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‘Client must get time for margin before broker squares off position’

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NSE bench orders refund in 2018 case

In an important order, the Arbitration Appeal Bench of the National Stock Exchange (NSE) has ruled that a broker cannot square off a client’s position without proper notice even if the client’s margins fall below the required level due to a sudden fall in stock prices.

The order assumes significance as many clients approach the exchanges with similar complaints against brokers who, they say, sell their shares without giving sufficient time to bring additional margin if required.

The bench ordered the entire amount of loss to be refunded to the client along with interest from the date of sale.

As per the order, CD Equisearch has been directed to pay ₹1.23 lakh along with 9% interest to Suwarna Choudhary after the investor filed an appeal alleging that the broker sold her securities to meet the margin shortfall without giving time to bring in additional margin.

The matter dates back to September 2018, when the client had ₹1.23 lakh as margin, based on which she bought one lot each of Maruti Suzuki India and Canara Bank in the derivatives segment.

However, as per the order, the broker sold the lot on the same day due to a sudden fall in prices and post the ‘forced’ sale, the market recovered and closed at a much higher level than the price at which the position was squared off.

The complainant has alleged that the broker was required to ‘demand’ additional margin before squaring off her position.

Further, she alleged that the regulations allowed a broker to sell the securities only if the client was not able to deposit the required margin ‘within the next trading day’.

“Broker has to inform their client of the shortfall in margin calculated at the end of the day. And even after intimation/notice, if a client fails to pay additional margin as levied by the broker next day, then the broker can sell off the client’s open position, otherwise not,” Bhalchandra Ganu, the lawyer for the complainant, said.

There have also been rulings by the Bombay High Court that a broker cannot square off the client position without giving sufficient time to bring additional margin. “The trading member was at liberty to close out the transactions by effecting sales/purchases of derivative contracts but that was subject to the constituent being given a chance to meet his/her obligations in respect of the open position on the next trading day,” stated a Bombay high court in August 2019.

“The requirement of intimation and approval has been held to be sacrosanct before an open position is closed out by broker,” said Sumit Agrawal, Partner, Regstreet Law Advisors.

“In recent years, while SEBI has come up with a lot of circulars to deal with unauthorised trades that puts clients at risk, it should now consider looking at recasting Stock Exchange Byelaws and Rules, which are ambiguous in various provisions,” said Mr. Agrawal, who had earlier worked in the legal department of SEBI.