[Tarun Toprani is an associate and Sumit Agrawal a partner at Regstreet Law Advisors. The authors can be reached at [email protected]]
The preamble of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) begins by stating that it is “[a]n Act to provide for the establishment of a Board to protect the interests of investors in securities…”. In fact, Section 11 of the SEBI Act, which provides for the functions of SEBI, states that “…it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit…”. There are also several decisions of the Supreme Court of India and various High Courts which have read and interpreted the above phrase in a broad manner while deferring to the decisions of the regulator.
In this background, the Securities and Exchange Board of India (“SEBI”) on December 19, 2022 released a Consultation paper on strengthening the Investor Grievance Redressal Mechanism in the Indian Securities Market by harnessing Online Dispute Resolution mechanisms (“Consultation Paper”) which was also followed up by a press release dated December 21, 2022.
The Consultation Paper seeks public consultation on strengthening the existing stock exchanges administered mediation, conciliation and arbitration mechanism. The existing mechanism under stock exchanges operates in four stages:
- SEBI has mandated all stock exchanges to constitute an Investor Grievance Redressal Committee (“IGRC”). The IGRC functions as an administrative / meditation body and tries to mediate the complaint between two parties.
- If unsatisfied, a party may file a claim for arbitration whereby, on the basis of the pecuniary jurisdiction, a sole arbitrator or a panel of three arbitrators would be appointed to settle the dispute.
- If still not satisfied by the order of the arbitrator, a party can appeal against the order for appellate arbitration.
- Subsequent to the decision of the appellate arbitrators, the party would still have a limited scope of appeal that would lie to the jurisdictional High Court under the Arbitration and Conciliation Act, 1996.
Earlier, such a mechanism was only available in respect of entities associated with stock exchanges, such as trading members, clearing members, sub-brokers, and authorized persons. However, through a May 2022 Circular issued by SEBI, the dispute resolution mechanism was also extended to listed companies and registrar and share transfer agents (“RTAs”) in respect of all disputes pertaining to or emanating from investor services such as transfer or transmission of shares, demat or remat, issue of duplicate shares, transposition of holders, and investor entitlements like corporate benefits, dividend, bonus shares, rights entitlements, credit of securities in public issue, and interest coupon payments on securities. The 2022 Circular notes that the arbitration mechanism in respect of listed companies and RTAs can be initiated after exhausting all actions for resolution of complaints.
Further, SEBI already has in place a robust SCORES (SEBI Complaints Redress System) platform for filing a complaint in respect of listed companies and SEBI registered intermediaries. Additionally, by way of a January 2020 circular, SEBI has directed and empowered stock exchanges to deal with certain categories of complaints, including for violations in respect of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. The January 2020 circular has empowered stock exchanges to impose penalties, freeze promoter or promoter group shareholding and suspend trading of the scrip of the defaulting company. Further, an August 2020 circular has additionally empowered to stock exchanges to be the first port of call for certain categories of complaints (broadly relating to non-receipt of securities or funds in a corporate action) investors may have in respect of listed companies.
In view of the above background, the Consultation Paper has set out several proposals and questions on which SEBI is seeking consultation. Briefly, they are as under:
Proposal 1: To introduce online or hybrid mode for stock exchange administered mediation / arbitration.
After the experience arising from the lockdowns and social distancing norms occasioned by COVID 19, this is a very welcome step. By allowing online mediation or arbitration with the option of hybrid participation, it will facilitate utilizing this option efficiently.
Proposal 2: Relabeling of the IGRC into a panel of mediators
Once any complaint is submitted to the exchange, the IGRC, being the first port of call for investors, acts as a mediator to amicably resolve and settle the dispute between both parties. Currently, there is a debate on the enforceability of IGRC orders, and a mediation or conciliation process will clear this ambiguity.
Proposal 3: All matters to be dealt by a sole arbitrator while doing away with the panel of arbitrators & Proposal 4:Discontinue appellate arbitration
The current process for arbitration is based on pecuniary jurisdiction wherein for claims up to INR 25 lacs a sole arbitrator is appointed while for claims greater that INR 25 lacs a panel of three arbitrators is appointed. SEBI has proposed to do away with the concept of the panel of arbitrators while suggesting that all disputes be dealt with by a sole arbitrator. SEBI has also sought comments on whether there should be a higher qualification criteria for dealing with claims over a certain threshold. Further, it has also been proposed to discontinue the process of appellate arbitration wherein a panel of three arbitrators decide an appeal of an award passed by the sole (or panel) of arbitrators.
While transitioning to a single arbitrator model would certainly help with capacity building and higher qualification criteria for dealing with claims over a certain threshold would be an effective substitute, the above two criteria must be read in conjunction. There are currently over 59 lakh cases which are pending before various High Courts in India, and doing away with the appellate arbitration mechanism would only increase the undue burden on the various High Courts.
Perhaps, the problem is not as much as about the qualification or the threshold but speedy judgements and certain misuse by intermediaries through non-compliance with such awards, all of which may not be in the interest of investors.
Proposal 5: Extending the stock exchange administered online mediation or conciliation and online arbitration to specified securities market intermediaries
SEBI has proposed that to effectively redress of investor grievances, issues or disputes in the securities market, it would be appropriate to require that all such grievances, issues or disputes pertaining to specified securities market intermediaries be governed by the stock exchange administered mediation or conciliation and, failing which, the arbitration mechanism.
The Consultation Paper in Annexure A thereto has also provided a list of securities market intermediaries which have a direct nexus with investors or clients and such intermediaries (including Fund managers of alternative investment funds, asset management companies of mutual funds, mangers for infrastructure investment trusts and real estate investment trusts).
However, there may be an infirmity in respect of the above proposal. Currently, under the SCORES platform, upon the registration of a complaint SEBI examines if the intermediary against whom the complaint has been made is in violation of any of the extant laws. If SEBI is prima faice of the view that there is a violation, it would initiate proceedings against the intermediary either in the form of enquiry proceedings under section 12 of the SEBI Act seeking to suspend or cancel the registration of the intermediary or proceedings under section 11B of the SEBI Act, seeking to issue directions (like refund of amount collected from investors, restrain from accessing the securities market), or initiating adjudication proceedings under section 15I of the SEBI Act to impose monetary penalty. However, under the stock exchange arbitration proceedings, a claim is to be filed by the complainant and, based on the merits of the case, the arbitrator will pass an award in the form of monetary compensation for the loss incurred by the complainant.
At this stage, it is also essential to examine the now repealed SEBI (Ombudsman) Regulations, 2003 which provided for the establishment of the office of ombudsman to redress the grievance of the investors. The scheme of the regulations allowed for the said ombudsman to examine a complaint (the scope of a complaint which can be considered by an ombudsman is also provided in the regulations) of an investor, intermediary or listed company and to facilitate resolution thereof by amicable settlement. If the settlement terms were not mutually acceptable by both parties, the ombudsman would (after adjudication) make an award in respect of the party(ies).
However, during the SEBI board meeting on March 25, 2021, a proposal was put up by SEBI in respect of the “Repealing of Securities and Exchange Board of India (Ombudsman) Regulations, 2003”. In the proposal put up to the SEBI board, it noted the mechanism for redressal of investor grievance already in place but, peculiarly, it also relied upon a letter dated December 21, 2011 written by SEBI to the Ministry of Finance in respect of the “legal issues which are impeding SEBI in extending the concept of Ombudsman to securities market”. The letter, which has been summarized in the proposal, notes that “SEBI Act does not expressly empower the Board to award compensation and therefore, SEBI may not empower an Ombudsman to award compensation through delegated legislation”.
The above discussion clearly establishes the SEBI Act does not confer inherent power to grant awards and, as a result, SEBI could not have delegated the same to an ombudsman. Similarly, even under the Consultation Paper, SEBI will have to consider whether through delegated legislation SEBI can extend the stock exchange administered online mediation / conciliation and online arbitration to specified securities market intermediaries. It is now trite law, upheld by several decisions by the Supreme Court of India, that what cannot be done directly also cannot be done indirectly.
Further, this proposal would also require more precise implementation to account for situations such as (i) the status of arbitration once enquiry proceedings have already been initiated / concluded in respect of an intermediary and the registration of the intermediary has been cancelled. In such a case, would the complainant still be able to initiate arbitration against such intermediary? The current scheme under the stock exchange provides that if a member has defaulted, no arbitration proceedings can be initiated in respect of the said member. Other situations include (ii) the status of arbitration proceedings in respect of an intermediary against whom an interim order has been passed by SEBI; (iii) the role of the Investor Protection and Education Fund when an order of refund has been passed in respect of an intermediary and parallel arbitration proceedings have been initiated in respect of the same intermediary.
Proposal 6: Capacity building & Proposal 7: Cost of arbitration
Proposal 6 is welcome in as much as it provides for stock exchanges to partner with Online Dispute Resolution institutes. However, SEBI would have to intervene to ensure that the professionals are adequately trained in matters relating to, and incidental to, the securities market. Further, as noted above, if Proposal 3 is implemented, the same would also assist in capacity building. In terms of Proposal 7, it is advisable to have a single fee structure as opposed to a percentage-based fee structure. Further, SEBI must provide strict timelines on the process of refund of arbitration fees.
Proposal 8: Interim Relief
SEBI’s move to require intermediaries to maintain an on-account deposit of a prespecified amount that may be utilized as and towards interim relief, and replenished if it declines below such prespecified amounts, is a positive development. However, such requirement could be pegged at a percentage of the net worth of the intermediary in order to maintain a balance of convenience.
While the intent and proposals of SEBI in the Consultation Paper are in the interest of investors especially retail investors, however the expression in the SEBI Act “by such measures as it thinks fit” cannot, without an express amendment, include measures which were never contemplated by legislation in the first place. SEBI must take lessons from the several orders of the Securities Appellate Tribunal, which has reprimanded SEBI for non-application of mind in dealing with complaints of investors, and equally focus on building existing capacity. The above proposals also raise a larger policy question and a constitutional debate. Can the protection of interest of investors be transferred / outsourced by SEBI to its registered MIIs by myriad delegated legislation?
Perhaps it is time SEBI relook at its own request to the Joint Parliamentary Committee (JPC) 2002 seeking certain measures for strengthening investor protection with the support of the Justice Dhanuka Committee and Dr. NL Mitra Committee reports. Essentially, SEBI had asked specific provisions to be built into the SEBI Act, Securities Contract (Regulation) Act, 1956 and Depositories Act, 1996 for specific rights for investors to approach courts and the specific right for investors to claim damages, compensation, and interest.
– Tarun Toprani & Sumit Agrawal