How Sebi’s new dispute redressal mechanism empowers investors

ODR, according to experts, will help investors initiate mediation and arbitration proceedings against various intermediaries. Till now, investors could settle their disputes at IGRC, but this was possible only against a limited set of intermediaries.“ODR can make arbitration and mediation less time-consuming and more cost-effective, as there is now an online mechanism available that allows seeking arbitration against a number of intermediaries," says Sandeep Parekh, managing partner of Finsec Law Advisors.

Why ODR?

SCORES, which is largely used by investors seeking redressal of complaints against stock brokers, is a comprehensive redressal system, which allows investors to escalate their complaint (see graphic) in a time-bound manner. In the final stage, the complaint is reviewed directly by Sebi and an investor who is not satisfied by Sebi’s review can now opt for ODR.

Earlier, the IGRC resolved disputes between stock brokers, depository participants, commodity brokers and their clients. Last year, Sebi expanded this list to include listed companies and registrar & share transfer agents (RTAs). ODR widens the ambit of intermediaries.

As Sebi’s recent consultation paper on ODR points out, the existing dispute resolution process under this framework is “largely a physical process making it relatively costly, time-consuming". To be sure, most of IGRC’s mediation proceedings had moved online during the pandemic. This is set to continue under ODR.

 

 

The ODR mechanism aims to expand the ambit of the dispute resolution process by including alternate investment funds (AIFs), collective investment management company, investment advisors, InvITs (infrastructure investment trust), mutual funds (including distributors of these fund), portfolio managers (PMS), Reits (real estate investment trusts), research analysts and commodity clearing corporations.

Institutional investors or clients can also use the ODR framework against credit rating agencies, clearing corporations, custodians (their clients being foreign institutional investors), debenture trustees, KYC registration agency, merchant bankers, proxy advisors, vault managers, trading members and clearing members, among others.

So, what happens to IGRC now? Experts see it being subsumed by ODR over a period of time. The cases currently under IGRC will continue till they are all resolved. But, Sebi wants ODR to be the preferred route for conciliation and arbitration in future.

SCORES to ODR

Investors need to first register their complaints on the SCORES platform, where they can escalate the matter up to two stages—a first-level regulator (self-regulatory body or the exchanges) in the initial stage, followed by Sebi’s intervention in the final stage.

This is a time-bound process where the entity needs to respond to the investor’s complaint within 21 days. After this, the complainant has 15 days to escalate the matter to the next stage. Similarly, on receiving the action taken report (ATR) from the first-level regulator (within 10 days), the complainant has 15 days to escalate the matter with Sebi.

An investor can either wait for the entire SCORES process to conclude with Sebi’s final review, and then initiate a conciliation and arbitration process under ODR portal, or even initiate it after completion of any one of the stages on the SCORES platform. The only caveat is that the matter should not already be under any review at any other forum, including courts.

How ODR works

Sebi has envisaged appointment of ODR institutions by market infrastructure institutions (MIIs)—stock exchanges and depositories—to facilitate the conciliation and arbitration proceedings for the clients. Within five days of the complainant starting the conciliation process in the ODR portal, the ODR institution concerned appoints a conciliator, who shall conduct one or more meetings for the disputing parties to find a consensual resolution within 21 days. If no resolution is found, the disputing parties can consent to extending the process by another 10 days.

Sebi has stipulated that there won’t be any fees for registering the complaint on the ODR portal. However, the conciliator (mediator) will charge a fee. If the conciliation (mediation) is successful, the fee would be ₹4,800. For unsuccessful conciliation, the fee would be ₹3,240. The ODR institution will get ₹600.

If the matter is not resolved by conciliation within the stipulated period, the complainant can initiate arbitration proceedings on the ODR portal.

The ODR institution has to appoint a neutral arbitrator with the required expertise and qualifications within five days. Arbitration proceedings should be conducted within 30 days. However, the arbitrator shall have the right to extend the proceedings by another 30 days.

Also, if the claim amount is below ₹1 lakh, no hearings may be required and the arbitration-award will in most cases be based on document-only process. If the claim amount is more than ₹30 lakh, the matter needs to be referred to an arbitral tribunal consisting of three arbitrators.

The intermediary against which the arbitration proceeding is initiated will be required to deposit the entire claim amount with the relevant MII. If the intermediary fails to do so, it can be declared as not ‘fit and proper’ and lose its licence to conduct any business. The intermediary may choose to opt out of arbitration stage.

The claim amount, up to a maximum of ₹5 lakh, can even be transferred to the aggrieved investor before the arbitration proceedings are concluded. However, the investor must guarantee that the amount will be returned if the arbitration decision goes against the investor. Failure to return the amount can result in the investor being barred from trading in stock exchanges and a freeze on demat account or mutual fund holdings. If the investor gives his securities or investments as security, these can be sold to realize the amount.

The arbitration fee will depend on the claim amount. If the claim amount is up to ₹1 lakh, the arbitrator’s fee would be ₹4,800 (see graphic). For instance, if the claim amount is ₹1 -10 lakh, the fee would be ₹8,000. If the claim amount is ₹10-20 lakh, the fee would be ₹12,000.

Arbitration clause

While Sebi had last month made changes in regulations of relevant intermediaries to enable mediation and arbitration, some lawyers that Mint spoke to suggested including an arbitration clause in contracts between intermediaries and clients.

“Currently, arbitration is mainly used in stock broker-client agreements at stock exchanges. It is a new development for other intermediaries like mutual fund distributors, investment advisors, portfolio managers, etc. and this will require huge capacity building. Also, the rules of what cannot be arbitrated will require more clarity," says Sumit Agrawal, managing partner of Regstreet Law Advisors and former Sebi officer.

Experts are also of the view that more clarity is needed on whether other institutions (besides MIIs) need to be covered, to ensure efficiency of ODR framework across intermediaries. “The MIIs such as exchanges have supervisory powers over brokers, but what about mutual funds and mutual fund distributors. Will a body like Amfi (Association of Mutual Funds In India) also be asked to join the system? These things would need to be ironed out," says Chirag Shah, counsel and securities lawyer.

In the first phase of ODR implementation, brokers and depository participants will get covered in the ODR system by 15 August. In the second phase of implementation, other market participants need to register on the ODR portal by 15 September.

Sebi’s move aims to make it easier for investors and clients to seek redressal without getting too worried about costs, lengthy proceedings and court visits. Efficiency of ODR institutions in managing arbitration across different intermediaries would encourage wider set of investors to access the framework for recourse.