Central Depository Services India Limited vs Daksha Narenda Bhavsar

J-CARBAL-41571-2025-DEPOSITORIES.odt
rajshree
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
COMMERCIAL ARBITRATION APPEAL (L) NO.41571 OF 2025

Central Depository Services (India) Ltd. .. Appellant
vs.
Daksha Narendra Bhavsar & Anr. .. Respondents
Mr.Ravi Kadam, Senior Advocate a/w Mr.Pranav Badheka, Senior
Advocate, Mr.Rohan Kadam, Mr. Vaibhav Singh, Ms. Radhika
Indapurkar, Mr.Rahil Shah, Mr.Manas Kotak, Mr.Pranav
Chandhoke i/b Veritas Legal for the Appellant.
Mr.Karl Tamboly a/w Mr.Harsh Moorjani, Ms.Priyanka Chaddha,
Mr.Abhay Dhadiwal, Ms.Vidhi Karia i/b Jayakar and Partners for
the Respondent No.1.
CORAM : BHARATI DANGRE &
MANJUSHA DESHPANDE, JJ
rd
RESERVED ON : 23 APRIL 2026
nd
PRONOUNCED ON: 2 JULY, 2026
JUDGMENT (PER BHARATI DANGRE, J) :
1 Central Depository Services Limited (CDSL), a Company
established under the provisions of the Companies Act, 1956 and
a Depository under Section 12(1-A) of the Securities and
Exchange Board of India Act, 1992 (SEBI Act) and facilitator for
holding securities in a dematerialized form, has preferred the
present Appeal being aggrieved by the Judgment of the learned
Single Judge dated 01/12/2025.
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CDSL approached this Court by filing a Petition under
Section 34 of the Arbitration and Conciliation Act, 1996, seeking
invalidation of the Award dated 30/01/2024 passed by the
Arbitral Tribunal, under which Tribunal allowed the claim filed by
the claimant Daksha Bhavsar, respondent no.1 before us to the
extent of Rs.86,02,768/- and directed it to pay the awarded sum,
being the value of her lost shares on the date of the dispute. In
addition, the Tribunal also awarded simple interest at the rate of
9% p.a. on the awarded sum.
2 The background reveal that Daksha Bhasar had filed a
statement of claim before the Arbitral Tribunal against CDSL and
BRH Wealth Kreators (West Bengal) and the Arbitral Tribunal
comprising of three Arbitrators granted the claim and upon a
challenge being raised to the Award, the learned Single Judge by
the impugned Judgment reached to a conclusion that the view of
the Arbitral Tribunal was a plausible view taken after
considering the facts and circumstances of the case by holding
the Petitioner responsible for indemnifying Respondent No.1 for
lost shares and since the impugned Award did not suffer from
perversity or patent illegality apart from the fact that Award
was supported by reasons, the Arbitration Petition was dismissed.
The learned Single Judge also recorded that the case
involved a unique and possible unprecedented fraud where
broker and Depository Participant had stolen shares of the clients
entrusted to it and had indirectly caused sale of the same by
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creating pledge with HDFC Bank and the Arbitral Tribunal
considered the composite role of BRH in the transaction, as BRH
had also acted as Depository Participant in causing transfer of
the shares and creating pledge and since the client had been
made to suffer a loss, the findings recorded by the Tribunal were
found to be reasonable and purely attributable to it, warranting
no interference.
It is this Judgment, which is questioned before us.
3 We have heard the learned senior counsel Mr.Ravi Kadam
for the Appellant and Mr.Karl Tamboly, who has marked
appearance on behalf of the Respondent no.1.
4 By consent of the respective counsel, we have taken up the
Appeal for final hearing.
Before we appreciate the rival contentions, it would be
appropriate for us to make a reference to the nature of
transaction involved in the proceedings.
CDSL is one of the two Depositories in India and a
Facilitator for holding securities in dematerialized form, in
addition to the National Securities Depository Limited (NSDL). It
is registered with SEBI as a Depository under Section 12(1-A) of
the SEBI Act.
In the Scheme of the securities market, wherein, in order
to facilitate the shares to be held in electronic form and not paper
form, and with the introduction of concept of ‘dematerialization’,
the Depositories were introduced to hold the securities in a De-
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mat Account for the owner of such Securities and are cast the
onus to transfer the Securities in a paperless manner.
The Petitioner is regulated by SEBI and governed by the
provisions of the Depositories Act, 1996 as well as the SEBI
(Depositories and Participants) Regulations, 2018 as well as
various circulars, notifications issued by SEBI from time to time.

5 The Securities Market in India has involvement of three
kind of market participants each playing separate and distinct
role and relegated by three separate market infrastructure
institutions. At the top of the pyramid lies the Depository
Participants who execute instructions received from clients
/clients Power of Attorney Holder and who are registered with
and regulated by Depositories Act, 1996 i.e. CDSL or NSDL.
In addition, there are stock brokers who execute the orders
resulting in trade received from trading account holders, who are
registered with and regulated by stock exchanges like the
National Stock Exchange (NSE) or Bombay Stock Exchange
(BSE). There are also Clearing Members’ who clear trades on its
own behalf or on behalf of other stock brokers and who are
registered with and regulated by Clearing Corporation like NSE.
The Petitioner function as a central accountant and record
keeping office in respect of Securities in dematerialized form.
Any company which wants to issue any Securities in
dematerialized form or provide the option to the holder of its
securities to hold it in dematerialized form, is required to admit
its securities into the system of the Petitioner or the other
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Depository Participant i.e. NSDL, by establishing electronic
connectivity with such Depository either directly or through
Registrar and Transfer Agent and both listed and unlisted
Securities can be admitted into the system.
The Petitioner operates through various agents referred to
as ‘Depository Participants’ who act as intermediaries between
the Petitioner and the beneficial holders of the Securities. In
order to hold a Security in a dematerialized form with the
Petitioner, a beneficial owner of the Security is required to open
Dematerialised Account (a Demat Account) which is a digital
repository used to securely hold security bonds, mutual funds
and other securities in electronic format. It eliminated the need
for physical Share Certificate and enables the holder to trade in
stock market. As an agent of the Petitioner, the Depository
Participant facilitates the dematerialization of Securities and
offer services connected with the maintenance of the ownership
records and transfer of ownership of Securities in the records of
the Depository.
The Petitioner exercises monitoring power over the
functions which a Depository Participant perform as its agent.
6 The rights and obligations between the Petitioner and its
Depository Participants are governed by a) Bye-laws of the
Petitioner; b) an Agreement entered into between the Petitioner
and each of its Depository Participant, c) the operating
instructions issued by the Petitioner to its Depository Participant
and (d) the communication issued by the Petitioner to its
Depository Participant.
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Several entities which are registered as Depository
Participants are also members of the Stock Exchanges and act as
stock broker, who execute the orders resulting in trades.
While Depository Participant act as an Agent of the
Petitioner, a Stock Broker is member of the Stock Exchange who
has trading rights on such Stock Exchange and execute trade on
the platform of the Exchange, either on his own behalf or on
behalf of its client and such trades are cleared and settled
through Clearing Member which the Stock Brokers chooses. A
Clearing Member has to ensure that the Securities and Funds
are credited to the relevant accounts within a specific time period
post the sale/ purchase of Securities on the Stock Exchange.
It is in this background, and with the introduction of the
three elements operating in the Stock Market in India, we have to
appreciate the dispute that was taken for Arbitration before we
appreciate the submissions advanced.
7 The Respondent-Daksha Bhavsar opened a Demat Account
with BRH Wealth Kreators Ltd, respondent no.2 (Stock Broker)
on 27/06/2018 and on 29/06/2018 she alongwith her late
husband jointly executed a Power of Attorney (PoA) in favour of
the Stock Broker. On 31/07/2019 and 23/08/2019, the Stock
Broker BRH Wealth Kreators transferred the equity shares from
Bhavsar’s Demat Account (BOID1204630001867255 Bo-Sub
Status Individual-Resident) to its Corporate Trading Member
(TM)/Clearing Member (CM) Client Account. This transfer was
carried out pursuant to the authority conferred under the PoA
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and by virtue of the said transfer the title in Bhavsar’s securities
was transferred to the TM/CM account of the Stock Broker, which
was the first leg of the transaction.
Shares being fungible in nature, with its transfer from the
Demat Account of Bhavsar to the Stock Broker’s TM/CM account,
it became the holder of the Securities and was entitled to further
transfer the Securities.
Bhavsar was aware that the Securities have been
transferred out of a joint Demat Account as pursuant to the first
leg of transaction being completed, CDSL generated SMS alert of
the transfer on her registered mobile number.
8 Once the Securities of Bhavsar went into the account of
Stock Broker, who was also dealing with shares of various
beneficial owners and which had reached first TM/CM account
(BOID 1204630000023100), the securities were transferred to
another dematerialized account of the Stock Broker, also a
TM/CM client account being the Corporate Clearing Member of
the trading member of Client Account (BOID
1204630000021137).
Worth it to note that upon such transfer to the second
TM/CM account, the Shares/Securities lost their identity being
fungible in nature and they no longer could be identified against
the individual beneficial owner.
On the very same day, BRH, the Depository Participant (DP)
pledged the shares of various beneficial owners including Daksha
Bhavsar, which had arrived in its second TM/CM account with
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HDFC Bank Limited (HDFC), a scheduled commercial bank for the
purpose of availing a loan facility. It is evident that this second
leg of transaction of the Stock Broker pledging shares (HDFC)
was evidently for its own use.
When BRH i.e. Respondent No.2 defaulted in its loan
obligations, HDFC Bank invoked the pledge and sold the pledged
securities and it posed no difficulty in invoking the pledge as the
pledge was created prior to the action of suspension against
BRH.
In continuation of the sequence of events, it is also to be
noted that on 30/09/2019 the National Stock Exchange (NSE)
being the market infrastructure institute responsible for
monitoring and overseeing the activities of the Stock Brokers
including BRH, suspended its activities with effect from
01/10/2019 for non-compliance of regulatory provisions of the
Stock Exchange.
Upon HDFC invoking the pledge, since BRH defaulted in its
obligations, Daksha Bhavsar filed an Appeal before the Securities
Appellate Tribunal (SAT) seeking direction against the CDSL to
appoint a Conciliator/Arbitrator to settle her claim in respect of
the unauthorized transfer of her shares. SEBI issued notices to
HDFC alleging illegal invocation of pledge of securities and by
order dated 21/01/2021, the Whole Time Member (WTM) of SEBI
directed HDFC to deposit a sum of Rs.158.68 Crores alongwith
interest at the rate of 7% p.a. alongwith penalty of Rs.1 Crore.
HDFC raised a challenge to the order by filing an Appeal
before SAT and by order dated 18/02/2022 it was held that the
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pledge created by BRH in favour of HDFC was valid and it was
validly invoked by HDFC Bank and the order of WTM was set
aside.
We are informed that this order passed by SAT is subject
matter of Civil Appeal before the Apex Court.
9 On 11/01/2023, SEBI, by invoking powers under Section 11
of the SEBI Act, 1992, passed an order declaring that BRH had
violated its duty as broker under SEBI Circular dated
18/11/2021 and 26/09/2016 by pledging the shares of its clients.
As the SEBI intended to take strict action for such violation,
BRH was debarred from the market for 7 years and was directed
to pay the investors, under the supervision of NSE.
By order dated 06/06/2023, SAT permitted Daksha
Bhavsar to initiate arbitration proceedings for redressal of her
grievance and accordingly the Arbitral Tribunal comprising of
three Arbitrators was constituted by CDSL.
Before the Tribunal, Daksha Bhavsar filed Statement of
Claim (SoC) on 17/07/2023 and while seeking adjudication of
her claims, she attributed negligence to CDSL in discharge of its
duties and staked her claim that CDSL alongwith BRH were
jointly and severally liable to restore her shares or make payment
of the amount claimed in the SOC.
CDSL resisted the claim of Daksha Bhavsar by filing reply.
However, in the meantime, SEBI examined the entire transaction
and issued notice to CDSL alleging that it had violated certain
provisions of SEBI (Depositors and Participants) Regulations
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2018 and its own bye-laws and appointed an adjudicating officer
to adjudicate the alleged violations. A show cause notice came to
be issued to CDSL as to why inquiry shall not be initiated and
penalty shall not be imposed against it under the Depositories
Act, 1996 for the alleged violations and ultimately on
24/07/2023, SEBI reached a conclusion that CDSL has not
violated the provisions of the Act or Rules/ Regulations/
Circulars and in fact held that CDSL allowed invocation of pledge
for De-mat Account on which freezing orders have been passed
by SEBI, provided the pledge has been created prior to the
passing of freezing order and eventually the proceedings
initiated by show cause notice against CDSL were dropped.
On 25/07/2023, SEBI issued a letter, wherein the Stock
Exchanges and Depositories were directed to compensate the
investors in the manner set out therein by holding that in case of
negligence/fraud committed by Depository Participant/
Employee in its operations or in case of transfer of Securities
from client account to account of broker/any other entity without
corresponding trade obligations, post implementation of paying
validation the depositors shall be held liable and shall compensate
the investors. However, in case of unauthorized transaction by
misuse of PoA by the broker or shares transferred from investors
Demat Account by misuse of settlement ID, it was the Stock
Exchange which was to be held liable. However, these directions
applied prospectively and did not cover the past transactions.
.. The arbitration proceedings before the Arbitral Tribunal
resulted into an Award dated 30/01/2024 recording that CDSL is
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liable to indemnify Daksha Bhavsar for breaches committed by
BRH and her claim was allowed in the sum of Rs.86,02,768/-,
being value of her lost shares on the date of dispute alongwith
post award interest of 9% p.a. from the date of Award till
realization.
The Arbitral Tribunal probed into the role played by BRH as
broker and held that BRH pledged the shares of Daksha Bhavsar
without authority to HDFC Bank as security for availing loan. It
was also held that a standard PoA only enable a broker to invoke
the same for getting margin requirements, but BRH misused the
same to pledge the shares for availing loan for itself from HDFC
and thus it was concluded that PoA was used for the purpose
other than fulfilling the margin requirements.
The Arbitral Tribunal also probed in to the role of BRH as
Depository and held that it failed to obtain ‘pledge request’ from
the client before pledging her securities as required under SEBI
(DP Regulations) and CDSL bye-laws and this amounted to
serious manipulation by BRH. Apart from this, the Arbitral
Tribunal also held that it was unconceivable that unauthorized
pledge could have been made without involvement of BRH as
Depository Participant and in absence of client pledge request
and the PoA not authorizing Depository Participant to pledge
client securities, it was concluded that the pledge created by BRH
was fraudulent .
By referring to the Scheme of Depositories Act as well as
the SEBI Regulations, 2018, bye-laws of CDSL, the Arbitral
Tribunal held that there was abject failure of Government, both
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structurally and hierarchically and all attempts were made to
insulate the Depositor from defaults committed by BRH as
Depository Participant. Since in the whole scheme of the
Depositories Act, Depository Participant exercised the role as an
agent of the Depository, the Tribunal observed that the
fundamental question of lack of inadequate monitoring and
supervision by CDSL lead to inescapable conclusion that CDSL
as a principal could not be expected to be blissfully obligated, as
Securities of 9493 clients of BRH as Depository Participant were
fraudulently pledged to HDFC without obtaining their consent to
the pledge request, as contemplated under the Act.
Considering the role of CDSL as a regulatory body the
Tribunal accused it of failing to stall BRH as Depository
Participant from mis-utilizing the shares of thousands of
investors and ultimately concluded that CDSL cannot shy away
from its paramount duty of protecting the investors interest
from malpractices and thus allowed the claim of the claimant
being the value of lost shares.
This Award was subjected to challenge before the learned
Single Judge under Section 34 of the Arbitration Act and by the
impugned Judgment dated 01/12/2025, the Award was upheld
since it was held that the finding rendered therein do not suffer
from any perversity or any patent illegality and the reasoning
recorded in the Award being a plausible view, no interference was
shown.
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10 In support of the Appeal presented before us under Section
37 of the Arbitration and Conciliation Act, 1996, the learned
senior counsel Mr.Kadam has taken us through the Scheme of the
Depositories Act, 1996, alongwith elements involved viz ‘The
Depository’ ‘The Participant’ and ‘the Registered Owner’
alongwith the rights and obligations of the key elements under
the Depositories Act, 1996.
He would also invite our attention to the manner of
governance of Depositories as well as the rights and obligations of
Depositories, Participants, Issuers which include a specific
prohibition of assignment and obligation for maintaining separate
accounts by every Participant in the name of each beneficiary
owner and the segregation of the Securities, as well as the
manner of creating pledge.
Our attention is also invited to the Regulations of SEBI
made in exercise of power conferred under Section 30 of the SEBI
Act, 1992 read with Section 25 of the Depositories Act, 1996
known as Securities and Exchange Board of India (Depositories
and Participants) Regulations, 2018 (hereinafter referred to as
Regulations of 2018).
According to Mr. Kadam the Depositories Act, 1996 was
enacted to facilitate seamless and paperless transfer of securities
held in dematerialized and fungible form and under the Scheme
the beneficial owner retain all rights and liabilities in respect of
the Securities. Relying upon the Scheme of the Act, Mr. Kadam
has submitted that the Depository functions merely as a
registered owner for the limited purpose of effecting transfer and
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the Depository Participant acts only on instructions of the
beneficial owner (the client) or his authorized PoA holder, as per
the Regulations of 2018 and upon receipt of intimation from a
Participant, the Depository is statutorily bound to register the
transfer. Thus, function of a Depository is merely administrative
i.e. confined to record keeping and verification of authorization, is
the submission of Mr.Kadam and he would submit that keeping in
mind this role the Depository is entitled to charge nominal
transfer fee and account charges.
As against this, he would submit that the Stock Exchange is
exclusively empowered and conferred with jurisdiction to
examine whether the transfer by brokers under the PoA was for
margin requirements and for a proper use.
For this purpose, he would place reliance upon the circular
dated 26/09/2016, which the SEBI has issued with a view of
enhanced supervision of Stock Brokers/Depository Participants
and this circular with the prevailing regulatory regime reiterated
instructions to the Stock Broker, who was restrained from using
client’s funds and securities for proprietary purpose including
settlement of proprietary obligations.
11 By inviting our attention to Clause 2.4.3, it is urged that the
circular acknowledged that transfers of securities by a broker
under a PoA from the client’s account to the broker’s pool account
permitted transfer by the broker of the securities from the
client’s account for limited purpose, such as implementation of
Government directions, rectification of erroneous transfers,
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meeting legitimate dues and other similar purposes, but it was
also indicated that for such transfer, the broker shall maintain a
Stock Transfer Register clearly indicating day-wise details of the
Securities transferred. This circular also obligated the Stock
Broker to upload the client’s fund balance and security balance
on the stock exchange system for monitoring purposes.
Further, Mr. Kadam would also rely upon the circular
issued by SEBI on 25/02/2020 to all recognized Stock
Exchanges/Clearing Corporations and all Depositories with
regard to the subject of ‘Margin Obligations’ to be given by way of
pledge/re-pledge in the Depository System and he would submit
that the Brokers were permitted to transfer shares of beneficial
owners in CM/TM account for margin requirements, but by the
said circular the transfer of securities for collateral was made
permissible only through the creation of margin pledge created in
the Depository System.
In the whole Scheme of SEBI Act, 1992 as well as
Depositories Act, 1996 and the SEBI Regulations of 2018 read
with the SEBI circulars, it is canvassed before us by Mr. Kadam
that though SEBI acknowledged Power of Attorneys were usually
taken from clients, who wanted to avail internet-based trading
services, in order to offer the same, a Stock Broker required
necessary authorization for seamless trading, collection of
margins as well as settlement of funds and securities and this
PoA was to act in aid of the stock broker activities. It is also
submitted by Mr. Kadam that the guidelines issued by SEBI in its
Circular on 23/04/2010 were applicable to the Stock Brokers as
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well as those who acted in dual capacity of Stock Broker and
Depository Participant and when shares were erroneously
received and/or defaulted by a person acting in dual capacity,
his role as Stock Broker is attracted and the onus is cast on him
as ‘Broker’ to return the shares and he is bound by guideline No.8
of the said circular.
According to Mr.Kadam, SEBI, the Regulator itself had
exonerated the Petitioner, and he would place reliance upon the
order dated 24/07/2023 to that effect and would submit that
SEBI recognized that the Depository has no control over
securities , balances etc. that would enable it to inquire into why
a transfer was being sought and with the specific observations to
the effect that the Noticee i.e. CDSL was under obligation to
process the request for creation of pledge within 15 days of the
application, it had very limited scope with respect to
determining legality of the hypothecation operation and in
extending the scope to include analysis of debit balance of clients,
whose shares have been pledged seems to be misplaced. In
conclusion, the order noted that Noticee i.e. CDSL by allowing
creation of pledge by BRH from Demat Account of its clients has
not violated the provisions of Regulation 79(5) or Regulation
79(3) of the Regulations of 2018.
12 Mr.Kadam has analysed before us the three phases of the
transaction, the first phase being the transfer of securities from
the clients account to BRH first CM/TM second account which
involve use of the PoA. According to him, SMS alerts for the
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transfers were forwarded to the client and she raised no
objection. The stand of CDSL is very specific that there was no
reason for it to look at the transfer with suspicion, since that is
effected pursuant to PoA executed by Daksha Bhavsar, which
was never revoked and had the depository being informed about
demise of her husband on 07/06/2019, it would have been alerted.
Upon credit of the Securities in the first CM/TM account,
BRH became the beneficial owner by principle of fungibility
under Section 9 of the Depositories Act.
The second leg covered the transaction from BRH’s first
CM/TM account to BRH CM/TM second account, where the
beneficial owner of the first CM/TM account transferred the
shares to his own CM/TM account.
In the third leg, there was transaction from BRH second
CM/TM account in form of a pledge to HDFC Bank and this act
was initiated from BRH’s account, as it had become the beneficial
owner and according to Mr. Kadam, as per Regulation 79 of the
DP Regulations, only the Depository was only to verify whether
the beneficial owner has initiated the pledge and confirm the
same with the pledgee i.e. the HDFC Bank and nothing more was
required to be inquired into.
Therefore, as a Depository, according to Mr. Kadam, CDSL
has discharged its role in the fullest, without any breach of any
statutory/regulatory regime and in his view the root of the
transaction emanate solely from the misuse of the PoA by BRH
issued to it in its capacity as ‘Broker’, for facilitating trading and
margin collection and by no stretch of imagination the liability
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can be foisted upon the Depository (CDSL). It is his specific
contention that PoA was not used to pledge the Securities with
HDFC and it is only at the first tranche of transaction when the
shares were transferred by BRH as a Broker into its own CM/TM
account, the PoA was put to use and, thereafter, BRH became the
beneficial owner entitled to deal with the shares in its account.

13 Criticizing the Award, Mr.Kadam has argued that the
Arbitral Tribunal rightly held that BRH as broker appear to
have misused the PoA to pledge shares for availing loan for itself
from the Bank and this finding was rightly based upon the
statutory regime under 2016 circular, as such transfers effected
by the Broker in Clause 2.4.3, which was monitored by Stock
Exchanges under clause 2.4.4. However, according to him, the
Tribunal erroneously held that BRH has deeply failed to obtain
pledge request from the client after pledging the client’s
securities under DP Regulations and CDSL Bye-laws. This
finding, according to him suffers from perverse and patent
illegality, as the Tribunal ignored the admitted vital fact that
shares were not directly pledged from Daksha Bhavsar’s account,
but the transactional chain in three tranches clearly lead to an
inference that there was no occasion to obtain her assent to the
pledge, when the shares were not pledged from her account.
The first leg of transfer according to Mr.Kadam, was legally
permissible prior to June 2020 since as per Clause 2.4.3 of 2016
Circular, being a transfer from beneficial account to the broker’s
pool account (TM/CM account) and the onus to ascertain
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whether such transfer was in furtherance of actual broker
requirement was on the stock exchange as per 2016 circular.
According to him, since shares were fungible in nature,
once those were transferred to BRH account, it became the
beneficial owner and the question of obtaining client’s pledge did
not arise thereafter and the finding of the Tribunal in that regard
cannot be sustained, as Tribunal over-looked the admitted
position that for the first leg notice was given to Daksha Bhavsar
by SMS alert, to which she never objected and she never
intimated the Depository about the death of her husband nor did
she apply for rectification of the PoA. Both the material
considerations were clearly ignored by the Tribunal, is what is
strongly urged by Mr.Kadam.
Another finding of the Tribunal holding CDSL liable under
Section 16 of the Depositories Act, 1996, despite its own finding
to the effect that the pledge created by BRH was fraudulent, has
also received extreme criticism from Mr.Kadam as he would
submit that as a Depository, the Appellant handled lakhs of
transactions per minute and if for every transaction, the
Appellant is made answerable, it will be impossible for it to run
the show. It is also his submission that a bare look of Section 16
of the Act would make it clear that the provision is confined only
to ‘negligence’ and do not cover ‘fraudulent transactions’ as it
cast a responsibility on the Depositories to indemnify loss in
certain cases.
Mr.Kadam has vehemently asserted before us that in law
there is a distinction between negligence/nonfeasance and
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misfeasance and he would rely on the decision of the Apex Court
1
in Malay Kumar Ganguly vs. Dr.Sukumar Mukherjee & Ors. , to
urge that ‘negligence’ is breach of a duty caused by the omission
to do something which a reasonable man, guided by those
considerations which ordinarily regulate the conduct of human
affair, would do or doing something which a prudent and
reasonable man would not do and in determining whether
negligence exist, all the attending and surrounding
circumstances will have to be taken into account, but it is quite
distinct from a fraud and malfeasance which is at a higher degree
of crime and when BRH, a Stock Broker had acted fraudulently
and this is what the Tribunal held, such conduct cannot be
indemnified under Section 16.
The finding of the Tribunal holding that CDSL was
purportedly negligent in not supervising BRH’s operations in
accordance with the Depository Regulations and bye-laws
according to Mr.Kadam is highly erroneous as according to him
the monitoring agency in the Securities market is SEBI and if
SEBI has given CDSL a clean chit and exonerated it, the finding of
the Tribunal, is perverse, when it held that the Appellant was
negligent in not supervising BRH’s conduct qua obtaining
concurrence before the pledge.
In addition, he would place into service a well settled
principle that the liability of acts committed by an Agent beyond
its authority are not attributable to the Principal and he would
place reliance upon two decisions of the Apex Court; State Orissa
1 (2009)9 SCC 221
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2
vs. Union India Assurance Company Ltd. and Britannia
3
Industries Limited vs. Punjab National Bank & Ors . . According
to him, the Authority conferred upon the Depository
Participant as agent are specifically prescribed under the bye-
laws in form of ‘rights and obligations’ of participants in relation
to CDSL making it imperative to maintain separate accounts by
every participant in the name of its beneficial owner and
Securities of each beneficial owner to be segregatfAgented and
not to be mixed up with the securities of others or with the
participant’s own securities.
Relying upon the aforesaid obligations, according to Mr.
Kadam, the act of inter-mixing securities is beyond such an
Agent’s authority and particularly when it is specifically
prohibited and, therefore, the principal would never be held
liable, when such inter-mingling is a result of a fraud
perpetrated by the Participant (BRH) in its capacity as Broker
while misusing the PoA.
According to Mr. Kadam when the sectoral regulator viz
SEBI has not found the activity of CDSL to be wrongful or
unlawful, the finding of the Tribunal in pointing a finger at it and
observing failure to monitor without specifying as to under what
Rule or Regulation, CDSL was to exercise its monitoring role, the
Award is seriously criticized by Mr. Kadam.
2(1997) 5 SCC 512
3 (2013) 10 SCC 642
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14 Apart from this, Mr.Kadam would also point out to us the
errors in the impugned Judgment of the learned Single Judge as
the tranches in the transaction had rightly identified in the
impugned Judgment, but he would submit that the Single judge
has supplanted the Tribunal’s reasoning to sustain its
conclusions, holding that the Depository Participants role was
attracted in absence of corresponding trades on exchange and
this finding, according to him, is patently illegal in the
background that the correct transaction of chain was fully
acknowledged i.e. from Daksha Bhavsar’s account to TM/CM
account and thereafter pledged to HDFC Bank.
By relying upon the decision in Mcdermott International Inc
4
vs. Burn Standard Co. Ltd. & Ors . and M/s. Pearl Developers Pvt.
5
Ltd. vs. M/s. Universal Land and Finance Co. , he would submit
that an Award must stand or fall on its own reasons and it is not
open for the Court to correct the errors of law in exercise of the
jurisdiction under Section 34. It is also his submission that the
Single Judge proceeded on a fundamental misconception, that
broker’s role is only attracted where shares are transferred from
client’s account to broker’s CM/TM account only against the
corresponding trade exhibited on exchange, which is not correct,
as shares would also to be transferred from the client’s account
to the broker, as a margin for facilitating future trades.
Therefore, according to Mr. Kadam, a transfer need not be
regulated through an executed trade, but it would equally be
made in anticipation of future trade i.e. by way of margin, when
4 (2006) 11 SCC 181
5 2018 SCC OnLine Del 11722
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shares of a Bank can be transferred to the broker for margin,
which can be utilized for any future trade and then such a
transfer is said to be made in the course of broker’s activities.
This transaction, according to him, is fortified under Clause 2.4.3
of 2016 Circular which provide that a transfer from client’s
account to the pool account, was transfer by a person acting as
Broker and such transaction would be monitored for compliance
by the Exchange under Clause 2.4.4.
15 Mr.Kadam would also heavily rely upon the bye-laws of
CDSL to submit that inter-mixing of Securities was beyond
BRH’s Authority, but the Single Judge failed to take note of the
same and he would insist in noticing that the impugned Award as
well as the impugned Judgment did not identify a single duty or
responsibility allegedly breached by the Depository i.e. the
Appellant and in its absence, no liability could have been fastened
upon it.
The whole emphasis of Mr.Kadam in raising a challenge to
the Award which, warranted an interference at the instance of
the learned Single Judge is, that the view adopted has unsettled
the very structure of the Securities Market, as the Depository
CDSL has been held liable for functions of the Depository
Participant, which in fact are carried out by it (BRH) in its
capacity as a Broker and this would go a long way in the
Securities market and result in adverse impact upon the
functions to be discharged by the Depository like CDSL. It is his
submission that in the event of any fraud being committed
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through any transaction and considering that millions of
transactions are effected every day, the Depositor would be
bound to compensate the affected parties by virtue of the
expanded and unlawful interpretation of Section 16 and give rise
to consequences far reaching, since the Depositories charge
nominal fee for effecting the transaction and the fund collected
will be wholly insufficient to meet such obligations which
effectively entail unlimited liability. This according to him would
render the functioning of depository system unworkable and
would frustrate the object of paperless trading envisaged by the
Parliament, while it enacted the Depositories Act, 1996 to ensure
seamless and paperless transactions.
16 The submissions of Mr. Kadam are strongly opposed by Mr.
Karl Tamboly representing Respondent Daksha Bhavsar and
though he would rely upon the list of dates placed before us by Mr.
Kadam, he has projected before us the disputed transaction by
channelizing it as below :-
17 Mr. Tamboly, at the outset would focus upon the limited
scope for interference by this Court in an Appeal under Section
37 of the Arbitration and Conciliation Act, 1996, and he would
rely upon the latest decision of the Apex Court in case of Ramesh
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6
Kumar Jain vs. Bharat Aluminium Company Ltd. (Balco) when
the scope of Section 37 came to be reiterated in the backdrop of
the terminology ‘patent illegality’ to conclude that it should
create such a scenario, such as findings of the Arbitrator must
show judicial conscience or that the Arbitrator take into account
matters he should not have or he must have failed to take into
account vital matters leading to an unjust result or the decision
being so irrational that no fair or sensible person would have
arrived at if given the same facts.
In addition, he would also invoke the well settled position in
that regard as laid down in the earlier decisions of the Apex Court
including the decision in case of Ssangyong Engineering and
Construction Company Ltd. vs. National Highways Authority of
7
India (NHAI) , and Consolidated Construction Ltd. vs. Software
8
Technology Parks of India .
18 Mr. Tamboly has placed before us a Circular issued by SEBI
on 17/12/2018 addressed to All Recognized Stock
Exchanges/Clearing Corporations and the Depositories, on the
subject of ‘Early Warning Mechanism’ to prevent diversion of
client securities and according to him, this circular was issued in
the back drop of instances where stock broker had diverted
clients’ Securities received as collaterals towards margin
obligations and/or settlement obligations for raising loan against
shares on their own account and/or for meeting securities
6 2025 SCC OnLine 2857
7 (2019) 15 SCC 131
8 (2025) 7 SCC 757
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shortages in settlement obligations of its own account.
According to Mr. Tamboly, the circular outlined the early
warning signals in relation to Securities pledge transactions by
the stock broker to be identified by the Depositories and to be
shared by the Stock Exchanges. Not only this, the said circular
also contemplated constant monitoring by CDSL from the alerts
generated from the monthly /weekly submissions made by the
Stock Broker under the risk based supervision (RBS) or
enhanced supervision to the Stock Exchanges.
The most important facet of the said circular according to
Mr.Tamboly is the direction for the Stock Exchange and
Depositories to frame internal policy guidelines regarding non
co-operation by Stock Brokers and Depository Participants
during inspections and according to him there is abject failure
on part of Mr.Kadam’s client in not framing the guidelines even
till date.
By relying upon Clause 8.2 of the said Circular, he would
submit that the Depositories were entitled to take the following
actions :
“8.2 Actions to be taken by the Depositories :
a) Restriction on further pledge of client securities from the client’s
account by freezing the stock broker client account for debit.
b) Imposition of 100% concurrent audit on the depository participant.
c) Cessation / restriction on uses of Power of Attorney (POA) given to
stock broker by clients mapped to such brokers only to meet settlement
obligation of that client. Clients to issue instructions electronically or
through Delivery Instruction Slip (DIS) for delivery of shares for off
market transfers.”
.. These guidelines having come into effect from 01/02/2019,
according to Mr.Tamboly, if this circular was scrupulously
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followed and guidelines would have been framed, the hard earned
money of his client could have been saved. Having framed these
guidelines, if still the transaction would not have been noticed,
then according to Mr. Tamboly the Depository definitely could not
have been attributed any negligence. He is conscious of the fact
that there was no guarantee that even if such instructions were
issued by Depository in form of guidelines, every misfeasance
would have been avoided, but it is his specific contention that the
Depository acted in a negligent manner, in not taking any steps
in following the directives issued by SEBI in detecting early
warning signals and in not adopting mechanism specified therein
which has resulted into loss to his client.
19 As far as the argument about Agent-Principal relationship
between CDSL and BRH is concerned, Mr.Tamboly would submit
that the Appellant is a market infrastructure institution and not
a passive intermediary as its functions are by statutory designs
supervisory and compliance driven and its obligations to
investors flow directly from that status. According to him, a
Depository cannot ignore the discharging of the supervisory
responsibilities that defined it and re-characterize its statutory
duties as merely mechanical or administrative, in an attempt to
shirk its statutory obligations and evade the liability under
Section 16 of the DP Act. According to him, the DP Regulations
has set out the core function of the Depository and this includes
critical operations like holding, transfer of securities, record
keeping, cyber security and cyber resilience framework
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alongwith the regulatory compliance like surveillance,
investigation, inspection, investor protection and services etc.
According to Mr. Tamboly the Depositories Act read with
the DP regulations framed thereunder, cast a substantive and
continuing duty on the Depository CDSL to protect investors
/beneficial owners interest and to supervise the activity of its
Depository Participant and according to him, it is a statutory
mandate and not a discretionary function to be discharged. When
BRH has faulted or alleged to have faulted, as a Depository
Participant, it was the duty of the Appellant, which is governed
by the Code of Conduct and make it imperative for it to adopt a
pro active approach in protecting the investors, monitoring the
Rules and Regulations at the end of the Participants and
implement the Risk Management Framework and adopt
appropriate due diligence measures.
On failure to do so and in particular, implementing the
Circular of SEBI issued on 01/02/2019, to put ‘early warning
mechanism’ in place to prevent diversion of client securities, the
Appellant has failed in discharge of its duties and for this purpose,
according to Mr. Tamboly its negligent approach is noted by the
Tribunal and also the learned Single Judge.
By relying upon the decision in SEBI vs. Rajkumar Nagpal
9
& Ors. he would submit that SEBI circulars issued in exercise of
the powers have the force of law and form an integral part of the
regulatory framework governing market participants and he
admit that this circular was not brought to the notice of the
9 (2023)8 SCC 274
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Tribunal , but was placed before the Single Judge while hearing
Section 34 Petition. But in any case, according to him, the
contention of Mr. Kadam that there is no provision in the
Depositories Act or the Regulations conferring a positive
supervisory role over CDSL may not be the correct position.
In the conclusion, according to Mr. Tamboly the concurrent
findings of the Arbitral Tribunal and that of Section 34, Court
do not warrant any interference as both the Authorities on due
consideration of the entire statutory and regulatory framework
has held the Appellant liable under Section 16 of the Depositories
Act and the plea of no specific breach being identified cannot be
accepted. In addition, it is submitted by Mr.Tamboly that the

Section 34 Court did not supply the reasoning of the Tribunal, but
tested the Award on permissible touchstones and found it
plausible and grounded in law and not equity and refused to
interfere with its finding and conclusion by applying the settled
principal that the scope of interference under Section 34 is
narrow and it is not permissible to re-appreciate facts/evidence,
law or substitute the view merely because another view is
possible.
20 The argument of the learned Advocate Mr. Kadam
apprehending, destabilization of the financial system is also
misconceived, as according to him, the volume of the
transactions which is placed into service (purportedly 1,08,141
per minute) necessitate the automated surveillance,
reconciliation, inspection and audit and that is the specific reason
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why the SEBI has issued the Circulars from time to time.
According to him, if the Depositories are permitted to
disclaim the fraudulent activity of their own Depository
Participants, who act as its Agent and are bound by its own bye-
laws and have to operate within a regulatory architecture of their
own design, then the investors who place trust in such
Depository, which is expected to play a pro active role in keeping
the check on the purported transactions or else an investor
would be stripped of his life saving with no meaningful recourse.
It is therefore asseverated by the Mr.Tamboly that the appellant
cannot run away of its responsibility when BRH has altered and
caused loss to the respondent no.2.

21 The counter submissions advanced before us need to be
appreciated in the backdrop of prevailing statutory regime which
include the SEBI Act, 1992, which provide for establishment of
a Board to protect the interest of investors in Securities and to
promote the development of and regulate the Securities market
in India.
The Board constituted under Section 3 of the Act is cast
with a duty to protect the interest of investors in securities by
adopting such measure as it thinks fit and this includes the
following measures : -
(a) specify, by regulations—
(i) the matters relating to issue of capital, transfer of securities and
other matters incidental thereto; and
(ii) the manner in which such matters shall be disclosed by the
companies;
(b) by general or special orders—
(i) prohibit any company from issuing prospectus, any offer document,
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or advertisement soliciting money from the public for the issue of
securities;
(ii) specify the conditions subject to which the prospectus, such offer
document or advertisement, if not prohibited, may be issued.
(2) Without prejudice to the provisions of section 21 of the Securities
Contracts (Regulation) Act, 1956 (42 of 1956), the Board may specify
the requirements for listing and transfer of securities and other
matters incidental thereto.]
In addition, it is also empowered to issue directions if the
Board is satisfied that it is necessary --
(i) in the interest of investors, or orderly development of securities
market; or
(ii) to prevent the affairs of any intermediary or other persons referred
to in section 12 being conducted in a manner detrimental to the
interests of investors or securities market; or
(iii) to secure the proper management of any such intermediary or
person, it may issue such directions,—
(a) to any person or class of persons referred to in section 12, or
associated with the securities market; or
(b) to any company in respect of matters specified in section 11A,
as may be appropriate in the interests of investors in securities and the
securities market.]
22 Under Section 12 (1-A) no Depository Participant,
custodian of securities or any other intermediaries associated
with Securities market shall buy or sell or deal in Securities
except under and in accordance with conditions on Certificate of
Registration obtained from the Board in accordance with the
Regulations made under the Act.
It is open for the Board in exercise of the powers conferred
or in the performance of its functions under the Act to be bound
by such directions on the question of policy as the Central
Government may give it in writing. Similarly, the Board, by
virtue of Section 30 is empowered to make Regulations
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consistent with the Act and the Rules thereunder to carry out the
purpose of the Act.
23 The regime of Securities is also governed by the
Depositories Act, 1996 which is a statute to provide for
regulation of Deposit in Securities and the matter is connected
therein.
The Depositories Act has the participation of beneficial
owner that is a person whose name is recorded with a
Depository.
A Depository is a company formed and registered under the
Companies Act and which has secured a Certificate of
Registration under Sub Section 1-A of Section 12 of the SEBI Act,
1992. ‘Participant’ as per Section 2(g) means a person registered
under sub-Section 1A of Section 12 of SEBI ACT 1992 and
registered owner is a, Depository whose name is entered as such
in the Register of the Issuer.
The Depositories Act contemplate an agreement between
the ‘Depository’ and one or more ‘Participant’ (broker) as its
agent and any person, though a participant may enter into an
agreement with any Depository for availing the Services in such
forms as specified by the Bye-laws. A ‘Depository’, on receipt of
the information shall enter the name of a person in its record as
the ‘beneficial owner’.
The duties of the ‘Depository’ are set out in Section 7 of the
Act which include registration of transfer of security on receipt of
information from a participant in the name of the transferee.
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Every person subscribing to securities offered by an Issuer
have an option either to receive Security Certificate or to hold
Securities with the Depository and where a person opts to hold a
Security with a Depository, the Issuer shall intimate such
Depository the details of allotment of such Deposit and on
receipt of such information the Depository shall enter in its
record the name of the allottee as the beneficial owner.
In the new regime of the Depositories Act, securities held by
the Depository exist in form of fungible form, and are
dematerialized.
Section 10 recognize the right of Depositories by providing
that a Depository shall be deemed to be registered owner for the
purpose of effecting transfer of ownership of securities on behalf
of a beneficial owner and the beneficial owner is entitled to all
rights and benefits and is subjected to all liabilities in respect of
the Securities held by a Depository.
Subject to the Regulations and Bye-laws made in this behalf
a beneficial owner, with the previous approval of the Depository,
is empowered to create a pledge or hypothecation in respect of
the Security owned by him through a Depository, but sub-
section(2) of Section 12 contemplate that every beneficial owner
shall give intimation of such pledge or hypothecation to the
Depository and the Depository shall make entries in its record
accordingly, which shall be the evidence of a pledge or
hypothecation. Similarly, the rights and obligations of the
Depositories are set out to be as specified in the Regulations and
the Statute is supported by the SEBI Regulations 2018 (DP
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Regulations).
The said Regulations distinctly set out the framework of the
Depository and govern the registration of Depository by grant of
Certificate of Registration of the Board in form B of Schedule
subject to the necessary compliances. One of the requirement
being that the Depository shall comply with the provisions of the
Act, Depositories Act, the bye-laws, Agreements and 2018
Regulations.
24. The Regulations, 2018 provide for governance of
Depository by the governing board as set out in Chapter V with
the prescription of the Code of Conduct as well as segregation of
the functions. Chapter VI provide for grant of Certificate of
Registration to a Participant through a Depository in which it
proposes to act as a Participant and the Depository Participant
under Section 35 entitled for registration may be a Public
Financial Institution, a Bank, State Financial Corporation, a
Clearing Corporation or Clearing House of Stock Exchange or a
Stock Broker granting Certificate of Registration by the Board
under Sub-Section (1) of Section 12 of the Act, as well as a non
banking finance company having net worth of not less than 50
Lakhs etc.
The rights and obligations of the Depository, Participants,
Issuers etc. including the manner of surrender of Certificate and
creation of pledge or hypothecation is also specifically provided
in the Regulation with the prohibition of assignment imposed on
the Depository from assigning or delegating to any other person
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its functions as Depository without prior approval of the Board. It
is also mandatory for every participant to enter into an
Agreement with the beneficial owner before acting as participant
as per the bye-laws No.5.3.23, of the Depository. One important
stipulation in the Regulation is maintaining of separate accounts
and we deem it appropriate to reproduce Regulation 59 and 60,
which reads thus :
Separate accounts
“59. (1) Separate accounts shall be opened by every participant
in the name of each of the beneficial owners and the securities of each
beneficial owner shall be segregated, and shall not be mixed up with the
securities of other beneficial owners or with the participant’s own
securities
(2) A participant shall register the transfer of securities to or from a
beneficial owner’s account only on receipt of instructions from the
beneficial owner and thereafter confirm the same to the beneficial
owner in a manner as specified by the depository in its bye-laws.
(3) Every entry in the beneficial owner’s account shall be supported by
electronic instructions or any other mode of instruction received from
the beneficial owner in accordance with the agreement with the
beneficial owner.
Statement of accounts
60. Every participant shall provide statements of account to the
beneficial owner in such form and in such manner and at such time as
provided in the agreement with the beneficial owner.”
There is also specific provision in form of Regulation 79
prescribing the manner of creating pledge or hypothecation and
it allow a beneficial owner to create a pledge or security owned by
him by making an application to the Depository through the
participant, who has his account in respect of Securities.
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The procedure to be followed is specifically set out in Section
79 and we will refer to the same while we deal with the actual
process that has been followed.
25 In order to give effect to the whole statutory regime, SEBI
has issued various circulars from time to time chartering the
course of action to be followed by the Depositories/Depository
Participants and though we will refer to the said circulars when
the occasion arises, at this juncture we must only note that the
circular issued by SEBI has a statutory force and binds the
players in the field.
Under the aforesaid regime, a Depository is an entity that
hold securities in an electronic or dematerialized form and
facilitates their smooth transfer between the buyers and sellers
and the Appellant is a depository registered under Section 12(1)
of the SEBI Act, 1992. In terms of Section 4 of the Depositories
Act, the Depository has to enter into an Agreement with
Depository Participant to act as their agent and BRH before us is
one of the Agent of CDSL.
The DP Regulations has set out the code functions of the
Depository and this includes the key function of holding, transfer
of securities, record keeping and to regulate as a regulatory
compliance. It is involved in risk management, surveillance,
investigation, inspection, investor protection services and also
providing a redressal mechanism. In terms of the Depositories
Act alongwith the Regulations, the depository plays a substantive
role in protecting the interest of the investors/ beneficial owners
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and supervising the activities of its participants. CDSL as a
depository has framed its own by-laws and Mr.Kadam has
tendered a copy of the same.
26 CDSL Bye-laws has defined market trades concluded
through market trades and off market trades. CDSL indulges in
trades concluded through the trading system of recognized stock
exchange and clear and settle through clearing corporation which
has entered into an Agreement with CDSL and this include trades
which are negotiated privately and reported for clearing and
settlement through clearing corporation.
It also engages off market trades i.e. trades that are not
cleared or settled through the clearing corporation which entered
into an Agreement with CDSL in terms of the bye-laws. The
transaction before us is an off market trade as it is not through
the platform of NSE or BSE.
CDSL bye-laws has set out its functionaries and process of
admission of its participants. It also set out rights and obligations
of participants qua CDSL and bye-law No.5 specifically provide
that no participant shall conduct any business as participant
unless it has entered into an Agreement with CDSL. Section 3.4
of the bye-laws require participant to maintain a separate account
in the name of each of its beneficial owner and segregation of the
securities, so that they are not mixed up with the securities of
others.
As per bye-law No.5.3.22 every participant shall indemnify
and keep indemnifying CDSL against any loss, damage caused to
it by reason of any mistake, error, misfeasance, willful
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misconduct, mis representation, fraud, forgery etc. by its officers,
employees, servants or agents, who fail to meet any of the
obligations or liabilities to CDSL. In case of any loss, CDSL is also
duty bound to indemnify the loss incurred by such beneficial
owner and where such loss due to negligence of participant is
indemnified by CDSL as provided in Section 16(1) of the Act, the
CDSL has a right to recover the same from such participant.
27 In this statutory background if we look at the transaction
involved, it is evident that Daksha Bhavsar and her late husband
executed a PoA in favour of the Stock Broker BRH and as per
SEBI Guidelines it was permissible for the Stock Broker to
transfer the Securities to its Corporate Clearing Member/
Trading Member client account and this transfer can be for sale,
margin or collateral security.
In the second tranche, the Depository Participant/stock
broker BRH transferred the equity shares which came into its
TM/CM account to its Corporate Clearing Member/Trading
Member client account. This transfer was carried out based on
the authority granted under the PoA and by virtue of the transfer,
the securities stood transferred in the account of BRH, who
became its beneficial owner. Once the Securities/Shares came
into the account of TM/CM of BRH, they lost their identity, the
shares being fungible in nature and it became the holder of such
Securities, the transaction being an off market transaction.
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28 It is the case of Mr. Kadam that for this transfer an alert
was created and Daksha Bhavssar was aware of such transaction,
but it is the specific case of Mr.Tamboly that though the De-mat
account was opened by Daksha Bhavsar with BRH on 18/06/2018,
it being a stock broker and also Depository Participant, she was
always a passive, long term investor with no trades/pledges and
no market obligations before the disputed transaction.
It is the case of Mr.Tamboly that after a period of one year
i.e. on 31/07/2019 and 23/08/2019 without any specific
instructions from Daksha Bhavsar, BRH by misusing the PoA
issued in its favour, illegally transferred the shares valued at
Rs.98,07,884.60 from her De-mat Account into its own TM/CM
Account. Mr. Tamboly has specifically urged that the PoA was
never placed on record.
The further transaction according to Mr. Tamboly is equally
illegal when BRH pledged the shares of Daksha Bhavsar
alongwith those of other clients with HDFC Bank as a security for
a loan availed by itself and when there was a default, HDFC
invoked the pledge resulting into sale of the securities and
investors shares in the market.
29 In the wake of the aforesaid transaction, Respondent No.1
Daksha Bhavsar alleged that BRH had illegally transferred and
pledged her shares by misusing the PoA and caused loss to her
and the claim was also staked against the Depository, as the
Depository Participant was acting as an Agent of the Depository
i.e. CDSL and, therefore, liable under Section 16 of the
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Depositories Act, as it was alleged that she lost her amount as it
was negligent in supervising its Participant.
The claim was opposed primarily on the ground that it was
based on the misconstrued role of the Depository and the
accusations levelled against BRH were in its capacity
independently, as a Stock Broker and not a Depository
Participant. One more aspect which was placed into service was
absence of negligence, and it being demonstrated that the
Depository had failed to discharge its statutory obligations.
The Tribunal by its Award of 30/01/2024, taking recourse
to the provision of Section 16 of the Depositories Act, held the
Depository, CDSL, liable to indemnify the claimant for breaches
committed by BRH, its Depository Participant and awarded
Rs.86,02,768/- alongwith post-award interest at 9%.
The Tribunal analysed the role of the Appellant CDSL and
BRH and concluded that BRH misused the PoA to pledge the
shares for personal loans rather than margin requirement and
failed to obtain the required pledge request as a Depository
Participant. In the light of the statutory framework including the
Depositories Act, as well as Regulation of 2018 along with the
bye-laws of CDSL, it was concluded that there was abject failure
of governance and inadequate monitoring/supervision was the
primary cause for loss to Daksha Bhavsar and in specific it is
observed that with its participant misusing the PoA, as a
principal, CDSL cannot remain ‘blissfully oblivious’, particularly
when BRH illegally pledged the Securities of 9,493 clients
without their consent and, therefore, was liable under Section 16
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of the Depositories Act, to indemnify the investors for the loss
caused by the participant.
In the entire litigation, the stand of CDSL presented before
us through Mr. Kadam is, that neither before the Tribunal or
before the learned Single Judge, any specific violation is
attributed to the Appellant as a Depository and a plea is adopted
that lakhs of transactions take place on its platform per minute
and, therefore, it is impossible for it to supervise every
transaction and in fact on 31/07/2019 and 23/08/2019 when
BRH transferred the Securities to its own TM/CM account SMS
alert was created for the first leg of transaction on her mobile
number and, therefore, Respondent No.1 was aware that the
Securities have been transferred out of her joint De-mat Account
and Mr.Kadam has vehemently urged that once the amount came
into the TM/CM account of BRH, it became the beneficial owner
entitled to transact, which did not require any authority from the
original account holder and in such situation the Depository had
no role to play.
30 The Depository, under the Depositories Act is entitled to
enter into an Agreement with one or more participants as its
Agent and any person , though a participant may enter into an
Agreement with any Depository for availing its services. By
virtue of Section 7 it is the responsibility of Depository, on
receipt of intimation from a Participant, register the transfer of
security in the name of transferee and the option is given to the
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person subscribing securities to either receive the security
certificates or he can decide to hold securities with a Depository
and when a person opts to hold a security with Depository, the
issuer shall intimate the Depository about the details of allotment
of the security and on receipt of such information the Depository
shall enter in its record the name of the allottee as the beneficial
owner.
As the Securities are held by the beneficiary in
dematerialized form, by virtue of Section 10 of the Depositories
Act, a Depository is deemed to be a registered owner of the
securities for the purposes of effecting transfer on behalf of
beneficial owner. It is imperative for the Depository to maintain a
Register and an index of beneficial owners and thus he acts as a
record keeper.
The indirect involvement of the Depository is evident from
Section 12 of the Depositories Act when a beneficial owner is
authorized to create a pledge or hypothecation in respect of a
security owned by him with the previous approval of the
Depository and Sub-section (2) of Section 12 mandate it for
every beneficial owner to give an intimation of such pledge or
hypothecation to the Depository and such Depository shall make
entries in its record accordingly. Therefore, though Mr. Kadam
has urged that once BRH became the beneficial owner and created
hypothecation, that was a transaction which was outside the
purview of the Appellant as a Depository, we find that even if BRH
had become the beneficial owner, if it had hypothecated the
Depository, it ought to have given intimation of such pledge to
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the Depository and an entry in that regard ought to have been
made. It is also the obligation cast on the Depository under
Section 13 to furnish to the Issuer information about the transfer
of the Securities in the name of the beneficial owners at such
intervals and such manner as may be specified in the bye-laws
and it will be the duty of the Issuer to make available to the
Depository the copies of the relevant records in respect of the
Securities held by such Depository.
From reading of the aforesaid two provisions, it is evidently
clear that the Depository plays an important role in the Securities
market and the regulatory frame work in existence has
determined its role and its relationship with its participants like
BRH. Section 16 of the Depositories Act, which is the fulcrum of
the Judgment of the Tribunal and also of the learned Single
Judge, making the depository liable to indemnify the loss, reads
to the following effect :-
Depositories to indemnify loss in certain cases
16(1) Without prejudice to the provisions of any other law for the
time being in force, any loss caused to the beneficial owner due to the
negligence of the depository or the participant, the depository shall
indemnify such beneficial owner.
(2)Where the loss due to the negligence of the participant under sub-
section (1) is indemnified by the depository, the depository shall have
the right to recover the same from such participant.
31 We do not agree with the submission of Mr. Kadam that
there is no statutory responsibility cast upon the Depository,
but perusal of Section 26 of the Depositories Act, would dispel the
said contention as the Depository, with the previous approval of
SEBI is entitled to make Bye-laws consistent with the provisions
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of the Act, and Regulations and in particular such by-laws
provide for :-
“Power of depositories to make bye-laws.
26(1) A depository shall, with the previous approval of the Board,
make bye-laws consistent with the provisions of this Act and the
regulations.
…..
(g) the procedure for ensuring safeguards to protect the interests of
participants and beneficial owners;
(o) the procedure for proceeding against the participant committing
breach of the regulations and provisions for suspension and expulsion
of participants from the depository and cancellation of agreements
entered with the depository;
(p) the internal control standards including procedure for auditing,
reviewing and monitoring.”
What is also relevant to note is sub-section (3) and sub-
section 4 of Section 26 which is clearly indicative of the fact that
the Depository is entitled to make bye-laws as it is cast with the
responsibility of safeguarding and protecting the interest of
participants and the beneficial owners.
32 In exercise of this power, CDSL has formulated the bye-
laws in tune with its role under the Depositories Act, which has
received approval of SEBI as contemplated under Section 26(1)
of the Depositories Act. The bye-laws itself is indicative of the
supervisory role to be discharged by the Depository as it provides
for constitution of committees like Functional Committee,
Grievance Redressal Committee, Oversight Committee, Advisory
Committee with composition of its members. The Advisory
Committee is an Oversight Committee of CDSL and comprised of
public interest directors and Depository Participants of CDSL
and it exercise the power prescribed under the Regulations of
2018 and other applicable Regulations and is empowered to
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advise the Depository on non regulatory and operational matters
including technology, charges and levies amongst others. There
is also a Regulatory Oversight Committee which comprises of
independent external persons which has powers prescribed
under the Regulations of 2018 and is also empowered to monitor
the dealings in the Securities of the key management personnel
and also consider and decide the criteria for admission and
withdrawal of Securities and continuous compliance
requirements.
Clause 4.1 authorises CDSL to issue operating instructions,
specifications and guidelines relating to its functioning and
operation of CDSL and also that of its Participants, Issuers,
Clearing Corporations and Clearing Members, both interse and in
relation to CDSL. CDSL is empowered to repeal , delete, amend
and /or alter the operating instructions by keeping SEBI in the
loophole.
The operating instructions may cover the mode and
operation in the depository system of CDSL as well as
determination from time to time of the fees, system usage
charges, deposits, margins, penalties and other monies payable to
CDSL by the Participants, Issuers, Clearing Members and
Clearing Corporations. The operating instructions shall also
cover the detail procedure for dematerialization and
rematerialization of Securities and also reconciliation of records
between CDSL and Participants, Issuers, RTAs and Clearing
Corporations. The operating instructions issued by CDSL shall
govern the administration, maintenance and investment of all
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fund(s) settled by CDSL including the corpus, accretions and
contributions to the fund.
33 In the bye-laws of CDSL, the admission of Participants and
ground of Registration Certificate is one of the most important
function of CDSL as a Depository.
Every participant who is admitted in CDSL is required to
pay such amount by way of admission fees, annual fees and other
fees for the due performance of the duties and obligations and
CDSL is entitled to call upon the Participant to make such
contribution towards fund and to pay such fees, deposits and
additional security deposit or to furnish any additional guarantee
or required the deposit of any money in respect of contribution
to the funds for protection of interest of the beneficial owners.
The bye-laws has also formulated rights and obligations of
participants in relation to its dealing with CDSL and a participant
while conducting any business as a participant with a beneficial
owner., act as an Agent of the CDSL. There are instructions given
to the participants in clause 5 of the Bye-laws which are in
consonance with the SEBI Regulations, requiring maintenance of
separate accounts in the name of each of its beneficial owner and
avoiding mixing up of securities.
It is the duty of the participant to indemnify and keep
indemnified the CDSL and its Officers, employees or agents, from
any act committed or omitted , which is inconsistent with or in
breach of the existing regime or if any loss is suffered on account
of an overt act in form of mistake, error, misfeasance etc. As a
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part of the bye-laws, it is permissible for the CDSL to recover
from the participant, such amount as CDSL may deem fit and
appropriate in case if it suffers or incur any harm, loss, damage,
injury on account of any act, deed, or matter or thing done,
committed or omitted by acting in default or breach of the Act,
Regulations, bye-laws, agreements and operating instructions
issued by CDSL. In case of any loss caused to the beneficial
owner due to negligence of any participant, CDSL which is duty
bound to indemnify the loss under Section 16(1) of the Act, CDSL
has right to recover the same from the participant.
.. In addition to the aforesaid regime, we find that SEBI has
also issued circulars from time to time and the subject of the
Circular dated 26/09/2016, is specifically with regard to the
enhanced supervision of Stock Brokers/Depository Participants
and the said Circular mandated the depositories to draw attention
of the Stock Brokers/Depository Participants to give guidelines
framed by the Committee constituted by SEBI, which were issued
with a view to enhance the supervision over the Depository
Participants and Stock Brokers and these guidelines cover
various instructions.
Clause 2.4 clearly contemplate that the Stock Broker shall
not use the client’s funds and securities for the proprietary
purposes including settlement of its obligations and what BRH
has done is clearly contrary to this direction. Transfer of funds
between the account of the Stock Broker and client account and
the Stock Broker and the settlement account and the client’s own
bank is permitted only for legitimate purpose such as recovery of
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brokerage, statutory dues etc. Similarly transfer of Securities
between the stock broker and the client’s account and individual
clients BO account to pool account, is permitted only for
legitimate purpose like implementation of Government/
Regulatory directions or orders and the stock exchange is
empowered to monitor the compliance during inspection.
The detail guidelines issued by SEBI include the conduct of
internal audit and monitoring of quality of internal audit
reports and though these guidelines has cast the duty of
monitoring the financial indicators on the stock exchanges, the
standard operating procedure for Stock Brokers/Depository
Participants prescribed also require the depositories to monitor
their Members/Depository Participants and they are empowered
to frame various event based monitory criteria based on
market dynamics and market intelligence. Clause 6 of the said
Circular has set out the monitoring criteria for Stock Brokers and
the monitoring criteria for Depository Participants, obviously to
be supervised by the Depository. The Stock Exchange and
Depository as per the said circular are empowered to jointly
initiate uniform penal action on Stock Brokers and Depository
Participants respectively in the event of non compliance with the
criteria set out therein with a liberty conferred on the Stock
Exchanges and Depositories to frame more stringent criteria.
The reading of the whole guidelines annexed to the said
circular has an active involvement of the Depository i.e. CDSL and
it will be incorrect to say that the entire supervising/ monitoring
function is that of Stock Exchange, as we find that for
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transactions taking place on the platform of Stock Exchanges, it
is the Stock Exchange which shall monitor the activities of the
Stock Broker, but for Depository Participants the monitoring is
through the Depository and, therefore, in our view the Appellant,
CDSL cannot run away from its responsibility.
34 Mr. Tamboly has also placed before us the copy of another
Circular of SEBI dated 17/12/2018, on the subject of early
warning mechanism to prevent diversion of clients Securities
and this circular is prefaced in the background set out as below :
“There have been instances where stock brokers had diverted clients’
securities received as collaterals towards margin obligations and/or
settlement obligations, for raising loan against shares on their own
account and/or for meeting securities shortages in settlement
obligations on its own account. However, such instances of diversion of
securities come to light when stock broker failed in meeting the margin
and/or settlement obligations to Stock Exchange/Clearing Corporation.
2 It has been decided to put in place an Early Warning Mechanism
and sharing of information between Stock Exchanges, Depositories and
Clearing Corporations to detect the diversion of client’s securities by
the stock broker at an early stage so as to take appropriate preventive
measures. The threshold for such early warning signals shall be
decided by the Stock Exchanges, Depositories and Clearing
Corporations with mutual consultation.”
The said circular identified the early warning signals on
deterioration of the financial health of the Stock Broker/
Depository Participant on account of sudden activation of
significant number of dormant client’s accounts and/or significant
activity in such accounts.
As per the said circular, early warning signals in relation to
securities pledge transaction by the Stock Broker has to be
identified by the Depository and shall be shared with the Stock
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Exchanges which would include movement of shares to/from a
large number of clients’ Demat Account or large value shares to
Stock Broker’s Proprietary Account and vice a versa or transfer
of large value of shares through off-market transfers other than
for settlement purposes and invocation of pledge of Securities by
lenders against Stock Broker or his clients.
These are the precise signs which the Appellant missed to
take note of as the account of Respondent No.1 was dormant for a
period of one year, but all of a sudden it resulted in the movement
of the Securities to the account of the Stock Broker and
subsequently these securities were pledged with HDFC Bank
towards discharge of BRH’s own liability, which was followed by
invocation of the pledge, but the Depository, CDSL, did not
identify these warning signals.
In the background of the increase in number of investors
complaints against the Stock Broker/Depository Participant
alleging unauthorized trading/unauthorized delivery instruction
being processed, and non receipt of funds and securities, it was
directed that CDSL should monitor monthly/weekly submissions
by the Stock Broker and this would relate to pledging of Securities
in case of client having credit balance and use of the funds by the
Stock Broker for its own purpose or funding debit balance of
clients.
It is to avoid such situation with the early warning signals
being mapped, the Stock Exchanges and Depositories were
directed to frame an internal policy/guidelines regarding non-
cooperation by the Stock Broker and Depository Participants and
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was empowered to lay down the time period, types of documents
critical for closing the inspection and if there is no compliance it
to be treated as non-cooperation. The directives of SEBI having
statutory force, it made imperative for the Appellant to frame
such guidelines in the wake of the circular of 17/12/2018, but we
are informed that no such guidelines are in place and had these
guidelines being issued and the activities of the Depository
participant would have been mapped, probably the situation
created by BRH could have been arrested.
Clause 8.2 provided for the action to be taken by the
Depositories in the following manner :
“8.2 Actions to be taken by the Depositories :
a) Restriction on further pledge of client securities from the client’s
account by freezing the stock broker client account for debit.
b) Imposition of 100% concurrent audit on the depository participant.
c) Cessation / restriction on uses of Power of Attorney (POA) given to
stock broker by clients mapped to such brokers only to meet settlement
obligation of that client. Clients to issue instructions electronically or
through Delivery Instruction Slip (DIS) for delivery of shares for off
market transfers.”
SEBI clearly directed the Stock Exchanges/Clearing
Corporations and Depositories to implement the early warning
mechanism and preventive actions with effect from 01/02/2019 ,
but no steps are taken by CDSL in this regard.
It is on account of non adherence to the said guidelines,
issued by SEBI, which has the statutory force, Mr. Tamboly has
attributed negligence in not performing the duties which are cast
upon the Depository/Stock Exchanges to frame guidelines.
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35 Another circular of 20/06/2019 also provided guidance for
handling of client securities by Trading Members/Clearing
Members which involve segregation of the the securities of the
client from that of the stock broker and the Securities Contract
(Regulation) Act 1956 and SEBI (Stock Brokers) Regulations
1992 provided that the Stock Broker shall segregate the
Securities or monies of the client and shall not use the same for
self or any other client and this is precisely what BRH has
indulged into.
The circular issued by SEBI cast a responsibility on Stock
Exchanges, Clearing Corporations and Depositories to put in
place a mechanism for monitoring as below:-
6. Monitoring with respect to handling of clients securities :
a) Handling of unpaid clients’ securities by the TM/CM-Mechanism of
matching of transfer of securities with the securities obligation as
obtained from the clearing corporation with respect to the following :=-
i. Securities transferred from the client unpaid securities account to
the pool accountant
ii. Securities transferred from the client unpaid securities account to
the concerned client account.
Iii. Securities transferred from pool account to the concerned client
account.
b) All the DP accounts tagged as “Stock Broker-Client Account’ are
wound up before August 31,2019.
c) Securities lying with TM/CM in client collateral account, client
margin trading securities account and client unpaid securities account
shall not be permitted to be pledged/ transferred to Banks/NBFCs for
raising funds by TM/CM.
The provisions in the said circular were declared to come
into effect from 01/09/2019 and non compliance of the same
invited a penalty .
Though Mr. Kadam has urged that this circular came into
effect after the subject transaction, we find that from time and
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again SEBI cautioned the Stock Exchanges and the Depositories
to maintain a vigil on the activities of the Stock Brokers and
Participants, so as to safeguard the interest of the clients and to
protect its securities and it is in this regard, the Depository CDSL
face an accusation of negligence and it has been fastened with the
liability under Section 16 of the Act. The Appellant has been
held liable for being negligent in not keeping vigil over the
activities of its Depository Participant, BRH and Section 16 of the
Depositories Act is based on the principal that Depository
Participant act as an agent of the Depository and, therefore, the
liability is fastened on principal (CDSL) for the wrongful acts
committed by its Agent (BRH) till the course of its engagement as
Depository Participant. BRH acting as a Depository Participant
in CDSL’s depository system, was authorized to deal with the
investor securities and misuse of PoA and consequent illegal
transfers were possible only because there was no supervision by
the principal. It is a well settled principle that if an Agent
commit fraud for an act in the course of business, as he was
authorized or held out as authorized to transact on account of its
principal, the later may also be held liable.
The aforesaid principle is also reinforced in the wake of the
provision of Section 238 of the Contract Act, 1871 which provide
that a principal is liable for fraud or misrepresentation committed
by its agent acting within the scope of its Authority.
The reliance placed by Mr. Kadam on Britannia Industries
Ltd. (supra) and State of Orissa (supra) to prove that principal is
not liable for the fraud committed by an Agent, when the Agent
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is acting in excess of the authority, according to us, is misplaced.
In fact, in the present case, we find that BRH acted within the
purview of depository system and by virtue of its position as
Depository Participant, with an Agreement entered with the
Depository, it was acting within the framework of its authority
conferred by the Depository. Here, the real test is whether the
Agent was placed in a position enabling the fraud in the course of
employment and in such case, principal remains liable.
The reliance in case of Malay Kumar Ganguly (supra) to
draw distinction between misfeasance, malfeasance and
nonfeasance do not take the case of the Appellant any further as
such classifications is of no assistance, as non adherence to the
clear statutory obligations and failure to discharge the regulatory
duties, definitely give rise to a civil liability and this is what has
been precisely held by the learned Arbitral Tribunal and the
finding being upheld by the learned Single Judge.
Had CDSL put up a mechanism timely in place and
implemented SEBI mandated safeguards, the disputed
transaction would have been captured and it would not have been
possible for BRH to transfer large volume of shares from dormant
passive investor’s account, one of which belong to Respondent
No.1. Once it is not disputed that the SEBI circulars have the
force of law and form an integral part of regulatory frame work
governing Depository Participants which include the Appellant
and Respondent No.2, and this position is not disputed by
Mr.Kadam, a failure to frame such guidelines/formula, a
chartered mechanism, to note some unwanted act of participant,
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in our view itself amounts to being negligent and that is the
specific reason why the Appellant has been caught in the web of
Section 16, which contemplate negligence. As suggested by
Mr.Kadam, the word ‘negligence’ in Section 16 is not limited to
convey a trivial mistake like allotting a wrong number to the
Securities or Depositories or miscalculation of the Securities
resulting into loss to the beneficial owner and though we agree
that the term ‘negligence’ used in Section 16(1) of the
Depositories act, is not synonymous to a fraud, but when the
legislature has consciously restricted its scope only to
‘negligence’, indicating lack of care or failure to act with the level
of care that a reasonably careful person would use in the same
situation, we attribute it to the appellant CDSL.
For establishing negligence, it is necessary to establish
presence of four elements; duty of care; breach of duty; causation
and damage.
Since CDSL had been cast with a responsibility of
protecting the interest of the investors and their securities in the
statutory regime, we find that it has failed to discharge the said
duty and rather remained completely oblivious for the acts of its
Depository participant (BRH). The careless action is the direct
reason for Respondent No.1’s loss alongwith other investors as
BRH freely pledged the Securities of the client by transferring it
into its own account, and definitely it could not have pledged the
Securities of the clients for securing its own personal interest.
There is also presence of all the four elements, as an injury being
caused to Respondent No.1 as she lost the amount invested in
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Securities as they being pledged with the HDFC Bank by BRH , the
Bank on its default revoked the pledge.
36 We are conscious of the fact that Negligence do not
necessarily cover fraud and it is distinct from fraud and we have
no hesitancy in holding that the liability fastened upon the
Appellant as a Depository is attributed to its negligence though
we find that at some places in the Judgment, the learned Single
Judge has also discussed the fraud, but ultimately the liability of
indemnifying Respondent No.1 has shown to have arisen out of
negligence attributed by BRH and for no other reason.
The finding of the Arbitral Tribunal as well as the learned
Single Judge is based on the correct understanding of the
Securities market as it is noted that BRH operated in dual
capacity as Stock Broker and also Depository Participant (DP)
and it executed a systematic illegality by misusing the PoAs to
unauthorizedly transfer shares from 9,493 clients into its own
Corporate Account without any underlying trades and pledged
these securities for personal loans, ultimately causing loss of the
investors holding since HDFC sold the shares upon BRH’s default.
The learned Single Judge rightly ascertained the role of
BRH not only as a Stock Broker, but also as a Participant by
holding that the Securities were moved into the account of BRH
from the Demat Account of the client by misusing the PoA without
the pledge request and that is how BRH manipulated the
depository system in its capacity as Depository Participant. The
transfers by BRH includes TM/CM account composite
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transaction which require the Depositories authorization and it
was executed by BRH acting as an Agent of CDSL as per its own
bye-laws, the finding of the Tribunal that transfer of
securities/shares was a composite act involving BRH as a
Depository Participant, was approved by the Single Judge.
That is the reason that under Section 16 of the Depositories
Act, it is a concurrent finding rendered that the Appellant is
directly and absolutely liable to indemnify the investor (Daksha
Bhavsar) because of BRH’s negligent acts committed in its
capacity as Depository Participant, who act as an Agent of the
Depository, and, therefore, any negligence on its part is legally
considered as negligence of the Depository, as the principal
making it liable to compensate the beneficial owner regardless
whether the Depository had prior knowledge of the same. Since
the broad scheme of the Act ensure quick and smooth
compensation for the mal practices of the Depository Participant
and the Scheme also permit the Depository to subsequently use
its resources to recover the funds from the Depository Participant
and this action is open for being pursued by the Appellant.
The liability under Section 16 of the Depositories Act to
indemnify the beneficial owner is absolute, once a negligent act
by Depository Participant is established and it is open for the
Appellant as Depository to recover the said amount from the
Participant as per its own bye-laws.
37 One important aspect which cannot escape our attention is
the provision for settlement in the bye-laws of CDSL and as per
the market trade settlement is concerned, CDSL is entitled to
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debit and or credit the account of the beneficial owner and/or to
such accounts as may be specified in the operative instructions
for the Clearing Corporation/Settlement Procedure, strictly in
accordance with the advise issued by Clearing Corporation on
confirmation of payment. However, with reference to Clause 7.2
of the Bye-laws, in respect of off market trade, CDSL shall debit
and/or credit the account of the beneficial owner entitled to such
credit or debit, only after receipt of confirmation from the
delivering beneficial owner and the receiving beneficial owner
through their respective participants confirming details of such
securities.
We find substance in the submission of Mr.Tamboly that
CDSL could not have permitted the transfers unless it received
confirmation from its client and this could not have been allowed
on the basis of PoA apart from the fact that the terms of PoA are
never produced before us.
Since the rights and obligations of the Depository qua the
Participant are clearly set out by the bye-laws and the participant
was under an obligation to maintain a separate account for each
beneficial owner and ensure that the Securities of the beneficial
owner are not mixed up with its own Securities, the supervision
or monitoring by CDSL as Depository was very much mandatory.
38 Reliance placed upon the order passed by the Adjudicating
Officer of SEBI in the matter of Karvy Stock Broking Limited
(‘KSBL’) is perused by us, as pursuant to a Joint Inspection of
KSDL conducted by SEBI along with NSE and BSE, the non-
compliances were observed with respect to Pledging/misuse of
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client securities by it.
The role of CDSL in the matter related to KSBL was
ascertained and explanation was sought from CDSL in relation to
the relevant clauses of SEBI circular of 2016 on enhanced
supervision of stockbrokers Depository Participants as well as the
compliance of circular dated 17/12/2018 on Early Warning
Mechanism.
The detail order dated 25/11/2022, a conclusion is drawn
that in respect of the complaints received in respect of KSBL – DP,
the noticee had taken reasonable steps to address the complaint
and the evidence was insufficient to establish that it had acted in
casual manner and there is violation of Regulation 17 read with
Regulation 98 of DP Regulations, 2018, as well as the Code of
Conduct for depositories. However, it is worth to note that the
said order is based upon the violations qua one of the Depositary
Participant i.e. KSBL and merely because the CDSL had adopted a
cautious approach in that case, is no justification to infer that
CDSL did not faulter in the present case, where Daksha Bhavsar
was deprived of her securities. Though the order noted that SOP
was formulated which was also approved by SEBI, the moot
question is why did it not trigger the Early Warning Alert in case
of Daksha Bhavsar, when BRH misutilised its authority and
pledged the shares with HDFC which were invoked by it when
BRH failed to discharge its personal obligation.
What is expected of an authority like the depository in light
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of its Bye-laws and the Regulation of 2018, is to have a keen
control over the affairs of its Depository Participant, and on
failure to do so, CDSL has been held liable under Section 16 of the
Depositories Act.
Mr.Karl Tamboly has also tendered before us a compilation
depicting compliance with SEBI circular dated 17/12/2018 (Early
Warning Circular) and we find this to be made applicable in the
matter of Karvy Stock Broking Limited, but CDSL definitely did
not issue any directions as regards any other depository.
From the material placed before us, in a sealed envelope, we
have before us minutes of the meeting held on 24/1/2019 with
stock exchanges, clearing corporations, and depositories, with
regards to the subject of formulation of the guidelines on ‘Early
Morning Mechanism’ and the triggers suggested, but
unfortunately we do not find the said decision to be translated in
form of any action.
38 In the wake of the aforesaid, we do not find substance in the
present Appeal and more particularly when in exercise of
powers under Section 37 of the Arbitration & Conciliation Act,
the scope for our interference is minimal and more
circumscribed than the scope available in Section 34. It being a
well settled position in law that the scope of intervention of the
Court in arbitral matters is virtually prohibited although not
absolutely barred and such interference is confined only to the
extent contemplated under Section 34 of the Act. The Appellate
power available under Section 37 of the Act is further limited
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within the domain of Section 34 and it is exercisable only to find
out if the Court, exercising the power under Section 34 of the Act
has acted within its limits as prescribed thereunder or has
exceeded or failed to exercise the power so conferred. It is not
permissible for the Appellate Court to consider the matter on
merits so as to find out whether the decision of the Arbitral
Tribunal is right or wrong and re-appreciate the evidence which
is permissible to be appreciated as a Court of Appeal. It is only
when the Court exercising the power under Section 34 has failed
to exercise its jurisdiction vested in it or has travelled beyond its
jurisdiction, it is open for the Appellate Court to step in and set
aside the order passed under Section 34 of the Arbitration and
Conciliation Act. But definitely the Arbitral Award is not liable to
be interfered unless a cases for interference is made out and it is
not permissible to interfere in the Award or the order only on the
ground that a better view is possible.
The Scope of Section 37 of the Act being more summary in
nature, when we find that the Arbitral Award was based on
evidence and is reasonable and the learned Single Judge has
rightly exercised the power under Section 34 of the Act and
examined the Award on the permissible grounds and recorded
that it did not suffer from illegality or that any error was
committed and therefore upheld the same, and therefore in
exercise of our power under Section 2 it is not possible for us to
show any interference. As a result, we dismiss the Appeal.
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The material placed before us by Mr.Kadam which was
retained by us in sealed envelope is directed to be returned to the
learned Senior counsel.
(MANJUSHA DESHPANDE, J) (BHARATI DANGRE, J)
On pronouncement of the judgment, Mr. Kadam seeks stay
of the judgment, but since we have pronounced upon the merits of
the Appeal, we refused to stay our judgment, as we have
expressed our concurrence with the Award of the Arbitral
Tribunal and the judgment of the learned Single Judge. However,
on the insistence of Mr.Kadam, we refrain the respondent from
taking any coercive steps for recovery of the amount due and
payable to Daksha Bhavsar in terms of the award and the
judgment of the learned Single Judge.
We therefore, grant stay limited to the effect that no
coercive steps shall be taken for recovery of the amount from the
appellant for a period of six weeks from today.
(MANJUSHA DESHPANDE, J) (BHARATI DANGRE, J)

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