Stock Exchange Arbitration An overview

Prachi Pande analyses the Stock Exchange Arbitration and lays emphasis on the kind of matters referred to and parties to an arbitration, along with place of arbitration and its limitations.

The density of the Indian stock market is amongst the top three in the world. As soon as the stock markets opens at 9.00 a.m., there is flurry of orders that are keyed - in from all over the world and from all strata of economic background.

 

In this hurly burly, frenzied and frantic market scenario, there are bound to be mistakes, differences and disputes. These disputes can be between a broker, sub broker, constituents, clearing member, depositories, authorized persons, etc. To deal with such disputes, stock exchanges i.e. the National Stock Exchange of India Ltd. (NSE) and Bombay Stock Exchange Limited (BSE) have devised a very sophisticated dispute resolution mechanism.

 

Imagine going to a cardiologist for a foot fracture. Regrettably, this is what is happening as far as stock market disputes are concerned. Aggrieved people are running pillar to post to police stations and consumer courts, to redress their grievances, instead of invoking Stock Market arbitration. Though these forums are available; the most efficacious mechanism remains stock market arbitration. Securities Exchange Board of India (SEBI) and NSE’s have recently issued circulars  (SEBI’s circular no. CIR/MRD/DSA/24/2010 dated August 11, 2010; NSE’s circular no. NSEIL/ARBN/2010/003 dated August 31, 2010 and SEBI’s circular No. CIR/MRD/DSA/29/2010 dated August 31, 2010), bringing about sweeping amendments to the manner in which arbitrations were being conducted by the stock exchanges.

 

  1.       Investor Grievances Redressal Committee (IGRC)

 

Both the stock exchanges provide for a designated committee – the Investor Grievances Redressal Committee (IGRC), deals with investor’s complaints. This forum mediates between the parties and attempts to resolve their claims, disputes and differences. Complaints are to be filed in the format prescribed by the respective stock exchange.  The prescribed form broadly seeks details of the parties, nature of dispute / claim, quantum of claim, supporting documents, etc. Thereafter, the IGRC, calls the parties for a personal meeting to resolve their dispute. If the parties are unable to resolve their disputes, the mediator then advises them to invoke arbitration under the Rules, Bye – laws and Regulations of the relevant stock exchange.

 

  2.       What matters can be referred to arbitration

 

All claims, difference or disputes between the trading members, constituents, sub – brokers, clearing members and issuers arising out of or in relation to transactions made subject to the Bye – laws, Rules and Regulations of the exchange can be submitted to arbitration.

 

The very fundamental requirement of Arbitration Act, 1996 (“Arbitration Act”) is applicable to Stock Exchange arbitration too, i.e. the existence of an arbitration agreement. It is pertinent that the parties to arbitration have executed an arbitration agreement or any other agreement which provides for arbitration and further that the arbitration be as per Bye – laws and Regulations of the applicable stock exchange.

 

Vis-à-vis. a broker and its constituent, the Member Client Agreement, which is signed whilst opening of trading account, provides for the arbitration clause. With respect to broker and its sub broker, it is the Memorandum of Understanding or any other agreement that is signed between them, which provides for such an arbitration clause. Thus, whilst entering into the stock market, one must ensure that it has signed the relevant agreement to enable them to initiate arbitration at a later date, if required.

 

Further, party invoking stock market arbitration must ensure that its disputes, claims or dealings is within the jurisdiction of the stock exchange and within the parameters of Bye - laws and regulations of the stock exchange. For example, a dispute between a broker and sub broker with respect to loan / money dealings inter se, would not be subject to Stock Exchange Arbitration, as such dealings are not subject to Rules, Bye – laws and Regulations.

 

  3.       Who can refer matter to arbitration / parties to arbitration

 

Disputes which are ordinarily referred to Stock Exchange arbitration includes:

 

3.1.                 Between broker and its constituents;

3.2.                 Between brokers inter se;

3.3.                 Broker and its sub broker; 

3.4.                 Constituent and its sub broker; 

3.5.                 Constituent / broker and clearing member;

3.6.                 Constituent / investor and issuer.

 

Brokers are liable for the acts of its sub broker. Therefore, where a claim, difference or dispute arises between a sub  broker and its client, the trading member to who the sub broker is affiliated, is also to be impleaded as a party.

 

  4.       Limitation period

 

The recent circulars have brought about a paradigm shift on the aspect of limitation vis-à-vis. stock market arbitration. Erstwhile, the timeline within which one could invoke Stock Exchange Arbitration was six months.  Clause 5.1 of the SEBI’s circular dated August 11, 2010 suggests that the limitation period for filing arbitration reference shall be governed by the law of limitation, i.e. The Limitation Act, 1963. Thereby, increasing the period of limitation 6 times, i.e. from 6 months to 3 years! However, to encourage parties to judiciously invoke arbitration, the circulars have suggested a lower arbitration fee incase the party invokes arbitration within 6 months as compared to arbitration being invoked after 6 months.  The 6 months is to be computed from the end of the quarter during which the disputed transaction(s) were executed / settled, whichever is relevant for the dispute.

Earlier the manner of computing the period of 6 months was different at NSE and BSE. The recent circulars have brought about uniformity in the manner of computing limitation in both the exchanges (Until September 6, 2010, BSE has not issued any circular adopting SEBI’s circular of August 11, 2010, thereby amending its Rules, Bye laws and regulations ).

 

  5.       Place of arbitration

 

Both the exchanges have created and provided four different seats of arbitration, in the cities of Delhi, Kolkata, Chennai and Mumbai. Each of these seats of arbitration covers a number of States. The parties may thus approach an appropriate seat in the manner prescribed by the exchange.

 

  6.       Panel of Arbitrator(s)

 

6.1. Determination of the arbitral tribunal bench depends upon the quantum of the claim. Arbitral Panel could either comprise of one or three arbitrators, as the case may be. Earlier, NSE and BSE had a different pecuniary yardstick, for determining whether reference is to be referred to a single bench or a panel of three arbitrators. SEBI’s circular of August 11, 2010 has removed this distinction.

 

6.2. Clause 5.2 of SEBI’s circular of August 11, 2010 states arbitration reference for a claim / counter claim up to Rs. 25 lakhs shall be dealt with by a sole arbitrator, while claim / counter claim above Rs. 25 lakhs shall be dealt with by a panel of three arbitrators.

 

6.3. A party aggrieved by an arbitral award may appeal to the appellate forum, which shall consist of three arbitrators who would be different from the panel who passed the arbitral award appealed against.

 

  7.       Arbitration Fee

 

7.1. Prior to the recent amendments, the arbitration fee was different for BSE and NSE. SEBI’s recent circular has now standardized the same and it currently stands as:

 

 

 

7.2. Constituent who has a claim / counter claim upto Rs. 10 lakhs and files arbitration reference for the same within 6 months, shall enjoy the exemption of paying the arbitration deposit amount.

 

It is explicit from the above table that, though SEBI has considerably extended the period of limitation, it is still encouraging people to approach the forum within a period of 6 months.

 

7.3. In all the cases, on issue of the arbitral award the stock exchange shall refund the deposit to the party in whose favour the award has been passed.

 

  8.      Engaging a lawyer

 

As per NSE’s Bye – laws, where both the parties to arbitration are brokers the parties are not permitted to be represented by a counsel, attorney or an advocate. However, when one of the parties is a constituent and if the constituent chooses to be represented by a counsel, attorney or an advocate, only then can the broker appoint a lawyer for itself. BSE does not have similar provisions. At BSE, arbitrating parties may appoint advocates to assist them in the matter subject to permission of the arbitrators, which is ordinarily granted.

The recent circulars do not comment on this aspect. It could therefore be assumed that the legal provision stands unchanged.

 

 9.       Award and appeal thereafter

 

Pursuant to the written and oral submission of the parties, the arbitrator(s) issue the award which is in writing signed by the arbitrator(s). Incase any of the party is dissatisfied with the award, there is a provision for appealing against the award. Formerly, only BSE had an Appellate Bench and a party who was dissatisfied with NSE’s arbitral award, had no option but to approach the High Court, under Section 34 of the Arbitration Act.

 

SEBI’s circular of August 11, 2010 now necessitates that both the stock exchanges provide for an appellate forum. A party aggrieved by the appellate arbitral award may file an application to a Court of competent jurisdiction in accordance with Section 34 of the Arbitration Act. Petition under Section 34 of the Arbitration Act is to be filed in the competent court nearest to the regional center where the arbitration was conducted.

 

10.       Advantages

 

One of the greatest advantages of Stock Exchange Arbitration is that there is time frame within which the arbitration proceedings are to be heard and completed. Clause 5.4 of SEBI’s Circular states, “arbitration reference shall be concluded within four months from the date of appointment of arbitrator(s)” (The Managing Director / Executive Director of the stock exchange may for sufficient cause extend the time for issue of arbitral award by not more than two months on a case to case basis after recording reasons for the same). Even an appeal is to be disposed off within three months from the date of the appointment of the appellate panel. Moreover, having dedicated tribunal facilitates, as the arbitrators are aware of the subject, thereby considerably reduces the time and effort in resolving disputes.

Unlike other legal proceedings, Stock Market Arbitration is less dogmatic, less bureaucratic, flexible and entails very less paper work.

 

 11.       Conclusion

 

Ignorance is not always bliss, especially when it comes to stock market related arbitration. Being aware of your rights and remedies not only enables to secure one’s hard earned monies, but also provides respite promptly. At the cost of repetition, it is reiterated, stop going to Cardiologist for a foot fracture.

 

Prachi is an advocate practicing with the Chambers of Corporate Attorneys, a law firm based in Mumbai. She primarily practices in stock market and capital market related matters. She can be contacted at prachi@ccalex.com.