HEADLINE: Depository is statutorily liable under Section 16 of the Depositories Act to indemnify investors for losses caused by a participant's negligence.

The Respondent, Daksha Bhavsar, maintained a Demat account with BRH Wealth Kreators ("BRH"), an entity acting in a dual capacity as a Stock Broker and a Depository Participant ("DP") for the Appellant, Central Depository Services (India) Ltd. ("CDSL")

In 2019, BRH misused a Power of Attorney ("PoA") executed by the Respondent to transfer her shares—without underlying trades—into its own corporate accounts

These shares were then pledged by BRH to HDFC Bank to secure personal loans; upon BRH's default, the bank invoked the pledge and sold the shares

The Respondent initiated arbitration, resulting in an Award dated 30/01/2024, which held CDSL liable to indemnify her for the loss under Section 16 of the Depositories Act, 1996

CDSL challenged this under Section 34 of the Arbitration and Conciliation Act, 1996, which was dismissed by the Single Judge on 01/12/2025

CDSL then preferred this appeal under Section 37.

1. Whether a Depository (CDSL) is statutorily liable under Section 16 of the Depositories Act to indemnify a beneficial owner for losses resulting from the fraudulent/negligent acts of its Depository Participant (BRH)

2. Whether the Appellant’s failure to implement SEBI-mandated "Early Warning Mechanisms" and supervisory guidelines constitutes "negligence" under the Act

3. Whether the Arbitral Award suffered from patent illegality or perversity warranting interference under Section 37

The court primarily applied Section 16 of the Depositories Act, 1996, which mandates that a Depository must indemnify a beneficial owner for losses caused by the negligence of either the Depository or the Participant

It relied on the principal-agent relationship established under Section 4 of the Depositories Act and the CDSL Bye-laws (specifically Bye-law 5.3.22), which hold the principal liable for the misfeasance or fraud of the agent acting within the scope of the depository system

The court also integrated SEBI Circulars dated 26/09/2016 and 17/12/2018 (Early Warning Mechanism), noting these circulars have statutory force under the SEBI Act, 1992

Finally, the scope of interference was governed by the "patent illegality" and "plausible view" standards from Ssangyong Engineering and Ramesh Kumar Jain v. Balco

The Court rejected CDSL’s argument that it acted as a mere passive record-keeper, holding instead that it is a "Market Infrastructure Institution" with substantive supervisory duties

The Court found that BRH’s misuse of the PoA and the subsequent unauthorized pledge of shares were made possible by CDSL’s "abject failure" to monitor its agent

Specifically, the Court noted that had CDSL implemented the "Early Warning Mechanism" mandated by the 2018 SEBI Circular—such as monitoring sudden activity in dormant accounts or off-market transfers to broker proprietary accounts—the fraud could have been arrested

The Court reasoned that Section 16(1) creates an absolute civil liability to protect investors; once the Participant’s negligence/malfeasance is established within the depository framework, the Depository must indemnify the owner and may later recover from the Participant under Section 16(2)

The Court held that the Arbitral Tribunal’s conclusion was a "plausible view" based on the statutory framework and the failure of CDSL to maintain internal control standards

It held that CDSL is liable under Section 16 of the Depositories Act to pay the Respondent Rs. 86,02,768/- plus 9% interest, representing the value of the lost shares

The Court ruled that the Depository cannot evade liability by claiming its Participant acted in excess of authority when the system provided by the Depository enabled the loss

The Court granted a limited stay on coercive recovery steps for six weeks to allow for further legal recourse