SEBI Update: New Alternative Dispute Resolution Mechanism
A well-functioning capital market is the backbone of the financial structure of a nation. As competition and complexities in the market increase, it becomes imperative to address customer disputes promptly and efficiently. Securities and Exchange Board of India (SEBI) plays a vital role in regulating and monitoring the Indian capital and securities market, where investors expect a fair and accessible system for complaint management and dispute resolution when their funds are affected by market participants’ errors or misconduct. A robust mechanism is essential for increasing retail investor engagement and ensuring efficient capital market operations
The complaint management system of SEBI includes an online platform known as the 'SEBI Complaint Redress System (SCORES). Investors can use SCORES to lodge complaints with SEBI against the authorized intermediaries and listed firms under (a) SEBI Act, 1992; (b) Depositories Act 1996; (c) Securities Contract Regulation Act, 1956; and (d) Companies Act 2013. Investors having accounts with depository participants or brokers can resolve disputes within a three-year limitation period for complaint submission from the date of cause of action. If a stock exchange or depository does not resolve an investor grievance, then Investors can file for arbitration under the rules and regulations of that stock exchange or depository.
Arbitration Mechanism of SEBI
SEBI provides for an arbitration mechanism for resolving disputes between clients and members in accordance with the provisions of the Circular dated 11 August 2010, read with Section 2(4) of the Arbitration and Conciliation Act, 1996 (1996 Act)
The panel of arbitrators is formed by considering the following factors: age, qualifications, and experience in financial services. Arbitrators from all stock exchanges with nationwide trading terminals will form a "Common Pool." If parties fail to choose arbitrators from this pool, an automated process will randomly select arbitrators.
The limitation period for filing arbitration claims is 3 years. An arbitration reference for a claim/counterclaim up to Rs 25 lakhs shall be dealt with by a sole arbitrator, while a panel of 3 arbitrators shall deal with claims above Rs 25 lakhs. The appointment of arbitrators should be completed within 30 days from the date of receipt of the application from the applicant. The arbitration shall be concluded by issuing an arbitral award within four months from the date of appointment of arbitrators. The arbitration facility must be available at centers specified by SEBI as the place of arbitration.
A party dissatisfied with an arbitral award has the right to appeal to the appellate panel of arbitrators. The appeal must be filed within one month of receiving the award, and the appellate panel must conclude the appeal within three months from the date of its appointment.
SEBI`s New Dispute Resolution Mechanisms for Securities Market Entities
On 3 July 2023, SEBI made a significant move by issuing amendments to the Alternative Dispute Resolution Mechanism. This amendment was approved during the SEBI Board Meeting in June 2023, wherein the they approved linking SCORES with the Online Dispute Resolution (ODR) platform.
The Board has also accepted the proposals aimed at revitalizing SEBI SCORES. One significant change is to reduce response timelines and ensure quicker resolution for complainants. Moreover, complaints will now be automatically routed to the relevant regulated entities, expediting the process further. To ensure adherence to prescribed timelines, an auto-escalation mechanism will come into effect in cases where regulated entities fail to meet the required deadlines. This move emphasizes the importance of timely action and accountability.
The SEBI has introduced an amendment through SEBI (Alternative Dispute Resolution Mechanism) (Amendment) Regulations, 2023 (ADR Regulations) in its following regulated entities, namely: merchant bankers, registrars to an issue and share transfer agents, debenture trustees, mutual funds, custodians, credit rating agencies, collective investment management companies, KYC registration agencies, alternative investment funds, investment advisers, research analysts, infrastructure investment trusts, real estate investment trusts, portfolio managers, foreign portfolio investors, and vault managers. These existing regulated entities were amended by the addition of a provision for a Dispute Resolution Mechanism through arbitration /conciliation /mediation.
ADR Regulations mandate that all claims, differences, or disputes between these regulated entities and their clients/ investors arising from their activities in the securities market shall be submitted by the standardized procedure for the ADR mechanism. Additionally, the Board has embraced a hybrid mode of conducting proceedings, allowing for a more flexible and accessible approach. This decision aims to streamline the dispute resolution process.
SEBI's recent amendments to the ADR Regulations represent a significant advancement in safeguarding investor interests by implementing various measures to enhance the resolution process within the securities market. The primary objective is to create a transparent and efficient system by streamlining the process of resolving disputes between financial entities and their clients. These amendments are geared towards providing a secure market for investors and addressing their issues.
Author: Purvi Shah - Partner
This update was released on 03 Aug 2023.
Legal Update Team
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