Karnataka High Court Upholds Award Against Kotak Securities Over Unauthorised Share Sale

The Karnataka High Court has dismissed an appeal by Kotak Securities Limited and declined to interfere with an arbitral award holding the broker liable for unauthorised sale of shares and wrongful charging of interest.

A bench of Chief Justice Vibhu Bakhru and Justice C.M. Poonacha upheld the findings of the arbitral tribunal as well as the commercial court. The court found no merit in Kotak's attempt to reopen the dispute by advancing a new case at the appellate stage.

“We do not consider it apposite to permit KSL to set up completely a new case at this stage,” the Court said.

The dispute relates to trading and demat accounts opened by Sudeep R. Prasad and his family members with Kotak Securities. Prasad approached the NSE's Grievance Redressal Committee alleging that Kotak had sold shares from his demat account without his instructions.

He also complained that instead of settling the account, the broker continued to charge interest over several years. The GRC found that on a consolidated basis, Prasad and his immediate family members had a net credit balance of Rs 61,507.08.

Despite this, Kotak had charged interest of Rs 6.67 lakh and later sold shares to recover the alleged dues. Holding the sale to be wrongful, the GRC awarded compensation of Rs14.26 lakh.

Kotak challenged the GRC's order under the NSE bye-laws before a sole arbitrator. The arbitrator accepted that the accounts carried an additional facility permitting adjustment of balances across family accounts and noted that Kotak had failed to use this facility at the relevant time.

The arbitrator held that charging interest and selling shares despite available credit balances was unjustified. However, the arbitrator reduced the compensation, holding that Prasad was not entitled to gains arising from subsequent appreciation in the value of the shares.

An appellate arbitral tribunal upheld this reasoning and fixed the payable amount at Rs 11.50 lakh. Kotak's challenge before the commercial court was also rejected.

Before the High Court, Kotak argued that a SEBI circular issued on December 3, 2009, prohibited stockbrokers from adjusting balances between different clients, and that adjustment of balances of related entities was permitted only later under an NSE circular dated December 31, 2019.

The court rejected this contention. It noted that Kotak had never pleaded before the GRC, the arbitrator, the appellate tribunal, or the commercial court that it was legally barred from adjusting balances between Prasad and his family members.

On the contrary, Kotak had consistently admitted that the accounts carried a family adjustment facility. The Bench further observed that even if Kotak's reliance on the 2009 SEBI circular were accepted, the running account ought to have been settled by the end of the relevant quarter in 2010.

“It is clearly not open for the KSL to contend that it would continue to maintain a running account without any actual settlement. With the closure of the running account, there would be no impediment for KSL to adjust the amounts due in the account of the respondent from the amounts payable by KSL to his immediate family members,” the court observed dismissing the plea.

For Appellant: Advocate Venkatesh Murthy G.R