KOTAK SECURITIES LIMITED v. GAJANAN RAMDAS RAJGURU

Profits Earned from Erroneous Margin: Broker's System Error Does Not Entitle Recovery of Trader's Profits; Upholding Arbitral Award.

Court: Bombay High Court
Citation: 2025:BHC-OS:23272
Decision Date: 03-12-2025

List of Laws

The Arbitration and Conciliation Act, 1996; The Indian Contract Act, 1872; The Sale of Goods Act, 1930; Securities and Exchange Board of India (SEBI) Regulations; National Stock Exchange of India Ltd. (NSE) Bye-laws

Case Brief

Facts: Kotak Securities (Petitioner) erroneously provided Gajanan Ramdas Rajguru (Respondent) with undue margin for trading in the stock market. The Respondent, using his skills, traded and earned a profit of Rs. 1.75 crores. The Petitioner claimed that the profits made by the Respondent out of the undue margin belonged to them, reversing the credit initially given to the Respondent's account.
Procedural Posture: The Petitioner filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996, challenging the final award dated 25 October 2023 passed by the Appellate Arbitral Tribunal. The Appellate Arbitral Tribunal had directed the Petitioner to pay the Respondent Rs. 1,75,01,672.92 with 12% interest p.a. from 26 July 2022. The Grievance Redressal Committee (GRC) and the lower Arbitral Tribunal had previously rejected the Respondent's claim, but the Appellate Arbitral Tribunal reversed these orders.
Issue: Whether profits earned by a person using an undue trade opportunity (erroneously provided margin) can be retained by that person, or whether they must be handed over to the opportunity giver; and whether the Appellate Arbitral Tribunal's award directing the Petitioner to pay the Respondent is justifiable.
Holding: The Court held that the Appellate Arbitral Tribunal's decision was correct and dismissed the petition, allowing the Respondent to retain the profits earned.
Reasoning: The Court reasoned that the margin money provided by the Petitioner does not fall under the definition of 'goods' as per Section 2(7) of the Sale of Goods Act, 1930, thus Sections 71 and 163 of the Indian Contract Act are not applicable. The Court emphasized that the Respondent used his own skills and took risks to earn the profits. The Petitioner's system error was the primary cause of the situation, and they also failed to invoke adequate risk control protocols. The Court found that the Petitioner initially charged interest and deducted levies on the trades, indicating they initially treated the trades as valid. Allowing the Petitioner to retain the profits would amount to unjust enrichment at the expense of the Respondent. The court stated, "Given that there is system glitch attributable to Petitioner coupled with failure to invoke adequate and timely risk protocols, Petitioner cannot be permitted to retain the profits."