SEBI Circular Breach Alone Cannot Shift F&O Losses to Broker: Bombay HC Sets Aside Arbitral Awards

Bombay High Court Sets Aside Arbitral Awards Against Sharekhan in F&O Loss Dispute

The Bombay High Court recently set aside two arbitral awards that had held Sharekhan Limited liable for losses suffered by investors in futures and options (F&O) trades. The court clarified that mere breach of a SEBI procedural circular cannot shift commercial losses from investors to brokers.

Judgment Delivered By: Justice Sandeep V. Marne
Date of Judgment: December 24, 2025

Background of the Dispute

• Two medical professionals filed complaints alleging unauthorised F&O trades executed by an authorised person (AP) of Sharekhan.
• The investors relied on SEBI Circular dated March 22, 2018, requiring brokers to maintain pre-trade and post-trade confirmations (call recordings or written instructions).
• The Investors Grievance Redressal Committee (IGRC) partially upheld their claims, noting both:
  • Broker failure to maintain required trade confirmations
  • Investor negligence due to lack of monitoring

IGRC Decision: Reversal of brokerage + 50% of trading losses awarded to investors.

• The arbitral tribunal and appellate arbitral tribunal confirmed this award.

Arguments by Sharekhan Limited

1. Regulatory Nature of SEBI Circular:
   • The circular is regulatory and directory, meaning violation attracts penalties but cannot automatically transfer commercial risk from investors to brokers.
2. Investor Responsibility:
   • Investors permitted trades through an authorised person; they cannot later disown losses while retaining profits.
3. Lack of Absolute Proof Requirement:
   • Absence of recorded authorisation does not automatically make trades unauthorised.

Bombay High Court Observations

• SEBI non-compliance ≠ automatic liability: Regulatory breaches alone cannot justify compensation claims.
• Reference to Precedents:
  • Ulhas Dandekar v. Sushil Financial Services
  • Erach Khavar v. Nirmal Bang Securities
  “There cannot be an absolute proposition that the absence of evidence of an authorisation is evidence of absence of authorisation.”
• Investor Knowledge Matters:
  • Receipt of contract notes, awareness of trades, and inaction over time indicate investor consent.
• Rejection of Arbitrary Loss Splitting:
  • Splitting losses 50:50 is legally flawed; loss assessment must follow Sections 73 and 74 of the Contract Act based on proof.

Key Takeaways

• Brokers are not automatically liable for investor losses due to procedural breaches.
• Investors must exercise due diligence even when using authorised persons.
• Arbitral awards based solely on regulatory non-compliance are unsustainable.
• This judgment reinforces the principle: regulatory lapses cannot serve as a shield for speculative trading losses.

Summary Table

Conclusion

The Bombay High Court judgment is a landmark clarification for brokers and investors in F&O markets, emphasizing:

• Investors cannot shift speculative losses to brokers solely on procedural lapses.
• Brokers must comply with regulatory norms but cannot bear commercial risk unjustly.
• Proper proof-based assessment of losses remains the legal standard.

This ruling provides legal certainty in arbitration disputes involving F&O trades and reinforces responsible trading practices.