CENTRAL DEPOSITORY SERVICES( INDIA) LTD v. DAKSHA NARENDA BHAVSAR
Depository Liability: CDSL Liable to Indemnify Investor for DP's Fraudulent Misuse of POA under Section 16 of the Depositories Act.
Court: Bombay High Court
Citation: 2025:BHC-OS:22899
Decision Date: 01-12-2025
List of Laws
The Arbitration and Conciliation Act, 1996; The Companies Act, 1956; The Securities and Exchange Board of India Act, 1992; The Depositories Act, 1996; Securities and Exchange Board of India (Depositories and Participants) Regulations, 2018; CDSL Bye-laws
Case Brief
- Facts: Respondent No. 1, a passive investor, opened a demat account with BRH, a stockbroker and Depository Participant (DP) of Central Depository Services (India) Limited (CDSL). BRH misused the Power of Attorney (POA) to transfer Respondent No. 1's shares to its own Trading Member/Clearing Member (TM/CM) accounts and subsequently pledged these shares with HDFC Bank for a loan. BRH defaulted, leading HDFC Bank to sell the pledged shares. Respondent No. 1's claim for compensation from the National Stock Exchange (NSE) was rejected. She then initiated arbitration against CDSL. The Arbitral Tribunal held CDSL liable to indemnify Respondent No. 1.
- Procedural Posture: CDSL filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996, challenging the Arbitral Award. The Bombay High Court is hearing this petition.
- Issue: Is CDSL, as a Depository, liable to indemnify Respondent No. 1 for the fraudulent acts of BRH, acting as both a broker and a DP, under Section 16 of the Depositories Act, 1996? Specifically, did BRH act in its capacity as a DP when it misused the POA to transfer the shares?
- Holding: Yes, CDSL is liable to indemnify Respondent No. 1. The High Court upheld the Arbitral Tribunal's award, finding no perversity or illegality in holding CDSL responsible for the actions of BRH acting in its capacity as a DP. The Arbitration Petition was dismissed.
- Reasoning: The Court reasoned that BRH acted in a dual capacity, both as a broker and a DP. The unauthorized transfer of shares from Respondent No. 1's demat account to BRH's TM/CM account, facilitated by the misused POA, involved BRH acting as a DP. The Court emphasized that Section 16 of the Depositories Act makes the Depository liable for the negligent acts of its DP. The court rejected CDSL's argument that BRH acted solely as a broker, stating that the transfer of shares was not related to any trade on the stock exchange. The Court also dismissed CDSL's reliance on a SEBI circular dated 25 July 2023, stating that the circular was intended to segregate responsibilities for compensation through Investor Protection Funds (IPFs) and did not dilute the depository's liability under Section 16 of the Depositories Act.