Arbitrability of Securities Law in India

following guest post is contributed by Shreyangshi
, who is a third year B.A., LL.B. student at the West Bengal National
University of Juridical Sciences (WBNUJS).
post aims at identifying the nature of rights relating to securities law, i.e. if
they are of such nature that they can be resolved by a private arbitral
tribunal, or whether they are exclusively reserved for adjudication in public
fora (courts). By analysing the interplay between court decisions on
arbitrability and the securities regime in India, the post highlights the
undefined position of law on arbitrability of securities issues.]
A contemporary debate
in arbitration deals with the question whether certain ‘public law’ issues involving ‘public
can be settled through ‘alternative,
private decision-making processes.
’ Such questions are resolved by looking
at the ‘arbitrability’ of a dispute i.e. the
ability of a dispute to constitute the subject matter of arbitration.
This concept of
arbitrability encapsulates three aspects:
– whether the disputes, by virtue of their nature,
could be resolved by a private arbitral forum or whether they are exclusively
reserved for public fora;
– whether the disputes are covered by the arbitration
agreement between parties; and
– whether the parties have referred the disputes to
Under section 81(1)(a) of the
English Arbitration Act, 1996, there exists no clarification if certain
disputes are arbitrable or not. Instead, the courts determine arbitrability depending
on the facts and circumstances of each case. As held in Fulham Football Club (1987) Ltd v. Richards,
case is not arbitrable if the dispute in question engages ‘third party
rights’ or matters of public interest which are incapable of being determined
within confines of private contractual processes.
In a nutshell, commercial
disputes, both contractual and non-contractual, are capable of arbitration.
This includes disputes relating to fraud,
intellectual property rights, employment law, consumer rights, as well as
certain competition law issues. Insolvency proceedings, by virtue of being
subject to a statutory regime, are incapable of arbitration. Similarly, criminal
matters and family law issues are also not arbitrable.
regard to India, the Arbitration & Conciliation (Amendment) Act, 2015 lacks
enumeration regarding the categorization of non-arbitrable disputes. Instead,
under section 7, it implicitly suggests that all disputes, owing to the presence
of any form of legal relationship, are arbitrable regardless of their nature.
under section 34(2)(b) of the Arbitration and Conciliation Act, 1996, Indian
courts are empowered to set aside arbitral awards or refuse enforcement in case
“the subject-matter of the dispute is not
capable of settlement by arbitration under the law for the time being in force.”

ambiguous statutory restriction on arbitrability throws the ball in the court
of the judiciary. By means of seminal judgments, certain limitations have been
placed on parties’ freedom to arbitrate, resulting in conceptual
crystallization of arbitrability to a certain extent.
Judicial Enunciation
In the landmark Booz Allen and Hamilton Inc. v. SBI Home Finance Limited & Others,
the Supreme Court, while dealing with the issue of arbitrability of disputes,
held that arbitral tribunals are ‘private
chosen by the parties, in place of courts or tribunals, the ‘public fori’ as per the laws of the
country. All disputes relating to ‘right in-personam’
are arbitrable whereas, all disputes relating to ‘right in-rem’ are unsuited for private arbitration and are to be adjudicated
by courts as well as public tribunals.
The Booz Allen case closely reflected norms
under English law and addressed pertinent issues relating to arbitrability;
however, securities law being a valid subject-matter of arbitration continues
to remain relatively unexplored. Thus, for understanding if securities law are
arbitrable or not, it is imperative to study certain judgments that expound on
the reasoning laid down in Booz Allen.
In Kingfisher Airlines Limited v. Prithvi Malhotra Instructor, the Bombay
High Court placed additional restrictions on arbitrability. It held that a
dispute regarding any subject-matter would be considered inarbitrable if a particular
legislative enactment creates or governs special rights, obligations, as well
as accords special powers (including jurisdiction) to subject-matter oriented
tribunals. Civil courts are necessarily excluded from the jurisdictions of such
specialised tribunals.
Elucidating on
this, in HDFC Bank v. Satpal Singh Bakshi, the Delhi High Court analysed
the legislative intent behind the formulation of various specialised tribunals
as well as the nature of rights and duties vested in them. It was held that the
Rent Control Act as well as the Industrial Disputes Act create special rights and
give special powers to the industrial adjudicators or tribunals. These powers are
not available to civil courts; hence, disputes within the ambit of these
statutes cannot be decided by means of arbitral tribunals which are essentially
substitutes of civil courts.
In Aircel Digilink India Ltd. v. Union of India, the Telecom
Disputes Settlement and Appellate Tribunal (‘TDSAT’) held that the Telecom
Regulatory Authority of India Act, 1997 was a special legislation aiming to
protect the interests of the service providers and the consumers of the telecom
sector. Proper functioning of various stakeholders in this sector, as well as
speedy adjudication by a specialised tribunal having requisite knowledge and
expertise of the sector, such as the
TDSAT, was vital for its development. Emphasizing on this, exclusive
jurisdiction was accorded to the TDSAT; civil courts and arbitrators had no
authority to interfere with this jurisdiction.  
For the purpose
of this post, parallels can be drawn between the aforementioned statutes, the functions
of the specialised tribunals they create, and the Securities and Exchange Board
of India Act, 1992 (“the SEBI Act”).
The Preamble
of the latter provides for the establishment of the Securities and Exchange
Board of India (‘SEBI’), to protect the interests of investors in securities
and promote their development, in addition to regulating business in stock
exchanges as well as the securities market. By maintaining oversight, performing
functions of auditing, and regulating substantial acquisition of shares or
take-over of companies, SEBI is mandated, under Chapter IV of the SEBI Act, to
unearth fraudulent and unfair trade practices, such as insider trading. The
investigation and exposé of such malpractices ensure investor confidence within
the public, which is collectively beneficial for markets and economic progress.
It is evident
from the SEBI Act that SEBI performs necessary public functions. SEBI deals
with specialised technical matters of securities dealings that have bearing
upon a larger section of the public and economic development.
In addition to
this, section 15U of the SEBI Act exclusively gives extensive, special powers
to the Securities Appellate Tribunal (‘SAT’). The SAT has the same powers as
vested with civil courts (including but not limited to appellate powers), but,
as per section 15Y of the SEBI Act, the latter has no jurisdiction to entertain
any suit or proceeding in respect of any matter. As per HDFC Bank, arbitral tribunals are essentially replacements of civil
courts; hence, neither special rights are created in their favour, nor they do
they have exclusive jurisdiction.
the SEBI Act is a special
legislation which creates and governs special rights, obligations which are
exceptions to the norm of rights in-personam.
Thus, keeping in mind the aforementioned decisions (most importantly Kingfisher Airlines), there is an implied
bar on arbitration of securities law matters because special powers are granted
or governed by specialized tribunals such as the SAT, and the same are lacking
with civil courts.
and Securities Disputes: The Analysis
However, the
solution to the question of arbitrability of securities law disputes is not as
straightforward. The matter becomes contentious when there is a dispute between
parties bound by a pre-existing, private contractual relationship. The
relationship could be in the form of a shareholders’ agreement, or a joint
venture or joint cooperation agreement between shareholders or securities owners
of any company. In case the agreement contains a clause to refer all disputes
arising out of or in connection with that dispute to arbitration, then it may
become difficult to adjudge the arbitral tribunal’s scope or jurisdiction in
resolving such a subject-matter.
In addition to
these agreements, there exist substantive norms permitting arbitration,
formulated by the SEBI. A 2013
SEBI press circular
lays down guidelines and exhaustive procedures on
arbitration mechanism for investor grievance redressal. From the circular, it
is palpable that arbitration is the ideal channel for streamlining the investor
grievance redressal mechanisms at stock exchanges and increasing overall
efficacy in granting investor protection.
Further, the SEBI bye-laws in Chapter
provide for arbitration as a method to resolve claims,
complaints, or disputes etc arising out of trading or settlement, between
trading members. The National
Stock Exchange (‘NSE’) bye-laws
also have similar provisions.
Undoubtedly, the
circulars and the bye-laws permit investor-broker arbitration, as well as
arbitration between trading members in a stock exchange. These norms implicitly
set the trend that at the outset securities issue can be arbitrated upon for
effective redressal and investor protection. This goes contrary to the
understanding previously derived from an analysis of case laws on
it is to be noted that in the aforementioned regimes, the securities matters
are classified as arbitrable simply because they are rights in-personam, or rights of such nature
that they have an effect only upon private parties, i.e. particular investors,
brokers or trading members in stock exchanges. As opposed to this, a perusal of
the aforementioned case laws indicates that the rights dealt with in relation
to securities are exceptions to the rights in-personam.
In support of
this contention, in cases of oppression and mismanagement, it has been held that any matter
relating to the rights of or benefits to the shareholders in their capacity as
members of the company is not required to be referred to arbitration, even if
the parties have an agreement to submit all disputes to such forums. A petition
under sections 241-244 of the Companies Act, 2013 is a proceeding in-rem. It is an action by shareholders
for the larger benefit of the company. Similarly, a securities matter will not
be arbitrable if the dispute potentially affects public interest or the economy
on the whole.
In conclusion, it
is indisputable that there exists a dichotomy with respect to the nature of
rights that are governed by securities law. There is no clear demarcation as to
what exactly constitutes a right in-rem
and a right in-personam with regard
to securities issues. Thus, it is crucial to have laws establishing a firm
position on this, and ultimately answering the question of arbitrability of
securities issues, once and for all.
– Shreyangshi

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


  • Dear Gupta,

    You are a true legal scholar! Excellent Research paper. Let me tell, you have the potential to do the Doctorate in Law. My sincere felt Congratulations to you. I wish you a bright future and all the best.

    Srirama Murthy
    [email protected]

    (FONT supplied)

    The purport of the cited editorial narration of the text of the write-up (or the writer’s conclusion) is not clearly understood, or is readily reconcilable.

    To be precise, it is unclear, as to why the referred court decisions, -infer-ably given in a case to case basis, under the Act of 1996,- should have any influence on, or come in the way of implementation of, section 7 of the Amendment Act of 2015 (referred by the writer), as “the law for the time being in force”, that is post its effective date,

    Perhaps, if at all, there could be a possible controversy on the question of applicability of the said amended provision to the past transactions; which, of course, if so called for will need to be clarified.

    Over to eminent law experts for competent elucidation.

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