BEFORE M.V.

BADRINATH (SOLE ARBITRATOR)

In the matter of Arbitration under the Bye-Laws, Rules and Regulations of the National Stock Exchange of India Ltd. A.M.NO.CM/C-0018/2010 BETWEEN APPLICANT
(Trading Member)

RESPONDENT
(Constituent)

M/s Sharekhan Limited A-206, Phoenix House, 2nd Floor, Senapati Bapat Marg, Lower Parel, Mumbai-400 013.

Mrs. A.P.Bhanumathi, Sheshe Gowda B.N. (Teacher) 6th Cross, Subashnagar, City: Sagar Karnataka 577 401.__________

:: 2 :: WHEREAS by its letter No.NSE/CRO/ARBN/10-109127-J dated April 19, 2010 the National Stock Exchange of India Ltd., Chennai,(NSE) conveyed that I have been selected as Arbitrator in the Arbitration Matter referred to above and had also forwarded the documents connected therewith. AND WHEREAS the claim averments are as follows:
I. PARTIES TO THE ARBITRATION MATTER

The Applicant for the Arbitration is M/s. Sharekhan Limited(SKL) having its registered office at A-206, Phoenix House, 2nd Floor, S.B.Marg, Lower Parel(W), Mumbai-400 013. The Respondent is Mrs. A.P.Bhanumathi, w/o Mr. Sheshe Gowda, B.A. (Teacher), residing at 6th Cross Subash Nagar., Sagar-577401, Shimoga Dist. Karnataka. The Applicant is a Trading Member of the NSE with Registration No. INB 231073330.

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II. STATEMENT OF CASE

2.1 The Applicant has stated that the Respondent Mrs A.P.Bhanumathi approached him and requested for opening a trading account. The Respondent executed the Member Client Agreement with the Applicant on or about the 8th October 2008 and was allotted client code 224188. In the ordinary course of business, the Applicant received orders which were executed as per her instructions. All the contract notes and bills were sent to the Respondent. Since an amount of Rs.1,27,526.79 was outstanding due and payable by the Respondent, the Applicant requested her to clear the debit balance and the Respondent had not paid. The claim amount was the balance derived after subtracting the BSE cash credit amount of Rs.1,04,853.08 from the NSE cash debit amount of Rs.2,32,379.87. The Applicant addressed a Recovery Notice dated 12/10/09 through its advocate calling upon the Respondent to pay. It has requested for directing the Respondent to pay Rs.1,27,526.79 together with interest at 24% p.a. till payment or realization and such other relief and the cost of arbitration. 2.2 In her statement of defence, the Respondent has stated that she is a client of M/s Sharekhan Ltd. through its franchisee M/s Sagar Shares & Investments (SSI) of Sagar-577401. Being a new entrant to the share market, on the assurance of Mr. H.V.Ramamurthy of SSI, she opened and started operating the account. Against her order for 100 shares, she used to receive contract note for 1000 shares and when she took up the matter, Mr. Ramamurthy was saying that it was a mistake in punching. This was repeated and her order for sale would come in the contract note as purchase and for this also the same reason of mistake in punching was given by Mr. Ramamurthy. This state continued till she received a lawyers notice and she also stopped trading because of the huge debit balance mainly due to the malpractice of Mr. Ramamurthy. The shares were squared off without proper margins and he had traded without balance in the account. She had invested upto Rs.9,75,069/- and taken out Rs.1,75,480/-. An amount of Rs.3,00,000/- by way of cheque has been brought in her account which was not her cheque.
III. CLAIM AMOUNT BY THE APPLICANT:

3.1 The Applicant has lodged a claim of Rs.1,27,526.79 thereon @ 24% per annum till payment or realization on the Respondent.
IV. ARBITRATION HEARINGS

with interest

4.1 The initial hearing was held on 10th May 2010 during which the authorized representative of the Applicant, Mr. J.Janardhanan, Regional Manager appeared. The Respondent had requested leave of absence for the hearings and had stated that she being a housewife was unable to attend the hearing in Chennai due to her monetary condition and family bindings. She had requested that the copy of the legal notice issued by her on 26-04-10 to the Applicant along with a copy of the bank

:: 4 :: statement showing the cheque No.134887 enclosed with her letter be treated as her defence. Answering questions, the Applicant stated that the Respondent was doing the trades through their franchisee, M/s Sagar Shares & Investments(SSI), Sagar, Shimoga District and generally the trades were done by telephone or by coming to the branch. Mr. H.V. Ramamurthy was the franchisee who was operating as SSI. The claim amount was the outstanding balance in the account of the Respondent as on 1-02-10. 4.2 In his rejoinder dated 05-05-10 which was received at the time of the hearing, the Applicant has stated that all the trades had been executed as per the Respondents instructions only and the contract notes for the trades were sent to the email ID mentioned in the MCA viz. bhanumathi_1969@rediffmail.com. He had also filed the POD for the dispatch of the contract notes. On 29-06-09, the Applicant executed the trades as per the instruction given by the Respondent on intraday basis and issued a cheque No.134881 and 134882 on 30-06-09. Further on 20-07-09 and 21-07-09 trades were executed on intraday basis and the Respondent issued cheque No.134884 on 21-07-09. As per instructions, on 27-08-09 and 1-09-09 stocks were purchased and due to huge debit balance, the Applicant requested the Respondent for payment or to sell off the securities. The Respondent gave the details of the cheque over the phone and she was to bring the cheque on the next day to the branch. Since the Respondent did not present the cheque as promised, the Applicant was left with no other option but to reverse the entry and sell off the securities. The Applicant sold off the securities on 2-09-09 and 8-09-09. After the sale, the Respondent again requested the applicant to purchase Aban Offshore on 8-09-09 and created more debit balance. Therefore compliance action against the Respondent was taken on 11-09-09 and 15-09-09. The Applicant has added that since the Respondent had not furnished the details of 1000 shares, he could not give the details. Although the Applicant had filed the arbitration application in March 2010, till date they had not received any complaint from the Respondent. 4.3 The Applicant was asked to file a statement of all the payins and payouts datewise, number of times the cheques bounced along with copies thereof and the bank statement, accounts statement for the entire period, contract notes from 1-07-09 and details and copy of the cheque No.134887 which got bounced. The Respondent was also asked to furnish the details of the payins made by her together with her reply, if any, to the Applicants rejoinder dated 5-05-10. Accordingly, an adjourned hearing was th scheduled on 28 May 2010. 4.4 In its submission dated 15-05-10, the Applicant had furnished some statements and had not submitted any of the documents required in the earlier hearing. In her further submission dated 18-05-2010, the Respondent has repeated that the franchisee, Mr. H.V. RamaMurthy of SSI was doing the trades contrary to her orders and he was inflating the numbers in purchases and doing the sale when purchase was ordered. Whenever she took up the matter, he said that he would adjust in due course. He had done trades to the tune of Rs.10 to 27 lakhs on many occasions without proper

:: 5 :: margin money or stock margin. She had invested Rs.9,75,069.00 and had taken out Rs.1,75,480/- and her investment of Rs.7,99,599/- was not having any positions as on date. That aside her account was showing a debit of Rs.1,27,526.79 on account of the wrong trade practice carried on by Mr. Ramamurthy. She had not paid in the cheque No.630792 for Rs.50,000/- on 16-01-09 which was reversed on 24-01-09. She issued the cheque to Mr. Devaraju for Rs.6,000/- which was encashed on 26-05-09. Even the cheque No.134887 dt.2-09-09 for Rs.3,00,000/- which was reversed on 14-09-09 had been done to create margin of which she was not aware. As she was not getting the contract notes or complete account statements, she was not aware of the huge trades done in her account and only along with the arbitration application she got them and came to know of the unauthorized trades. She was not having a computer or email ID and many trades had been done without her knowledge. She has pleaded her inability to attend the hearing due to her ill health and has requested for rendering justice and compensate her for the losses suffered by her. 4.5 During the hearing held on 28th May 2010, the Respondent was not present while the authorized representative of the Applicant appeared. He was advised to furnish all the documents called for in the earlier hearing. He was also advised to furnish a copy of the bounced cheque No.630792 for Rs.50,000/- and the credit balance as on 1-09-09 together with the shortfall in the margin by 7th June 2010. Although the Applicant made a submission on 7th June 2010 and furnished copies of the contract notes, it had not filed the other essential documents required in the earlier hearing. It rather chose to file an affidavit from the franchisee in regard to cheque numbers.
V. ISSUES TO BE RESOLVED:

5.1 RESPONDENT: ( i ) Where the statement of the Respondent that unauthorized trades had taken place in her account by showing deposit of cheques by the Applicant for margin and subsequently reversing the entry can be relied upon?
VI. OBSERVATIONS & FINDINGS:

6.1 The Respondent, right from the statement of her defence, had been categorically stating that orders were shown by the Applicant for an inflated figure or on the reversal order for sale as purchase and vice versa. She has stated that she could not appear for the hearings to plead her case considering the travel expenses, illness and her position as a housewife. The franchisee had been going on giving excuses of wrong punch and whether at all he rectified the mistakes was not known. The Respondent had also argued that she did not payin a cheque No. 630792 for Rs.50,000/- on 16-01-09 which was reversed on 24-01-09. She actually issued the cheque to somebody and the same was encashed o 25-01-09. The other cheque No. 134887 dt.02-09-09 for

:: 6 :: Rs.3,00,000/ which entry was reversed on 14-09-09 had been taken as margin for the franchisee to do the trades in her account. 6.2. As regards cheque No.630792 dt.16-01-09 for Rs.50,000/- the entry of which was reversed on 24-01-09, trades for Rs. 1.04 lakh on 15th, Rs.34.000 on 16th and Rs.95,000 on 19th January 2009 had been done. In the case of cheque No. 134887 a credit of Rs.3,00,000/- was given on 02-09-09 and after adjusting the debit balance of Rs.66,244.03, the account showed a credit balance of Rs.2,33,755.97 and along with the credit for sales of shares the balance as at close of 02-09-09 was Rs.2,44,202.61. On 01-09-09 itself, 1000 Nos. of Aban Offshore shares were purchased for Rs.16,64,357.27. It is observed that earlier, the Respondent had deposited cheques Nos. 134881 and 134882 on 30-06-09 which got cleared. The Applicant might have taken the number of the cheque in the same order as 134887 and given the credit and transacted. As on 01-09-09, the Respondent had a debit balance of Rs. 66244.03 only in her account and how the Applicant effected purchase of shares worth Rs.17 lakhs without proper margin could not be properly explained by the Applicant. The Applicant now pleads that the cheque number was furnished by the Respondent based on which he did the trades and when the cheque was not presented, he subsequently reversed the entry. From the bank statement furnished by the Respondent, it is seen that (real) cheque No.134887 for Rs. 34,000/- was encashed by Mr. B.N.Sheshegowda. 6.3 As has been stated by the Respondent, the account was being operated by the Applicant on his own whims and fancies and whenever there was a shortfall in the margin or no margin, he used to put a cheque number for a relevant amount and get the trades regularized. Doing transactions based on cheque number conveyed over the phone itself is not acceptable and is a violation. In a number of cases even the deposit of physical cheque is not being accepted and clean credit is required now a days. In the circumstances, the statement of the Applicant or the affidavit of the franchisee that based on the cheque number, the transactions took place cannot be relied upon. While the Applicant has stated that for clearing the outstanding dues, he had no option but to sell off the securities of the Respondent on 02-09-09 and 08-09-09, how he could purchase (at the request of the Respondent) again the Aban Offshore shares on 08-09-09 is not at all convincing. The franchisee of the Applicant who had been executing orders either for large quantities than what was ordered or sale or purchase in the reverse order of the Respondent as complained by her should have done the trades. In view of the foregoing, I am not inclined to place any reliance on the statement of the Applicant. The benefit of doubt goes in favour of the Respondent and therefore application for arbitration filed by the Applicant requires to be rejected. 6.4 The Respondent has stated that she had paid in Rs.9,75,069.00 and had taken out Rs.1,75,480/- incurring a loss of Rs. 7,99,589/-. Being a housewife and a small investor, the Respondent had been taken for a ride by the Applicants franchisee and if such unauthorized transactions are allowed to continue, the investor confidence will be

:: 7 :: shaken in the market and such things should be nipped in the bud itself. In the circumstances, I see no reason why the Applicant should not pay back the amount brought in by the Respondent (after deducting the amount paid out) and accordingly, the Applicant should pay the amount of Rs.7,99,589.00 to the Respondent. 6.5 Since the Respondent was not present to defend in the arbitration proceedings, besides the documents produced by the Applicant, all the relevant documents which were considered necessary for the purpose of arriving at a proper conclusion were called for from the Applicant as well as the Exchange, to the extent available with the Exchange and examined in detail for the purpose of passing a fair and proper award.
VII. THE AWARD

7.1 AND WHEREAS having fully examined and considered the Statement of Claim filed by the Applicant and all other correspondence, documents, papers and records concerning the said claim and the oral presentation and examination of the Applicant, the Respondent not being present for the hearings, I, M.V.Badrinath, Arbitrator, hereby make the following exparte Award: ( i ) The application filed by M/s. Sharekhan Ltd. against Mrs. A.P.Bhanumathi claiming an amount of Rs. 1,27,526.79 is hereby rejected. ( ii ) M/s Sharekhan Ltd., the Applicant is directed to pay to the Respondent, Mrs. A.P.Bhanumathi the sum of Rs.7,99,589.00 (Rupees seven lakhs ninety nine thousand five hundred and eighty nine only) as arrived at in paragraph 6.4 above. The arbitration amount of Rs.7,99,589.00 together with interest at 12% per annum on the award amount from the date of the Award to the date of Fixed Deposit Receipt (FDR) to be made out by M/s Sharekhan for a period of not less than 91 days from the Clearing Bank, where M/s Sharekhan has the settlement account and deposit such FDR with the NSE. The interest payable to the constituent, Mrs. A.P.Bhanumathi from the date of FDR till the date of payment shall be the interest accrued on the FDR till the date of encashment. The amount will be in full and final settlement of her accounts with M/s Sharekhan, the Applicant. ( iii ) The Applicant should bear the costs of arbitration.

This Award is made and signed by me on the 23rd day of June 2010 at Chennai.

(M.V.BADRINATH) SOLE ARBITRATOR