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Informist, Thursday, Dec. 4, 2025

 

NEW DELHI – The Bombay High Court has said that the profit earned through execution of valid and legal trades using erroneous credit of margin due to a stockbroker's mistake cannot be treated as unjust enrichment. The high court rejected Kotak Securities Ltd.'s plea seeking to retain profit of INR 17.50 million earned by its client Gajanan Ramdas Rajguru, who received undue credit in his margin, due to a technical glitch in the stockbroker's system.

 

Unjust enrichment is a legal principle that prevents one person from unfairly profiting at another's expense

 

The high court said that if there was unjust enrichment in the present case, it was by Kotak Securities. It was Kotak Securities that committed the mistake in making available margin for Rajguru, the court said, adding that the stockbroker initially charged interest on such margin money. Kotak Securities has also recovered various levies and fees in respect of trades legitimately executed, it said, adding that the stockbroker hadn't suffered any loss on account of erroneously making the margin available to Rajguru. 

 

However, Kotak Securities wants to unjustly enrich itself by retaining the profits earned by Rajguru through his own skills and risks on a specious plea that earning of profits was through the stockbroker's margin, said the court. In a converse situation, Kotak Securities would not have given up the claim for recovery of losses on the grounds that losses were suffered due to its error of making available margin to the client, the court said. Kotak Securities thus wants to enrich itself for its own mistake, the court added.

 

The high court upheld an arbitral award passed by an appellate arbitral tribunal constituted under the bye-laws of the National Stock Exchange of India Ltd. In 2023, the appellate arbitral tribunal had directed Kotak Securities to pay to Rajguru a sum of INR 17.50 million along with interest at the rate of 12% per annum from Jul. 26, 2022, till realisation of the award amount. The appellate arbitral tribunal has taken a plausible view by not permitting Kotak Securities to retain the profits earned by Rajguru just because such profits were an outcome of an opportunity made available to him by the petitioner, said the high court.

 

It said that none of the acts of Rajguru were responsible for reflection of erroneous margin in his trading account. There was no dispute to the position that Kotak Securities' system was solely responsible for making available the margin money to Rajguru, who has used his skills to make most of the opportunity and earned profits, said the court. Someone would have to be given those profits, said the court, adding that there was a system glitch attributable to Kotak Securities coupled with failure to invoke adequate and timely risk protocols, and the stockbroker cannot be permitted to retain the profits. 

 

The high court said that though Kotak Securities' argument that the arbitral award needs to be set aside for maintaining the sanctity of the risk management system, appears to be attractive at first, it is misplaced. Kotak Securities first made voluntary attempts to settle the matter by offering to share part of profits with Rajguru, said the court. Now what Kotak Securities desired to do by urging to set aside the arbitral award was to retain the entire profits earned out of the trades, which its own system permitted, the court added.

 

Apart from its own system failure, Kotak Securities apparently did not take adequate and timely measures to mitigate the consequences arising out of malfunctions of the system, said the court. There was sufficient material on record to indicate that Kotak Securities did not invoke risk control protocols, said the court. Far from warning Rajguru that it was unauthorisedly trading on erroneous margin, Kotak Securities issued contract notes upon execution of trades, deducted levies and even charged interest for use of margin. Kotak Securities even credited the net profit in Rajguru's ledger. "It later took a volte face and reversed the entry. Now it raises a specious plea that it must be permitted to retain the profits so that the sanctity of risk management system is maintained," the court added.

 

Kotak Securities is a registered trading member with the National Stock Exchange and BSE for cash and derivative segments and is also a depository participant with both the Central Depository Services Ltd. and National Securities Depository Ltd. Rajguru, a client of Kotak Securities, had opened a trading account with the petitioner in October 2021 and had opted to trade in the markets using an online trading facility. 

 

On Jul. 26, 2022, Rajguru had a margin of only INR 3,175.69. Due to technical glitch in the system of the Kotak Securities, Rajguru received undue credit in his margin. Taking advantage of receipt of such credit in his margin, Rajguru executed trades of about INR 948.1 million in futures and options contracts within a 20-minute window, by which time Kotak Securities rectified the glitch. Rajguru made a profit of NR 17.50 million on the basis of such trades executed using erroneous credit of margin. After Kotak Securities reversed the amount deposited in Rajguru's account, the latter filed a complaint with the investors services cell of the National Stock Exchange. Initially, Kotak Securities approached Rajguru for an amicable resolution but no solution was reached. The investors services cell and an arbitral tribunal rejected Rajguru's complaint, against which he moved the appellate tribunal, which ruled in his favour.  End

 

Reported by Surya Tripathi

Edited by Avishek Dutta

 

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