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The case Arjav Chakravarti v. M/S Sharekhan Commodities Pvt Ltd. highlights the necessity for investors to remain vigilant about their trading activities. The arbitration panel of the Multi Commodity Exchange of India Limited (MCX) stressed that investors cannot claim ignorance about unauthorized trades appearing in their demat accounts. Notably, complaints often arise primarily when investors experience losses, underscoring the need for better investor education. This is illustrated by the case Sriram Krishnamoorthy v. M/S Angel One Limited, where the investor lost money after divulging 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 since she was aware of the auto square-off policy that contributed to her losses. These examples indicate a concerning trend where investors attribute market losses to trading members (TMs) as though they were wrongful losses, which are defined under the Indian Penal Code and relevant statutes as losses incurred through unlawful means. Adequate investor education is critical to preventing baseless arbitration claims. Ultimately, the law acknowledges that market fluctuations can lead to losses, which are not always the result of wrongful actions by TMs. Understanding the inherent risks of trading is essential for investors to avoid misconceptions and improper claims against their brokers.
The National Stock Exchange (NSE) offers investors three types of Dispute Redressal Mechanisms (DRMs):
Initial inquiries are directed to the Investor Services Cell (ISC) of the exchange. If a complainant is dissatisfied with the Grievance Redressal Committee (GRC)'s order, they can seek arbitration. Conversely, TMs or listed companies aggrieved by a decision can also initiate arbitration. The NSE handles complaints against exchange members and listed firms and has set up Regional Arbitration Centres (RACs) throughout India, along with provisions for online hearings.
In this case, an impersonator posed as an employee of Angel One Limited, asking for Mr. Krishnamoorthy’s One Time Password (OTP) to address a technical issue in his trading account. The following day, Mr. Krishnamoorthy discovered transactions executed totaling Rupees 5.20 Lakhs, resulting in losses of Rupees 5.14 Lakhs. Although he sought compensation, the GRC concluded that he bore responsibility for the unauthorized trades, as he had voluntarily shared his OTP—a sensitive piece of information. The arbitrator upheld the GRC’s ruling, referring to the "Rights and Obligation of Stock Brokers, Sub-Brokers and Clients" circular issued by the Securities Exchange Board of India (SEBI), which emphasizes client responsibility for maintaining confidentiality of their credentials.
In this instance, Ms. Chauhan contended that ICICI Securities acted without authority when it squared off her position before 11:30 PM, resulting in a loss of Rupees 33,812. However, it is a standard procedure that TMs will auto square off positions at 4:30 PM on the expiry day, details of which were communicated on ICICI Securities' website and through various notifications sent to the client. The arbitrator ruled that Ms. Chauhan was an informed investor aware of the risks in the Futures and Options (F&O) segment and highlighted that her potential profit-seeking actions could have exposed the TM to greater market risk. Her claim was dismissed, as the loss was deemed notional and later balanced out by profits from the same trades.
These arbitration decisions reveal a troubling pattern whereby investors claim ignorance primarily in situations of loss. It is crucial to understand that high-risk segments such as F&O cannot consistently yield profits, and TMs should not be held liable for every loss incurred.
According to Section 23 of the Indian Penal Code, 1860 (IPC), wrongful loss refers to the loss incurred through unlawful means to property to which the individual is legally entitled. The definition highlights that wrongful loss must coincide with wrongful gain, establishing a two-pronged requirement. This principle is echoed in the Maharashtra Protection of Interest of Depositors Act, 2000 (MPID Act), which also asserts the need for an intent to cause wrongful deprivation. TMs do not have the intention to inflict losses on investors; often, market volatility leads to unavoidable losses.
For instance, on June 3rd, 2024, the equity index hit an all-time high, yet on result day, the market plummeted, diminishing nearly Rupees 33,36,284 Crores in value. During such events, loss is unavoidable. In many arbitration cases across the NSE, BSE, and MCX, investors label trades as unauthorized once they observe a loss in their accounts.
There has been a rising trend of investors filing complaints for minimal losses, sometimes as low as Rupees 10,000. Investor education should be prioritized not only by exchanges but also by financial institutions that provide brokerage services. A commendable example is Zerodha’s Varsity platform, offering free financial educational resources. The legal clarity on wrongful loss establishes that it must accompany wrongful gain, stating that brokerage fees are a rightful entitlement of brokers irrespective of investor losses. It must be acknowledged that not all losses arise from wrongful intent, a distinction that should guide exchanges in addressing investor complaints.