HARINARAYAN G. BAJAJ Vs. INVESTORS PROTECTION FUND OF

JUDGEMENT

(1.) HARINARAYAN G. Bajaj is the appellant before us. He is an investor and trades, among others, on the Bombay Stock Exchange Limited, Mumbai (hereinafter called BSE) through several brokers. In this Appeal, we are concerned with only two brokers through whom the appellant had traded and they are Akhil K. Dalal and T. J. Stock Broking Services Private Limited (hereinafter called Dalal and TJ, respectively). The appellant has two arbitration awards in his favour. One of them is against Dalal and the other against TJ. The award against Dalal is for a sum of Rs.9,42,518.71 paise and against TJ for Rs.2,42,367.40 paise. These awards have become final between the parties and the appellant has been pursuing with BSE for the release of the awarded amounts without success. The appellant claims that the award against Dalal who has been declared a defaulter on the BSE should be paid out of the Investor Protection Fund which is a trust established by BSE for the protection and benefit of the constituents of defaulter members of the exchange. The amount due from TJ has also been withheld and BSE has invoked Bye -law 232(b) of its Bye -laws to justify the withholding. The claim of the appellant was finally rejected by BSE and its decision was communicated as per its letter dated October 29, 2003, the operative part of which reads as under: In view of the huge liabilities outstanding against you on the Exchange, the Board was of the opinion that an amount of Rs.9,42,518.71 towards the arbitration award obtained by you against defaulter Shri Akhil K. Dalal should not be paid from the IPF. On the same grounds the Board further decided that the payment of Rs.2,42,367.40 towards the arbitration award obtained by you against the member M/s. T.J. Stock Broking Ltd. from the assets of the member set aside by the Exchange should also not be released to you. It is against this communication that the present Appeal has been filed under section 23L of the Securities Contracts (Regulation) Act, 1956. For the sake of convenience, we shall deal with the grievance of the appellant in regard to the two awards separately. Re - Award dated January 21, 2000 against Dalal:

(2.) THE appellant traded in the scrip of Sesa Goa Limited through Dalal as his broker. Disputes arose between the two and the appellant claimed large sums of money in relation to his dealings with Dalal in this scrip from his broker. The dispute was referred to and decided by arbitration as per the Bye -laws of BSE since Dalal was a member broker of BSE. The Arbitral Tribunal of BSE by its award dated 21.1.2000 decided the reference in favour of the appellant and against Dalal and awarded in favour of the former a sum of Rs.9,42,518.71 paise with interest @ 18 per cent per annum on Rs.7,49,856/ - from the date of reference till satisfaction and costs of the reference. As already noticed, this award has become final between the parties. The appellant claims that the awarded amount should be disbursed to him from the Investor Protection Fund maintained by the BSE as Dalal was a defaulter member broker of the exchange. It is not in dispute that Dalal was declared a defaulter on the BSE on 26.12.2000 and the default was notified on the exchange on 1.1.2001. As is clear from the impugned communication, the amount due to the appellant under the award has been withheld on the ground that he too owed large sums of money to others on the exchange. Whether this is a valid reason for withholding the amount is the sole question that arises for our consideration. Before we answer this question, it is necessary to go into the history as to how the Investor Protection Fund came to be set up and the manner in which it has thereafter evolved over a period of time.

(3.) BEFORE the Securities and Exchange Board of India (hereinafter called the Board) came to be established in January 1992, the securities market in the country was being regulated directly by the Government of India. In the year 1985, the Government felt that there was no provision for payment of any dues to non -member clients (like the appellant herein) whenever a member broker is declared a defaulter on an exchange. In the light of the position which then existed, the Government felt that it was not conducive to instilling confidence in the minds of the investing public in the stock exchanges and felt that there was an imperative need for the creation of a compensation fund to take care of the legitimate investment claims which are not of a speculative nature of the clients of defaulting members. The Government then directed the stock exchanges across the country to set up a fund and limited the claims of each nonmember to a maximum amount of Rs.10,000/ - to begin with which could be raised progressively in the years to come. In pursuance to the directions of the Government of India, BSE established in the year 1986 a fund called The Stock Exchange Customers Protection Fund (hereinafter called the Fund) by creating a trust and got the same registered under the Bombay Public Trusts Act, 1950 and the rules framed thereunder. Trustees appointed by BSE manage the Fund. BSE has also framed the Stock Exchange Customers Protection Fund Rules (for short the Rules) which govern the fund. It is necessary to refer to clause 5A of the Trust Deed and Rule 7E of the Rules on which great reliance was placed by the learned counsel for BSE for justifying its action and they are reproduced hereunder for facility of reference: Clause 5A: - The Trust shall be a Charitable Trust for the protection and benefit of the members of the public who invest and deal in securities through the members of the Stock Exchange. This Trust shall be compensating these members of the public in respect of their claims against defaulter members of the Stock Exchange in accordance with the provisions hereof and the Rules. Rule 7E: - Determination of nature of claims and payment: The Trustees shall have an absolute discretion as regards the mode and method of assessing the nature of the claims including their genuineness and shall likewise at their discretion accept, reject, or partially grant or allow claims and make payment thereat subject to the limits hereinmentioned, as they may deem fit and proper.