Unauthorized trading of Shares in Client's Demat Account -Broker held liable for making good the losses suffered by the Client. Adv. Rohit Erande. ©

*An Important Judgment Indeed - For Brokers and for Investors..*

 *Unauthorized  trading of Shares  in Client's Demat Account -Broker held liable for making good the losses suffered by the Client.* 

*Adv. Rohit Erande.©*

Case Details : VAMAN NAGESH UPASKAR & ANR., Goa (Appellants) V/s.  INDIA INFOLINE LTD. & 2 ORS. (Respondents)

BEFORE: HON'BLE MR. JUSTICE V.K. JAIN, PRESIDING MEMBER.

Judgment Link : http://cms.nic.in/ncdrcusersWeb/GetJudgement.do?method=GetJudgement&caseidin=0%2F0%2FRP%2F2873%2F2014&dtofhearing=2020-10-28

Facts in nutshell :

1. The case is of 2009. The complainant / appellant opened  Demat Account with respondent No.1 in India Infoline Ltd. It is the case of the Complainant   respondent No.3 - Siddesh A. Prabhudesai, an employee of Respondent No.1 - India Infoline Ltd carried out unauthorized trading /selling  of shares in his Demat Account without his consent and caused heavy losses to him to the tune of Rs.1,72,020/- and even though the Complainant lodged a compliant with the Respondent Company and also requested the Company to close the demat account, it turned out on deaf ears.  

2. The complainants, therefore, approached concerned the  District Forum by way of a consumer complaint seeking the above-referred amount of Rs.1,72,020/- with compensation, etc. The Respondent Nos.2 & 3 did not contest the consumer complaint. Respondent no.1 - Broker company however, filed the written statement thereby denying the compliant and it further alleged that   the complainant had entered into a mutual agreement with respondent No.3 -employee allowing him to trade into his account and on coming to know of this, respondent no.1 terminated the services of respondent Nos.2 & 3.

3.      The District Forum having allowed the consumer complaint, respondent No.1 approached the concerned State Commission  by way of an appeal.  The State Commission, to the much of dismay of the Complainants,  allowed the appeal and dismissed the complaint solely on the ground that the complainants were not consumers within the meaning of the Consumer Protection Act. Hence the matter reached upto the National Commission.

Held :

1. The National Commission while reversing the Judgment of state Forum observed that nowhere it has been pleaded in the written version that the complainants were not consumers. 

2. It was further observed that the term ‘consumer’ has been defined in Section 2(1)(d) of the Consumer Protection Act, which to the extent it is relevant for the purpose of this petition means a person who buys goods or hires or avails services for consideration but does not include a person who obtains goods for resale or who purchases goods or avails services for any commercial purpose. As per the explanation, inserted with effect from 15.3.2003, for the purpose of the above referred clause, commercial purpose does not include use of the goods or services exclusively for the purpose of the earning livelihood by means of self-employment.

3. The commission also referred to various judgments on this point and discussed in detail about who can be called as "a consumer" and not and mainly it relied on the observations in  the judgment of Hon. Supreme Court in the case of Lilavati Kirtilal Mehta Medical Trust Vs. Unique Shanti Developers & Ors. IV (2019) CPJ 65 (SC), wherein it was observed by their Lordships that :

“7.    To summarize from the above discussion, though a strait-jacket formula cannot be adopted in every case, the following broad principles can be culled out for determining whether an activity or transaction is ‘for a commercial purpose’:

4. It   has been further  held that the question of whether a transaction is for a commercial purpose would depend upon the facts and circumstances of each case. However, ordinarily ‘commercial purpose’ is understood to include manufacturing / industrial activity or business-to-business transactions between commercial entities and it was held that the following legal propositions emerge from the above referred decisions of the Hon’ble Supreme Court:

(a) Only a person engaged in large scale commercial activities for the purpose of making profit is not a consumer;

5.   While holding that the Complainants are 'the consumers' in the eyes of Law, It has been further observed that in the present case, there is no allegation much less evidence of the complainants trading in the shares on a large scale and  if a person engaged in a business or profession other than regular trading in shares, open a Demat Account and occasionally carries out trading in shares, it cannot be said that the services of the broker were hired or availed by him for a commercial purpose, the scale of such trading by a casual investor being very low. Such a person cannot be said to be in the business of buying and selling shares on a regular basis. 

7.      On the point of unauthorized use of Demat account by the said employee, it has been observed that the trading in a Demat Account can be done either by the client himself or by the broker acting on the instructions of the client. There is absolutely no written or digital  evidence of the shares mentioned in the consumer complaint having been sold on the instructions of the complainants. Further that, a mere  perusal of the letter dated 20.10.2009 written by respondent No.3 to the complainant clearly shows that he was trading without instructions from the complainants and that is why, he promised to the complainant that he would be responsible in case his losses were to increase.

8.      The commission held that the Respondent No.1 company has failed to prove that there was a private agreement by and between its employee and the customer.  Moreover, the respondent No.3 Siddesh A. Prabhudesai also stated in the said letter that on 15.9.2009, respondent No.3 had written and signed on his behalf stating therein that the matter has been resolved. It was also stated in the letter that the complainant wanted to close the account but the respondents refuse to close the said account.

9.    Thus the Commission in the last held that respondent No.3 having caused loss to the complainant by unauthorized trading in his Demat Account, he is responsible to compensate the complainant for the loss suffered by them. The commission held Respondent No.1 -Broker company vicariously liable to compensate for the misdeeds of its employee and  directed  them to pay a sum of Rs.1,72,020/- alongwith compensation in the form of  simple interest on that amount @ 9% p.a. from the date of institution of the consumer complaint till the date of payment. 

 

10. This is indeed very important decision. This case is of 2009 and currently SEBI has introduced many security measures for the safety of Investors. Now a days order call is recorded or unless a confirmation email is received from a client, final order is not proceeded further. Such incidences might be rare, nevertheless,  this judgment is a "lesson learned" for all. 

Take Care.. God is Great.🙏

https://vedhkaydyacha.blogspot.com/2020/12/unauthorized-trading-of-shares-in.html

Thanks and Regards,

Adv. ROHiT ERANDE. ©

PUNE