Stockbroker Cannot 'Wriggle Out' Of Liability For Agent's Unauthorized Acts: Bombay High Court

The Bombay High Court on 21 April, held that a stockbroker remains liable for unauthorised and fraudulent trades executed by its sub-brokers and agents, particularly where such acts arise in the course of agency and result in abnormal brokerage gains at the client's expense.

Justice Arun R. Pedneker upheld the arbitral award directing IIFL Capital Services Limited to pay Rs. 14.37 lakh to investor Sukhadeo Gorakha Bhil and dismissed the appeal filed under Section 37 of the Arbitration and Conciliation Act, 1996. He observed:

“The stock broker cannot wriggle out of the Alliance Partners actions, which are in the course of his agency, although the Broker / Appellant may have not permitted the Alliance Partner to indulge into fraudulent trades. The actions of the Alliance Partner has resulted in the profits to Stock Broker and the Broker is liable for the act of Alliance Partner and his servants.”

The dispute arose after Bhil opened a trading and demat account with IIFL in July 2024 through its alliance partner, Manvendra Pratap Singh. Between July and September 2024, multiple F&O trades were executed in his account, leading to losses of Rs. 14.37 lakh.

Bhil invoked arbitration under the client-broker agreement and alleged that IIFL and its agents executed trades without his consent. He claimed the trades were excessive, manipulative, and aimed at generating brokerage revenue rather than serving his investment interest.

An Arbitral Tribunal accepted his claim and, by award dated 10 March 2025, directed IIFL to pay Rs. 14.37 lakh after finding that unauthorised trades were executed without consent and structured to generate abnormal brokerage.

IIFL challenged the award under Section 34 before the District Court, which refused to set it aside. It then approached the High Court under Section 37, arguing that Bhil remained aware of the trades through contract notes, SMS alerts, and account statements, and his silence barred him from disputing them later.

The High Court rejected this contention and upheld the Tribunal's findings, holding that the trades were executed without valid authorisation and were designed to benefit the broker and its alliance partner through abnormal brokerage in F&O transactions.

Justice Pedneker reiterated that while clients generally cannot avoid trading losses by failing to raise timely objections, this principle does not apply to blatantly unauthorised or fraudulent trades executed by brokers or their agents. He further observed:

“Mere silence for some time in such a case by a passive investor, who is incapable of understanding the consequences of contract notes or text messages, in raising grievance about unauthorised transactions in his account, would not estop him from claiming return of stolen shares or claiming value thereof. Thus, the facts of this case, fails within the exceptions carved out in the case of Erach Khavar and Monita Khade.”

Separately, while examining the scope of interference under Section 37, the Court reiterated that an appellate court cannot reappreciate evidence or interfere with findings of fact unless they are shown to be perverse or unsupported by record.

It held that the arbitral findings were based on WhatsApp chats, audio recordings, and transaction data, and disclosed no patent illegality warranting interference and found that the broker's agents prioritised brokerage generation over client interest.

Accordingly, the High Court upheld the arbitral award and dismissed the appeal.

Appearances for appellant: (IIFL Capital Services Limited): Advocates Kunal Katariya, Shubham Dhamnaskar, Paramjeetsingh Parmar (for Karan Sarosiya).

Appearances for respondent: (Sukhadeo Gorakha Bhil): Advocates Vikas Gupta, Akshara Sharad Madake.