Application of Margin Trading Rules: A Dispute at National Stock Exchange |
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Nature submitted a statement of claim and Perfect submitted a defense statement along with all relevant documents. The personal hearing on this arbitration was held on April 11, 2016, at the Hyderabad Regional Center of the NSE, Hyderabad. Nature was represented by Z. A. Nazib, partner while Perfect was represented by A. S. Rao, President (Operations and Compliance). Both Nature and Perfect were given an equal opportunity to present their respective cases before the Arbitration Panel..
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| Nature contended that Perfect’s decision to liquidate its long position, was unfair, irregular, wrong and a mistake. It said it had neither consented nor accepted the selling of 46,600 shares of Just Dial by Perfect from its account, and sought reimbursement of the loss amounting to Rs.7,456,000 incurred on account of such unauthorized sale. .. |
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| Perfect submitted that it had complied with all the laws, rules, regulations, and circulars governing the trading, clearing and settlement obligations of a Trading Member (Perfect). It contended that despite repeated SMSs and oral communications, Nature had failed to make full payment towards the outstanding liability and not taken delivery of the shares under reference. Hence, Perfect had no option but to sell (square off) the long position of 46,600 shares of Just Dial. The action initiated on February 12, 2016, was forced upon it the by the circumstances prevailing in the stock market on that day, where the price of the stock was falling continuously and the margin would not have been sufficient to meet any further losses, it said. Perfect said Nature had been given ample opportunity to make full payment and take delivery of the shares. .. |
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| The panel asked Perfect to explain its policy regarding extending credit to a client, and whether it had set up an exposure limit. Perfect could not offer a clear and meaningful explanation on this issue. The panel asked Nature whether Perfect had warned it regarding possible liquidation before it took close out action. Nature responded that its partner was asked by the representative of Perfect the previous day and again on that particular day to settle dues and that it had clearly informed the person concerned that it would settle the issue including taking delivery of the shares. The panel of arbitrators observed that when the cushion available as on February 10, 2016, was about Rs. 2.3 million, a close out was not triggered, while on February 12, 2016, when the cushion was about Rs. 6.5 million, liquidation was effected. .. |
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| The Panel of arbitrators observed that there was a regular credit facility in Nature’s ledger account and Nature had to settle the account by making full payment within a period of a week or two. It was not a fact that through continuous extension of credit facility to Nature and regular settlement of dues by it, the Doctrine of Estoppel had come into play, which prevented Perfect from taking a position not consistent with past practices. The Doctrine of Estoppel prevented one party from withdrawing a promise made to a second party if the latter had reasonably relied upon that promise. .. |
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| Not satisfied with the award, Nature applied for the matter to be considered by the Appellate Arbitral Tribunal. It contended that the panel of arbitrators had given the award without analyzing the margin trading rules and margin calculation on the basis of its collateral (valued at Rs.7.5 million) available with Perfect. .. |
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| After having gone through the submissions, documents and personal hearings, the Appellate Arbitral Tribunal directed Nature to submit a statement of the credit facility allowed to it by Perfect and the details of the interest charged on such debit balances... |
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| The question before the Appellate Arbitral Tribunal was whether there had been any lapses on the part of the arbitrators in applying the margin trading rules of the exchange while analyzing the matter.. |
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Exhibit I: National Stock Exchange
Exhibit II: Margin Calculation before and during Liquidation of Just Dial Shares
Exhibit III: Nature’s Debit Balances from April 2015 to January 2016
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