Bombay High Court upholds trader’s ₹1.75 crore profit from margin glitch in Kotak Securities system

The Bombay High Court recently upheld an arbitral award allowing a trader to retain ₹1.75 crore in profits he earned using erroneous margin credit resulting from a technical glitch in Kotak Securities’ system. [Kotak Securities Ltd v. Gajanan Ramdas Rajguru].Justice Sandeep V Marne dismissed Kotak’s challenge under Section 34 of the Arbitration and Conciliation Act, 1996, holding that a broker cannot claim profits earned through a client’s skill and risk merely because the trading opportunity arose from the broker’s own system error..The dispute stemmed from trades executed on July 26, 2022, when respondent Gajanan Ramdas Rajguru had a margin of only ₹3,175.69 in his trading account with Kotak Securities.Due to a technical glitch, his account reflected undue margin credit, which he used to execute futures and options (F&O) trades worth approximately ₹94.81 crore within a short window, eventually booking a net profit of about ₹1.75 crore.Kotak initially credited this amount to his ledger but later reversed it, contending that the trades were executed on an erroneous margin and that allowing the client to retain the profit would amount to unjust enrichment..An appellate tribunal of arbitrators constituted under the bye-laws of the National Stock Exchange of India (NSE) had directed Kotak to pay Rajguru ₹1,75,01,672.92/- along with interest.The brokerage challenged the appellate arbitral tribunal’s award before the High Court under Section 34..The Court noted that ‘margin money’ does not strictly fall within the definition of ‘goods’ under Section 2(7) of the Sale of Goods Act, which expressly excludes money and actionable claims. Justice Marne characterised the erroneous margin reflection as an ‘opportunity to trade’, likening it to a temporary loan rather than a bailment of goods..On the unjust enrichment plea, the Court turned the principle against Kotak, holding that the doctrine that a party cannot benefit from its own wrong applied to the broker instead. It reasoned that if the trades had resulted in losses, Kotak would have undoubtedly sought to recover them from Rajguru.“It cannot be that the respondent would only be liable to repay the amount of losses but cannot be permitted to retain the profits."The Court also noted that Kotak had initially charged interest on the excess exposure and recovered statutory levies, yet later attempted to forfeit the client’s gains..Justice Marne was critical of Kotak’s conduct on the risk management front.“Kotak apparently did not take the adequate and timely measures to mitigate the consequences arising out of malfunctions of the system. There is sufficient material on record to indicate that the petitioner did not invoke risk control protocols,” the Court observed.It pointed out that the broker continued to allow trades, issued contract notes and credited the net profit before reversing it..The Court concluded that Rajguru had used his own skill and assumed the risk of loss in converting the undue opportunity into profit.“The margin reflected in his account merely opened doors for him to trade on the exchange platform. The opportunity came with risk of incurring losses or to earn profit, depending on Rajguru’s skill,” it said, upholding the award and dismissing Kotak’s petition.The Court permitted Rajguru to withdraw the amount deposited pursuant to earlier orders along with interest..Senior Advocate Pesi N Modi with Advocates Kunal Kataria, Shailesh Prajapati and Ankit Singhal, briefed by Dua Associates, appeared for Kotak Securities. Advocates Nitesh V Bhutekar and Aaditya Mahamiya represented Rajguru..[Read order].Follow Bar and Bench channel on WhatsAppDownload the Bar and Bench Mobile app for instant access to the latest legal news.