the trades were unauthorised. The Court restored the original award of the Sole Arbitrator, directing payment of the original portfolio value with 18% interest from the date of the first complaint. The award was confirmed in full except for the erroneous relief granted.
What This Means For Similar Cases
Unauthorised Trading Is Not Defined by Procedure Alone
- Practitioners must argue that unauthorised trading is determined by substance, not form: initiation by the broker, lack of client understanding, and absence of genuine consent are decisive.
- Silence or delayed objection to SMS/email confirmations cannot be equated with consent where the client is a layperson with no trading experience.
Regulatory Non-Compliance Is Not a Standalone Ground for Setting Aside Awards
- SEBI Circulars are regulatory guidelines; their breach invites penalties but does not automatically invalidate trades in arbitration.
- Arbitral tribunals must weigh all evidence - including call transcripts, account statements, and client capacity - to determine actual intent.
Relief Must Be Tethered to the Claim
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Arbitrators cannot award relief not prayed for, even in the name of equity.
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Where an award contains both valid and invalid portions, courts may sever the erroneous part and uphold the remainder under Section 34(2).
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If a claim seeks reinstatement of original portfolio value, awarding current market value is a material alteration and must be set aside.
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Always verify that the relief granted in an arbitral award precisely matches the pleadings.
