1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION ARBITRATION PETITION NO.437 OF 2004 Punjab National Bank ....Petitioner Versus Shrikant G. Mantri ....Respondent Mr.D. V. Merchant, Senior Counsel with Mr.Simil Purohit i/b M/s.Kanga & Co. for the Petitioner. Mr.E. P. Bharucha, Senior Counsel i/b RMG Law Associates for the Respondent. CORAM : S.J. VAZIFDAR, J. DATE : 15TH SEPTEMBER, 2008. P.C. : 1. This Petition is filed under Section 34 of the Arbitration and Conciliation Act (for convenience “the said Act”) to set aside an award dated 16.7.2004 made and published by the Appellate Bench of the Bombay Stock Exchange confirming the award dated 27.4.2004 pronounced by the Lower Bench of the Arbitral Tribunal, dismissing the Petitioner's claim against the Respondent. 2 2. In view of the nature of the proceedings under Section 34 of the said Act, it is not necessary to refer to the alleged transactions between the parties in detail. The Petitioner contends that between September, 1999 and March, 2000, it had entered various transactions with the Respondent. In respect of the transactions which were the subject matter of the arbitration proceedings, the Petitioner contended that as against a sum of Rs.65,79,00,480/-, the Respondent had paid only a sum of Rs.44,59,87,242=16 leaving a balance of Rs.21,19,13,238/-. The Petitioner contended that although the brokers were supposed to enter into arbitrage transactions only, the Respondent purchased the shares for the Petitioner and that therefore in March, 2000, the Petitioner acted as the owner of the shares, instructed the Respondent in his capacity as broker to dispose of the shares in the market. In view of the questions that fell for consideration of the Arbitral Tribunal, it would be convenient to set out the Petitioner's case on facts as pleaded in the Petition itself. Paragraph 11 of the Petition reads as under :- “11. At the instance of the Respondent, an understanding was arrived at between the 3 Petitioner, acting as the owner of the shares and the Respondent in his capacity as the broker. The undertaking was : a. The shares would be sold by the Respondent in the market to third parties at the prevailing market price in accordance with the rules of the Stock Exchange, but such sale would take place over a maximum period of one year. b. Irrespective of the price realized, the Respondent would pay to the Petitioner the price as agreed between them. Such price would be paid to the Petitioner by the Respondent upon the sale of the shares. However, the full amount would definitely be paid on or before 31st March 2001. c. The Petitioner would deliver the shares as and when they are sold in the market and against the receipt of money as agreed. Till then, the Petitioner would continue to receive the dividends and accretions on and to the said shares. d. The oral understanding was recorded in the form of contract notes (dated 27th and 28th March 2000) issued by the Respondent setting out the agreed price and the scrips to be sold. The contract notes specifically stated that the deal was subject to the rules and regulations of the BSE.” The Petitioner also contends that the above transactions were acted upon as evidenced by the dealings between the parties subsequently. 3. The Appellate Bench of the Arbitral Tribunal of the Bombay 4 Stock Exchange held that the question of illegality of the transactions required to be considered and considered the same in a detailed and if I may say with respect, well reasoned award. 4. The Arbitral Tribunal considered the relevant provisions of law in this regard namely section 25 of the Contract Act, Section 16 of the Securities Contracts (Regulation) Act, 1956 and the notification issued thereunder, the judgment of the Supreme Court in B. O. I. Finance Ltd. v. The Custodian, AIR 1997 SC 1952 = (1997) 10 SCC 488, and the bye-laws of the Bombay Stock Exchange. 5. The least that must be said in favour of the Respondent is that the above provisions were required to be construed and that the Arbitral Tribunal did construe the same. Their construction and interpretation thereof would normally not be disturbed in a proceeding under Section 34 of the said Act. In any event I am in respectful agreement with the decision. Even assuming that the transactions as alleged by the Petitioner is correct, they would be void. 6. In exercise of the powers under section 16 of the S. C. Act, 1956, the Central Government issued a notification dated 27.6.1969. 5 The notification has been set out and the effect thereof has been construed by the Supreme Court in B. O. I. Finance Ltd.' s case as under:- 34. On 27-6-1969 the Government issued a notification under Section 16(1) of the Securities Contracts (Regulation) Act, 1956 which is as follows: “S.O. 2561. In exercise of the powers conferred by sub-section (1) of Section 16 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) the Central Government being of opinion that it is necessary to prevent undesirable speculation in securities in the whole of India, hereby declares that no person in the territory to which the said Act extends, shall save with the permission of the Central Government enter into any contract for the sale or purchase of securities other than such spot delivery contract or contract for cash or hand delivery or special delivery in any securities as is permissible under the said Act and the rules, bye-laws and regulations of a recognised stock exchange: Provided that a contract other than a spot delivery contract or contract for cash or hand delivery or special delivery in any securities on the Cleared Securities List of a recognised stock exchange may be entered into between its members or through or with any such member for the purpose of closing out or liquidating all existing contracts entered into up to the date of this notification and remaining to be performed after the said date, but such contract shall be subject to the rules, bye- laws and regulations of the recognised stock 6 exchange that come into force when further new dealings are prohibited in any securities on the Cleared Securities List and subject also to such terms and conditions, if any as the Central Government may from time to time impose.” As a result of the aforesaid notification, except for sale or purchase of securities under a spot delivery contract or contract for cash or hand delivery or special delivery, all other contracts were prohibited. As a consequence thereof entering into a forward transaction became illegal. 45. What the notification issued under Section 16 did was to prohibit the entering into of a forward contract, i.e., sale at a future date for a fixed price. It expressly permitted sale of securities by spot delivery which, in the present case, is represented by the ready leg. It is only the future sale or the resale of the securities at a later date the notification did not permit. This latter part of the agreement could not have been entered into and is clearly severable and cannot affect the transfer of the title which had already taken place at the time of the execution of the ready leg. This being so the securities which had been purchased by the appellants from the notified persons could not be attached. Position in Law if the Transactions are not Severable.” 7. The Arbitral Tribunal has also relied upon by-law 354(a) (vii). Under bye-law 354(a)(ii) a member is prohibited from entering into contracts for a period beyond the current and ensuing clearing in cleared securities. Under bye-law 354(a)(iii), a member is not enti- 7 tled to enter into a contract for hand delivery for a period beyond 14 days, save as provided in the said bye-laws and regulations. The ef- fect of the transactions contrary to bye-law 354 is that the same would be void. 8. In these circumstances, it is difficult to find any fault with the reasonings of the Arbitral Tribunal and to set aside the award. 9. In view of the above, it is not necessary to consider any further submissions on behalf of the Respondent. 10. The Arbitration Petition is therefore dismissed.