Stock Exchange Bye-Laws Cannot Compel Arbitration Of Fraud Disputes: Bombay High Court

The Bombay High Court on 9 June held that although stock exchange bye-laws carry statutory force, they cannot compel arbitration of every shareholder dispute, particularly where serious allegations of fraud arise and the dispute falls outside the scope of arbitrability.

Justice Somasekhar Sundaresan allowed the challenge and quashed an arbitral award dated 6 August 2024, which had directed ABB India Ltd to restore 1,550 ABB shares and 310 Hitachi Energy India shares to shareholder Sunil Hariram Jaisingh or alternatively pay compensation equivalent to their market value. The Bench observed:

“The bye-laws of a stock exchange constitute subordinate law and are tabled in Parliament, having the force of statutory provisions. While such disputes of the nature set out in the aforesaid clause are made subject to arbitration, the law on arbitrability of disputes cannot be given a go-by. Indeed, every grievance raised by a shareholder cannot be said to be brought within the ambit of arbitration – for example, a grievance about accounting fraud by a listed company, made by a shareholder cannot be arbitrable. A shareholder who contends that a decision by the board of a listed company was taken negligently and that has resulted in losses for which damages are claimed, could arguably not be the intended beneficiary of the Master Circular.”

The dispute arose from 175 ABB shares originally held by Jaisingh's father, who died in 1988. After the family filed an application for transmission in 1992, ABB returned the original share certificates subject to probate proceedings. Jaisingh later claimed that his advocate misplaced the certificates and rediscovered them only in 2021. By that time, authorities had already issued duplicate certificates and the shares had dematerialised and transferred during 1998–99.

ABB's investigation showed that institutional investors received the shares through hand-delivery transactions arranged by Dolat Capital Market Pvt Ltd, which indicated a fraud requiring investigation.

The Court held that the possible involvement of Jaisingh, his advocate Amar Talreja, officials of Tata Consultancy Services Ltd (Tata Consultancy Services), and ABB India Ltd could not be ruled out. It further held that the arbitral tribunal ignored settled principles governing damages and failed to properly examine the fraud allegations. The Bench also held that the arbitral tribunal wrongly required ABB to first identify the fraudster before it could plead non-arbitrability, even though determining fraud itself required a full investigation.

Criticising the tribunal's approach towards Tata Consultancy Services, it noted that although the tribunal itself found a high probability of fraud within the organisation, it still proceeded without ensuring meaningful participation from it. It observed:

“It is at this juncture, that the Tribunal's handling of TCS calls for comment, the Tribunal clearly holds that the possibility of fraud having occurred in the office of TCS, is very high. TCS has been treated as a party that has not been served despite it being one of India's largest listed companies. The very comprehension of fraud is not something one can agree with, necessitating intervention under Section 34 of the Act. The aforesaid extracts speak for themselves.”

Moreover, the Bench identified inconsistencies in the tribunal's findings on the alleged loss and later recovery of the original share certificates. It held that the roles of Jaisingh and his advocate could not be excluded without proper adjudication through trial or investigation.

Accordingly, the High Court set aside the arbitral award and directed ABB India Ltd to receive restitution of all amounts released under the award.