JUSTICE V.K. JAIN, PRESIDING MEMBER

          The appellant Oriental Insurance Company Limited devised an insurance policy to cover certain risk encountered by the Members of the National Stock Exchange in the course of the trading at the said Exchange and submitted the Master to the Policy National Stock Exchange, and issued individual insurance policies to its Trading Members, known as Stock Brokers Indemnity Insurance Policy.  The policy issued to the complainant covered the specified risks to the extent of Rs.25.00 lacs.  The case of the complainant is that one of its clients namely Mr. Ajay Gupta, Proprietor of Trupti Investments sold counterfeit / stolen / forged shares of Rs.19,59,850/- through them.  Being forged documents, the said shares became bad delivery.  An FIR was lodged by the complainant against Mr. Ajay Gupta and a claim was lodged with the insurer.  The claim was repudiated by the insurer vide letter dated 14.6.2001, which to the extent it is relevant reads as under:

          “This refers to the above claim made by you for a total loss of Rs.13,79,488/- on account of your dealings with Mr. Ajay R. Gupta Prop. Of M/s. Trupti Investments.

          In this respect, we would like to draw your attention to exclusion No.3 of the policy which states that “Any claim or loss arising out of transactions / deals entered into by the Assured introducing member on the Exchange which have originated from a unregistered sub-broker or an unregistered client as per “Know Your Client” scheme is not covered under the policy which is effective from 01.6.1997.

          It is observed that in the above claim, most of the transactions have been done after 01.6.1997 and Mr. Ajay Gupta was not registered as a sub-broker with NSE.  Also attention is invited to the following observations made by our investigators.

• Ajay Gupta sold stolen shares through the TM.TM could not point out as to how he acted himself as owner while selling the stolen shares.

• Ajay Gupta was not a genuine holder of the shares sold by him through the Trading Member as the shares did not stand in his name.Mr. Ajay Gupta was not having with him any power of attorney to dispose of the shares and hence he was not legally authorized to sell the shares.

• The registration of a stock broker and sub broker who may be associated with the security market is necessary under SEBI Act, 1992.Since Mr. Ajay Gupta had associated and assisted the Trading Member in dealing with securities his registration as a sub broker was necessary.

Hence, Mr. Ajay Gupta was not a client.  He was doing business as an unregistered sub-broker. 

Out of the total shares sold by Mr. Ajay Gupta shares worth Rs.1,98,086/- were sold before 01.6.97, which are covered under the policy.  But, since the credit balance security deposit and excess under the policy is far in excess of the net loss; nothing is payable.”

2.      On receipt of the letter dated 14.6.2001, the complainant sent a letter dated 23.6.2001 to the insurer.  Responding to the letter of the complainant dated 23.6.2001, the insurer vide its letter dated 31.10.2001 inter-alia stated as under:

          “6.     It has also been found that though the first bad-delivery was received by you on 16.8.1997, intimation of loss was given to us on 18.12.1997 and to police on 19.11.1997.  This is in violation of Important Condition under the policy which states that claim should be reported within thirty days of discovery failing which it would prejudice your right to claim under the policy.  Also due to delay our right of recovery is prejudiced which is in violation of condition no.7 of the policy regarding our subrogation rights.”

3.      Being aggrieved from the repudiation of the claim, the complainant approached the concerned State Commission by way of a consumer complaint.

4.      The complaint was resisted by the insurer which admitted the policy issued to the complainant but maintained that the claim of the complainant was covered under the Exclusion Clause contained in the insurance policy.  It was also stated in the written version filed by the insurer that as per Clause 2(a) of the Chapter V of the Regulations of National Stock Exchange, the Trading Members were required to adhere to the Byelaws, Rules & Regulations of the Exchange and comply with all notices, guidelines and instructions of the relevant authorities as might be applicable, but the complainant had executed the alleged transactions in gross violation of the terms and conditions of the insurance policy and the rules, byelaws and regulations of the National Stock Exchange as well as the SEBI Regulations, 1992.

          The insurer also stated in its written version that as per Clause (3) of the Exclusions, the insurer is not liable for any claim or loss arising out of transactions / deals entered into by the assured which have originated from an unregistered sub-broker or unregistered client as per KYC Scheme.

5.      The State Commission vide impugned order dated 6.6.2014, allowed the complaint and directed the insurer to pay a sum of Rs.16,69,850/- to the complainant, along with interest @ 12% per annum.

6.      Being aggrieved from the order passed by the State Commission, the insurer is before this Commission by way of this Appeal.

7.      The insurance certificate issued to the complainant inter-alia reads as under:

          “This Certificate is only a summary of the salient features of the Stock Brokers Indemnity insurance as provided in the Master Policy issued to the National Stock Exchange of India Ltd. in respect of its Trading Members.  The Master Policy is available for inspection by any Trading Member and will form the basis for the processing and settlement of all claims.  This Certificate merely summarises the main terms and conditions of the Master Policy.”

It is thus evident that the policy documents issued to the complainant did not incorporate all the terms and conditions of the policy and such terms and conditions were to be ascertained by the policy holder by inspection with the National Stock Exchange, the Master Policy having been submitted by the insurer to the Exchange.  This is not the case of the complainant that the Master Policy referred in the policy certificate was  not actually submitted by the insurer to the Exchange and therefore, was not available for inspection by the Trading Members.

8.      The Master Policy which the insurer had submitted to the Stock Exchange, to the extent it is relied upon by the learned counsel for the insurer reads as under:

          “2.     Notification of Claims

          The Assured shall as a condition to their right to be indemnified under this …. Give to the Underwriters as soon as possible and in any event within thirty days after first discovery by the Assured notice in writing of

1. Any claim made against the Assured or loss sustained by the Assured.

3.      Any claim or loss arising out of transactions / deals entered into by the Assured introducing member on the Exchange which have originated from an unregistered sub-broker or an unregistered client as per “Know Your Client” scheme.”

9.      Clause 1 of the Important Conditions contained in the insurance policy issued to the complainant reads as under:

“1.     In the event that the Insured becomes aware of any loss sustained or any circumstances which may give rise to a claim, or any reasonable cause for suspicion of fraud, dishonesty or forgery on the part of any Employee, the Insured must notify The Oriental Insurance Co. Ltd. at the address given below in writing as soon as possible and in any event, not later than thirty days after discovery.  FAILURE TO DO SO WOULD AFFECT THE INSURED’S RIGHTS UNDER THE POLICY.”

10.    Vide Circular No.32 dated 24.10.1996, National Stock Exchange instructed all the Trading Members as under:

          “Attention of trading members is invited to Regulation 4.3.1 of the National Stock Exchange (Capital Market) Trading Regulations Part A, regarding Member Constituent agreement.  It is reiterated that trading members should enter into an agreement with each of their constituents before accepting of placing orders on the constituent’s behalf.  Trading members are also advised to affix a duly signed photograph (s) of the constituents, in the Member Constituent Agreements.  This would help members in identification purposes in the event of any fraud / offence committed by the constituent in dealings with the trading member.” 

Vide Circular No. 46 dated 06.2.1997 the Exchange instructed its Members as under:

“Therefore all trading members are to mandatorily insist upon some proof of identity (copy of Passport / Driving License / Ration Card etc.) in addition to the duly signed photograph(s) of the constituents.  In the case of non-institutional corporate clients, the photograph and other proof of identity shall be taken in respect of the Managing Director or such other senior functionary.  This would help members in identification purposes in the event of any fraud / offence committed by the constituents in dealings with the trading member and would enable resolution of problems / grievances faced by members arising out of dealings with constituents.  Members who do not follow the above procedures may be denied recourse to any insurance claims and Exchange grievance redressal mechanism including arbitration.  This circular comes into effect immediately in respect of the new clients of trading members and within a week from the date of this circular in respect of their existing clients (whether presently trading or not).”

11.    In terms of Clause-2 of the Umbrella Policy, the complainant was required to intimate its loss to the insurer by way of a notice to be given within thirty days of the discovery of the loss.  As stated in the letter of the insurer dated 31.10.2001 sent to the complainant, the first bad delivery was received by the complainant on 16.8.1997, whereas intimation of the loss was given to the insurer only on 18.12.1997 and to the Police on 19.11.1997. 

12.    The conditions of the Master Policy and the individual policy requiring intimation of the loss to the insurer within thirty days of the first discovery of the loss was binding upon the complainant.  Therefore, the loss should have been intimated to the insurer within thirty days of its having been discovered by the complainant.  The intimation to the insurer having been given only on 18.12.1997, despite first bad delivery having been received by the complainant on 16.8.1997, there was a breach of a mandatory term of the insurance policy.  This is not a case where the loss was promptly intimated to the Police and the delay occurred only in intimating the loss to the insurer.  Here, though a fraud was allegedly committed by Shri Ajay Gupta with the complainant by submitting forged documents and the matter was also reported to the police, the intimation even to the Police came to be given more than three months after the first bad delivery was received by the complainant.  The complainant has not come forward with any explanation for the delay in intimating the loss to the insurer and to the Police after the aforesaid letter dated 31.10.2001 was issued to it by the insurer.  If the complainant had any explanation for the said delay it ought to have filed an affidavit before the concerned State Commission, explaining the aforesaid delay.

13.    Condition No. 5 of the Important Conditions contained in the insurance policy issued to the complainant reads as under:

          “5.     Adherence to ‘Know Your Client’ and Registration of Sub-broker guidelines issued by NSEIL and SEBI is a pre-requisite in the settlement of any claim.”

          Clause-3 of the Master Policy filed by the insurer with National Stock Exchange to the extent it is relevant reads as under:

          “EXCLUSIONS TO PART II

          Underwriters shall not be liable for:

          1.

2.

3.      Any claim or loss arising out of transactions / deals entered into by the Assured introducing member on the Exchange which have originated from an unregistered sub-broker or an unregistered client as per ‘Know Your Client’ Scheme.”

14.    In terms of the Circular No.32 dated 24.10.1996 issued by National Stock Exchange, the complainant was required to execute an agreement with each of its Constituents before accepting or placing orders on behalf of the Constituents.  The complainant was also advised to affix a duly signed photograph of the Constituent on the agreement, so as to enable identification in the event of any fraud / offence committed by the Constituents in dealing with the Trading Members.  In terms of Circular No.46 dated 06.2.1997, issued by National Stock Exchange, the complainant was required to obtain proof of identity such as copy of Passport / Driving License / Ration Card etc., in addition to the duly signed photograph of the constituent.  The Members were cautioned that the failure to follow this procedure could result in the insurance claim being denied. 

15.    The case of the insurer is that Shri Ajay Gupta was a sub-broker of the complainant whereas the case of the complainant is that he was not his sub-broker and was only a constituent / client.

16.    During the course of hearing, the respondent / complainant submitted a copy of the Individual Client Registration Application Form purporting to be submitted by Ajay R. Gupta, along with a copy of his driving license and his ration card.  I have perused the copy of the driving license annexed to the above referred application form.  The document does not contain full address of Shri Ajay Gupta.  The address given in the driving license being Deputy Ganj Moradabad, without giving any house number.  The column whereby Date of Birth and Educational Qualification of the license holder were to be given, were blank and so was the column relating to his Blood Group.  More importantly, though Clause-8 of the application form required details such as address and telephone number of the Branch in which account was held by the constituent, bank account number and date of opening of the account, neither the address or telephone number of the Branch is given in the application form, nor is the date of opening of the account given therein.  Even the bank account number given on the application form appears to be ex-facie incorrect, the account number given on the form being ‘9’.  Normally, a bank account will not have a single digit account number.  There is no explanation form the complainant as to why the address and telephone number of the Branch and the date of opening of the account number was not obtained from Shri Ajay Gupta at the time the registration form was obtained from him.

          Still more importantly, Clause-8 of the application form required the constituent to submit a letter from the banker, certifying the account number and the period from which the account was in operation.  There is no evidence of such a letter from the banker of Shri Ajay R. Gupta having been taken by the complainant.  Again, there is no explanation from the complainant as to why such a letter from the banker was not taken, despite the requirement of the letter having been incorporated in the application form itself.  It therefore, appears to me that the proper ‘KYC’ of Shri Ajay R. Gupta was not carried out by the complainant.  As a result, it became almost impossible to locate Shri Ajay R. Gupta and bring him to justice.  Had the complainant obtained the branch address and telephone number and more importantly, a letter from the banker of Shri Ajay R. Gupta, certifying his account number and the period from which the account was in operation, it would have been possible for the Police and even for the insurer to locate him through the particulars available with the bank and make an effort to recover the loss to the complainant from him.   It is rather strange that the complainant opened an account of Shri Ajay R. Gupta, without even verifying his bank account and taking a letter from his banker.  Though, two telephone numbers have been given in column-2 of the application form, it is not the case of the complainant that the aforesaid telephone numbers were genuine and it had verified the same by making a call at those phone numbers.  There are only two possibilities as far as the telephones numbers given on the application form are concerned.  The first possibility is that the complainant did not verify the aforesaid telephone numbers by making a call to those numbers and confirming that those telephone numbers belonged to Shri Ajay Gupta.  The other possibility is that the complainant had verified the above referred telephone numbers by making a call before accepting orders on behalf of Mr. Ajay Gupta.  In the first case, the complainant would be negligent for not verifying the phone numbers of Shri Ajay Gupta given on the application from.  In the second case, the complainant ought to have verified the address of Shri Ajay Gupta with the help of the telephone numbers given in the application form and conveyed that address to the insurer as well as to the Police.  Since the complainant does not even claim to have verified the telephone numbers given on the application form, the obvious inference is that it did not bother to verify the said telephone numbers.  If this is so, the KYC verification would be inadequate and would not serve the purpose for which the said verification was required. In my opinion, the above referred omission on the part of the complainant not only constitutes breach of the terms of the insurance policy on account of the inadequate KYC verification, it also casts serious doubt on the truthfulness of the case of the complainant.

17.    For the reasons stated hereinabove, I hold that since (i) there was delay in intimating the alleged loss to the insurer and (ii) adequate KYC verification of Shri Ajay Gupta was not done by the complainant, the insurer was not obliged to reimburse any payment to the complainant in terms of the insurance policy issued by it.  The impugned order therefore, cannot be sustained and the same is hereby set aside.  The consumer complaint filed by the respondent is consequently dismissed, with no order as to costs.