Depositories Cannot Escape Vicarious Liability Under Section 16 Merely by Labeling Fraudulent Acts as Brokerage Activity: Bombay High Court Refuses to Set Aside Arbitral Award Against CDSL

“The moment negligence of a Depository Participant is established, the depository’s obligation to indemnify the investor is absolute under Section 16 of the Depositories Act” –Bombay High Court dismissed a challenge filed by Central Depository Services (India) Limited (CDSL) against an arbitral award holding it liable to indemnify an investor for the fraudulent siphoning of her shares by its depository participant, BRH Wealth Kreators Ltd.. The ruling was delivered by Justice Sandeep V. Marne reaffirming the strict liability framework under Section 16 of the Depositories Act, 1996, and the limited scope of interference under Section 34 of the Arbitration and Conciliation Act, 1996.

The Court refused to interfere with the arbitral award directing CDSL to pay ₹86,02,768/- with 9% interest per annum to the investor for the loss of her shares. The judgment is a significant reaffirmation of the vicarious liability of depositories for the acts of their depository participants, even when such acts intersect with the functions of a stockbroker.

Investor’s Shares Lost to a “Composite Fraud Engineered by DP-Broker BRH”

At the core of the dispute lies a fraudulent scheme engineered by BRH Wealth Kreators, a dual-registered entity functioning both as CDSL’s Depository Participant and as a broker with the NSE. The fraud involved misusing a Power of Attorney (POA) to illegally transfer the shares of investor Daksha Bhavsar from her demat account to BRH’s own TM/CM (trading and clearing member) accounts, and subsequently pledging them with HDFC Bank to secure a massive loan.

Justice Marne recounted the sequence of fraudulent acts, holding that “BRH relied upon POA of the investor, possibly showed it to CDSL, who authorised the transaction… The act of unauthorised transfer of shares from the demat account was not based on any trade on the Stock Exchange. While effecting the transfer, BRH acted not merely as broker but also as DP.”

The Court categorically rejected CDSL’s defence that BRH’s actions were undertaken solely in its capacity as a broker, finding that “this was a composite act of stark fraud played by BRH,” and that the depository had “authorised” and “facilitated” the transactions.

Tribunal’s Finding on BRH’s Role as DP Not Perversely Made, Says Court

Justice Marne endorsed the three-step analysis adopted by the Arbitral Tribunal, which had dissected BRH’s role in the fraud and concluded that it had not merely acted as a broker but had clearly functioned as a Depository Participant of CDSL when it failed to obtain pledge instructions from the investor before allowing the shares to be pledged.

The Tribunal had observed, “BRH as DP failed to obtain the ‘Pledge Request’ from the client before pledging the client’s securities… This default of BRH as a DP has not been highlighted even once in the submissions of CDSL or in SEBI’s adjudication order.”

The High Court held that this finding was plausible and backed by material evidence, and therefore did not warrant interference under Section 34, reiterating the standard that courts are not appellate forums in arbitral matters.

Section 16 of Depositories Act Triggers Strict Vicarious Liability

At the heart of the Court’s reasoning was Section 16 of the Depositories Act, 1996, which mandates that a depository must indemnify beneficial owners for loss caused by the negligence of either the depository or its participant. Justice Marne held that once any role of the DP in the transaction is established, the depository’s liability becomes automatic and strict.

“To escape liability under Section 16, CDSL would need to prove that BRH’s acts had absolutely no connection with its role as DP. That is not the case here,” the Court observed.

The judgment firmly rejected the argument that CDSL had no “knowledge” of the fraud or that it was merely following the POA instructions, clarifying that Section 16 does not require proof of the depository’s active negligence—mere negligence by the DP suffices.

SEBI Circulars Cannot Override Statutory Liability Under Section 16

CDSL relied heavily on SEBI’s circular dated 25 July 2023, which delineates the roles of stock exchanges and depositories in compensating investors from their respective Investor Protection Funds (IPFs). It argued that the circular made the NSE solely responsible for compensating in cases of POA misuse.

But the Court dismissed this argument, stating that regulatory circulars do not and cannot override the statutory mandate under Section 16:

“The Circular is issued for purposes of segregating claims between IPFs of stock exchanges and depositories. It cannot be used as a defence to avoid statutory responsibility under Section 16,” said Justice Marne.

Further, the Court noted that the NSE had already refused the investor’s claim, citing her lack of trading activity on the exchange, and therefore leaving her remediless if CDSL’s contention were accepted.

Not an Equitable Award: Tribunal Acted on Legal Principles, Not Equity

Rejecting the contention that the Arbitral Tribunal had acted as an amiable compositeur or applied equitable considerations beyond legal principles (which would have required express consent under Section 28(2) of the Arbitration Act), the Court clarified:

“Though the Tribunal used expressions like ‘travesty of justice’, the award is squarely based on statutory provisions and legal findings. It is not an award in equity or ex aequo et bono.”

Attempt to Shift Liability to NSE Rejected as “Footballing of Investor’s Claim”

Justice Marne was critical of CDSL’s repeated attempts to shift responsibility onto the NSE:

“What the Petitioner is attempting is mere footballing of the genuine claim of Respondent No.1 from itself to NSE. There is ample material on record that BRH did not act solely as broker.”

The Court also took note of CDSL’s failure to monitor its own depository participant, especially when shares of 9493 investors were similarly misappropriated, holding that such “abject failure of governance” could not go unaccounted.

Petition Dismissed, Award Upheld

In a meticulously reasoned judgment, the Bombay High Court dismissed the Section 34 petition, holding:

“The findings recorded by the Arbitral Tribunal cannot be treated as perverse. Even if it is assumed that treating BRH as broker is a possible view, that is not a sufficient ground for setting aside the award.”

Accordingly, the Court refused to continue an earlier stay on the interest awarded by the Tribunal and dismissed the interim application as well.

Date of Decision: 1 December 2025