A retired non-resident Indian (NRI) has allegedly lost Rs 5.67 lakh when representatives of Kotak Securities dabbled in futures and options (F&O) with his money without his knowledge. In this regard, the National Consumer Disputes Redressal Commission (NCDRC) has ordered Kotak Securities to refund the entire amount of money lost by them due to F&O trading, i.e., Rs 5,67,375 along with Rs 5,000 as compensation and Rs 1,000 as litigation expenses.
According to the NRI complainant’s testimony before the district consumer forum, he was an individual, who after giving up his job abroad, was lured by the advertisement made by Kotak Securities and hence invested. “Attracted by the advertisements made by Kotak Securities, the investment for trading in shares in September 2007 was made. The two executives deputed by Kotak Securities promised that they will trade in the account only after getting confirmation for each transaction,” said the NRI individual.
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Lawyers say that generally, a stockbroker is not liable for the losses caused to an individual while trading in the stock market. “The inherent risk of investing lies with the individual and not the stockbroker. However, a broker can be held liable if the individual can prove that the stock market trading loss has resulted directly due to the broker’s negligence, misconduct, or failure to fulfil their obligations,” says Rishi Segal, Advocate on Record, Supreme Court of India.
Read below to find out why Kotak Securities was ordered to make good on the amount of loss that they incurred in F&O trading.
Why Kotak Securities did not refund the money lost due to F&O trading
Kotak Securities contested that they are a member of the National Stock Exchange (NSE) and is acting as share broker and it is not their fault that money was lost trading in F&O(s). “The Complainant is not consumer as defined under section 2(1)(d) as the trades were executed with a speculative motive to earn profit. It is true that he had invested Rs 10,00,750/- with Kotak Securities but the loss is the trading loss for which we are not responsible,” said Kotak Securities.
According to Kotak Securities, “The Complainant concealed the fact that he received pay-in of funds from the statement of accounts claiming the disputed period. The copies of contract notes, bills, trade confirmation statement of account were forwarded to the Complainant in his email. The Complainant did not raise any objection against the trades executed in his account. After execution he had taken a pay out of Rs 58,496.54 as revealed by the ledger A/c dated 01.02.2008.”
Stock broker allegedly traded in F&O without authorisation
According to the complainant who is a retired NRI, Kotak Securities very well knew that for trading in the derivative segment of the stock market margin money has to be deposited. For this specific purpose (margin money), a separate bank account in the name of the complainant was opened and the demat account was linked to it.
On November 15, 2007, Kotak Securities representatives contacted the retired NRI and asked for approval in a trade, which he refused to give and asked the company to forward the trade ledger file. “They did not forward the same. The company has done derivative trade in the account without the written authority and without any kind of instruction,” alleged the complainant in the consumer forum.
Start of a long battle in the District Consumer Forum
The District Forum passed an order favourable to the NRI in September 2011. “In the result the complaint is allowed directing the opposite parties 1 (Kotak Securities) and 2 (Manager, Kochi Branch, Kotak Securities) to refund Rs 5,67,375 along with Rs 5000 as compensation and Rs 1000 as cost of proceedings to the complainant within 30 days from the date of receipt of this order, failing which the complainant is entitled to execute the order as per the provisos of consumer protection Act.” the order said.
However, when this order was appealed against in the State Consumer Commission, several questions came out. The State Commission did not contest the award given by the District Forum, but it raised the question of jurisdiction whether the award should have been given at all and if the consumer court had any authority to hear this case.
Questions raised by the State Consumer Commission in 2016
In an order dated November 30, 2016, the State Consumer Commission directed the case to be re-examined with the following three questions to be answered:
The following points arise for consideration:
1. Whether the complainant is a consumer as defined under section 2(1) (d) of Consumer Protection Act?
2. Whether the complaint is maintainable?
3. Whether the impugned order of the Forum can be sustained?
NCDRC answers the questions raised by the state commission
NCDRC answered the first question about whether the retired NRI is a consumer or not. It said: As per Section 2(1)(d), a Consumer is a person who buys goods or hires or avails services for consideration, except for commercial purposes. However, this exception has been expanded to a limited extent that, if such transactions are carried out for the purpose of earning livelihood, the individual undertaking such transaction will be considered as a Consumer.
“In the present case, the complainant was a retired NRI and had returned to India after giving up his job in gulf. Therefore, the NCDRC held that the Complainant qualifies under the exception and held him to be a consumer as defined under Section 2(1) (d) of the Act,” Rohit Jain, Managing Partner, Singhania & Co, a law firm.
Regarding the second question and third, NCDRC has said that the State Commission has specifically mentioned that no document is produced during the proceedings to prove or show the actual loss sustained. “Therefore, in my considered opinion the State Commission has rightly remanded the matter to decide the quantum of loss sustained by the Complainant and the compensation. I am of the considered view that the well-reasoned Order of the learned State Commission dated 30.11.2016 does not suffer from any illegality and thus no intervention is warranted. Therefore, the Revision Petition is dismissed,” said NCDRC in an order dated February 9, 2024.
