Case Note & Summary
The case involves an appeal by Central Depository Services (India) Ltd. (CDSL) against a judgment of a learned Single Judge dated 01/12/2025, which upheld an arbitral award dated 30/01/2024. The award had allowed a claim by Daksha Narendra Bhavsar (respondent no.1) for Rs.86,02,768/- representing the value of shares lost from her demat account due to a fraudulent transfer by a third party. CDSL, a depository registered under Section 12(1-A) of the Securities and Exchange Board of India Act, 1992, challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, arguing that it was not liable for the fraud as there was no negligence or breach of contract on its part. The Single Judge dismissed the petition, leading to the present appeal. The Division Bench of the Bombay High Court allowed the appeal, setting aside the Single Judge's order and the arbitral award. The court held that the depository's liability is not absolute; it arises only if there is negligence or breach of contract. Since the award did not find any such fault on CDSL's part, it was patently illegal and contrary to public policy. The court emphasized that the depository agreement did not impose strict liability for third-party fraud, and the award's contrary interpretation was erroneous. The appeal was allowed, and the award was set aside.
Headnote
A) Depository Law - Liability for Fraudulent Transfer - Section 12(1-A) SEBI Act, 1992 - The court considered whether CDSL, as a depository, is liable for shares lost due to a fraudulent transfer by a third party. Held that a depository is not liable for third-party fraud absent negligence or breach of contract on its part. (Paras 1-10)
B) Arbitration Law - Challenge to Award - Section 34 Arbitration and Conciliation Act, 1996 - The court examined the scope of interference with an arbitral award under Section 34. Held that an award can be set aside if it is patently illegal or contrary to public policy, including if it ignores contractual terms or settled legal principles. (Paras 11-20)
C) Contract Law - Interpretation of Terms - Depository Agreement - The court analyzed the terms of the depository agreement between CDSL and the client. Held that the agreement did not impose strict liability on CDSL for third-party fraud, and the award's contrary finding was patently illegal. (Paras 21-30)
Issue of Consideration
Whether a depository (CDSL) is liable to compensate a client for shares lost due to fraudulent transfer by a third party, in the absence of any negligence or breach of contract by the depository.
Final Decision
The appeal is allowed. The judgment of the learned Single Judge dated 01/12/2025 is set aside. The arbitral award dated 30/01/2024 is set aside.
Law Points
- Depository liability
- third-party fraud
- negligence
- breach of contract
- Section 12(1-A) SEBI Act
- Section 34 Arbitration and Conciliation Act
- 1996
Case Details
2026 LawText (BOM) (07) 37
Commercial Arbitration Appeal (L) No. 41571 of 2025
Bharati Dangre, Manjusha Deshpande
Mr. Ravi Kadam, Senior Advocate a/w Mr. Pranav Badheka, Senior Advocate, Mr. Rohan Kadam, Mr. Vaibhav Singh, Ms. Radhika Indapurkar, Mr. Rahil Shah, Mr. Manas Kotak, Mr. Pranav Chandhoke i/b Veritas Legal for the Appellant. Mr. Karl Tamboly a/w Mr. Harsh Moorjani, Ms. Priyanka Chaddha, Mr. Abhay Dhadiwal, Ms. Vidhi Karia i/b Jayakar and Partners for the Respondent No.1.
Central Depository Services (India) Ltd.
Daksha Narendra Bhavsar & Anr.
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Nature of Litigation
Appeal against judgment of Single Judge upholding arbitral award in favor of claimant for lost shares.
Remedy Sought
CDSL sought setting aside of the arbitral award dated 30/01/2024 and the Single Judge's order dated 01/12/2025.
Filing Reason
CDSL was aggrieved by the award directing it to pay Rs.86,02,768/- for shares lost due to fraudulent transfer by a third party.
Previous Decisions
Arbitral Tribunal allowed claim of Daksha Bhavsar for Rs.86,02,768/-. Single Judge dismissed CDSL's petition under Section 34 of Arbitration and Conciliation Act, 1996.
Issues
Whether the depository is liable for shares lost due to third-party fraud in the absence of negligence or breach of contract.
Whether the arbitral award was patently illegal and contrary to public policy under Section 34 of the Arbitration and Conciliation Act, 1996.
Submissions/Arguments
Appellant (CDSL) argued that it was not negligent and had no contractual liability for the fraudulent transfer by a third party.
Respondent argued that CDSL was liable as the depository for the loss of shares from her demat account.
Ratio Decidendi
A depository is not liable for shares lost due to third-party fraud unless there is negligence or breach of contract on its part. The arbitral award imposing liability without such finding is patently illegal and contrary to public policy under Section 34 of the Arbitration and Conciliation Act, 1996.
Judgment Excerpts
Central Depository Services Limited (CDSL), a Company established under the provisions of the Companies Act, 1956 and a Depository under Section 12(1-A) of the Securities and Exchange Board of India Act, 1992 (SEBI Act) and facilitator for holding securities in a dematerialized form, has preferred the present Appeal being aggrieved by the Judgment of the learned Single Judge dated 01/12/2025.
CDSL approached this Court by filing a Petition under Section 34 of the Arbitration and Conciliation Act, 1996, seeking invalidation of the Award dated 30/01/2024 passed by the Arbitral Tribunal, under which Tribunal allowed the claim filed by the claimant Daksha Bhavsar, respondent no.1 before us to the extent of Rs.86,02,768/- and directed it to pay the awarded sum, being the value of her lost shares.
Procedural History
Arbitral Tribunal passed award on 30/01/2024 in favor of Daksha Bhavsar. CDSL filed petition under Section 34 of Arbitration and Conciliation Act, 1996 before Single Judge of Bombay High Court, which was dismissed on 01/12/2025. CDSL filed present appeal before Division Bench, which was reserved on 23/04/2026 and pronounced on 02/07/2026.
Acts & Sections
- Securities and Exchange Board of India Act, 1992: Section 12(1-A)
- Arbitration and Conciliation Act, 1996: Section 34
- Companies Act, 1956:
