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Changing Winds in Investor Protection in the Securities Market

[All views expressed here are personal and nothing contained herein reflects the views, opinions and beliefs of any organization.]


The Joint Parliamentary Committee (2002) which was set up to inquire into the infamous Harshad mehta scam may be attributed to have first delved into several aspects of investor protection in the securities market that we continue to see the relevance of today. While scams of the magnitude have surfaced less in the recent past, it is admirable that SEBI within this year came out with a consultation paper, which soon was followed with a full-fledged Online Dispute Resolution mechanism mandating most SEBI regulated intermediaries to partake in what is touted as a step forward in investor protection.

 

This year it also repealed the SEBI (Ombudsman) Regulations, 2003 (“Ombudsman Regulations”). It is pertinent to remember the introduction of Ombudsman Regulations, the existence of the SEBI Complaints Redress System (SCORES) system and the eventual exit of Ombudsman, with the entry of the ODR mechanism. As it is not possible to fully understand the jurisprudence of today without examining the past this blogpost captures the historical journey on previous attempts made by SEBI, towards strengthening investor protection and challenges faced by it.


 

“9.94 The objective of SEBI is to protect the interest of investor. Therefore, investors also have to be given further legal rights for seeking protection and redressal. SEBI has already written to the Government requesting the Government to amend the SEBI Act whereby a statutory right is given to an investor to go to a court of law and to seek redressal of their grievances in case these are not resolved through arbitration or other means. SEBI has also written to the Government of India requesting for the amendment of the SEBI Act so that a provision is incorporated whereby the investors are entitled to seek damages, compensation and interest
13.48 The Ministry of Finance, being the financial custodian of the country, is duty bound to protect the interests of the small investors. SEBI has now been endowed with statutory powers under the amended SEBI Act to secure redressal of investor grievances and entitle investors to seek compensation, the award of damages etc
“14.60 – There also appears to be a need to have an independent look at resolution of investor complaints against companies and market intermediaries. The committee recommends that the concept of Ombudsman, which is already being used in the Banking Sector, should also be extended to the capital market. The issue of power, duties and responsibilities of the Ombudsman should be suitably worked out. As regard, investors complaint against broker and other market intermediaries, Arbitration Councils at exchange level can be used for resolution of investor complaints. Such body would be independent of market intermediaries, particularly the brokers”

 

In this manner, quoting Section 11 of the SEBI Act which provides that one of the foundational duties of SEBI is to protect the interest of investors by taking necessary steps as it deems fit, SEBI set forth to consider introducing the institution of an ombudsman in the securities market regulation. In its Concept Paper on Ombudsman for Securities Market (May 2003) which contained the proposed Ombudsman Regulations, SEBI noted as follows:

 

For redressal of investor grievance, SEBI had been advising the companies or the intermediaries to redress the same. The investors have also been claiming damages/ compensation/ interest etc. The extant power to take action by SEBI was limited to suspension and cancellation of registration or imposition of monetary penalty which did not resolve the grievance of investors nor give any compensation to them. Therefore, the issue of alternative redressal mechanism which is cheap, fast, informal and efficient has been engaging the attention of SEBI. AND Ombudman took effect.”

This Consultation Paper, it may be noted envisaged the ombudsman to have been appointed by the Chairperson of SEBI on recommendation of a selection committee containing a high court judge, an expert of financial market and a high level officer of SEBI. Further, it was envisaged that such person would be required to have served as a judicial or executive officer or having experience of at least 10 years in the matter relating to consumer or investor protection or having legal practice or serviced for a minimum period of 10 years in any financial institution or a regulatory body. Lastly, a key characteristic of ombudsman was the empowerment to consider such complaints and to facilitate resolution through mutual agreement or mediation and on failure of these to adjudicate any claim against the listed company or intermediary in respect of buying/ selling/ dealing of securities.


It may be noted as was later brought to the public attention that the Ombudsman Regulations could not be operationalized due to various practical difficulties and were being analyzed for their scope and effectiveness from 2008 as elaborated by SEBI in its board meeting dated March 25, 2021:

the Ombudsman Regulations were examined internally. During review, one issue which came up prominently was the difficulty in implementation of the awards passed by the Ombudsman. An external legal opinion was sought in the matter from Sri. D. J. Khambhata, the then Additional Solicitor General of India.
In his opinion dated October 20, 2009, Dr. D.J. Khambhata opined that the Ombudsman Regulations suffer from legal infirmities such as lack of enforcement mechanism for the Ombudsman Award and the power of SEBI to decide a lis. He also opined that SEBI does not have the express power to award compensation to investor sand therefore, cannot vest the same upon the Ombudsman. It was therefore felt that the Ombudsman Regulations cannot be operationalized under the extant legal framework.
SEBI vide its letter dated December 21, 2011 informed the Ministry about the legal issues which are impeding SEBI in extending the concept of Ombudsman to securities market. It primarily covered the following issues:
a. 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.
b. As per Regulation 5 of the Ombudsman Regulations, the Ombudsman need not be a judicial authority Therefore, it is doubtful as to whether such a non-judicial authority would be entitled to award compensation.
c. Ombudsman Regulations provides for imposing of penalties/ sanctions on the company/ intermediary, if found guilty upon adjudication of the complaint by the Ombudsman. But the Ombudsman Regulations do not provide for an enforcement mechanism to execute the orders of the Ombudsman

In this board meeting agenda, SEBI also highlighted the many measures to strengthen the investor grievance eco-system in the securities market. It elaborated the key features of arbitration mechanism of stock exchanges which included interim relief granted to investor from the Investor Protection Funds. It also said as follows:

As stated above, SEBI has taken substantial measures to enhance investor grievance redressal by putting in place suitable mechanisms and taking appropriate policy decisions to both strengthen the existing mechanisms of investor grievances as well as addressing the root cause of investor grievances. Given that the investor grievances against listed companies registered intermediaries and market infrastructure institutions are being handled by SEBI through SCORES and there are existing mechanisms at stock exchanges as well, Ombudsman may not have much scope to add value.

Thus, citing improved investor protection measures instituted by way of SCORES and exchange level arbitration mechanism, the ombudsman mechanism for securities market was shelved.


It becomes pertinent to note that the SCORES system was put in place by SEBI in 2011 to provide an online routing mechanism for investor grievances. This mechanism enabled investors to lodge their complaints pertaining to the securities market with SEBI against listed companies and SEBI registered intermediaries. All complaints received by SEBI against listed companies and SEBI registered intermediaries are dealt through SCORES. However, its key feature is that it is only a routing mechanism and the complaints are addressed by the concerned intermediary/listed entity and not SEBI, but under SEBI’s oversight. If a complaint remained unredressed on SCORES, the concerned intermediary/listed entity was liable to penalty. It may be noted that SAT has critically observed as follows in two of its recent orders:


While dealing with a matter wherein an investor’s complaint met with the conclusion by a mechanical order merely stating that the same had been disposed off on SCORES, The Securities Appellate Tribunal’s Order in the matter of Ashok Dayabhai Shah v. SEBI decided on November 14, 2019 (SAT Appeal No. 428 of 2019):

We find that written complaints made to SEBI from 2013 onwards has not been disposed of as yet but complaints filed on SCORES platform has been disposed of without deciding/ settling the issue that was raised in the complaints. Thus, disposal of the complaints by the respondents on the SCORES platform is no disposal in the eyes of law. It is merely an eyewash without disposing of the complaints and without settling the controversy involved in the complaints.
The disposal of the complaint does not refer to the issues raised by the complainants / appellants with regard to the non-disclosure of the promoters’ shareholding or violation of the minimum public shareholding requirement under the Rules and Regulations. On the other hand, the communication intimated to the appellants has closed the complaint in a roundabout manner intimating the appellant that the information provided by the complainants would be treated as market intelligence and would also be treated as confidential. Why would the complaint of the appellants be treated as market intelligence or be treated as confidential is not known nor in our view the complaint is such which requires SEBI to treat it as market intelligence or confidential. It is not a price sensitive matter which requires SEBI to keep such matters under wraps or confidential in nature.
We find the approach adopted by the respondents to be a strange one. Such computer generated disposal of a serious complaint speaks volume on the conduct of the respondents in treating the minority shareholders in this shabby manner. It seems that the respondents have lost sight of the mandate provided to them under Section 11 of the SEBI Act which mandates SEBI to safeguard the interest of the investors. Disposal of the complaint in this manner in the instant case indicates non-application of mind and non-consideration of the interest of the investors. We have no hesitation in stating that the SEBI as a regulator in the instant case has not performed its duties and has kept the complaint pending for more than six years which speaks volumes by itself. The Tribunal fails to fathom as to why the complaint could not have been decided unless SEBI officials had a vested interest in not deciding the matter.”

Coming to an order of the SAT in the matter of Mr. K.L.A. Padmanabhasa & Anr. V SEBI decided on August 03, 2023 in Appeal No. 614 of 2013, SAT observed as follows:

“In the first instance, we are constrained to observe that SEBI is required to address the investors’ grievance on the SCORES platform. The purpose of this redressal system so launched by SEBI in 2011 was to provide a platform for the aggrieved investors whose grievance pertaining to the securities market remained unsolved by the concerned listed company, registered intermediary or recognized Market Infrastructure Institutions. Merely seeking a reply from the company and passing it on to the appellants and thereby closing the complaint is not sufficient compliance of redressal of investors’ grievances. SEBI is required to consider whether the complaint infringes any provision of SEBI Act and its regulations and if it finds that the complaint is genuine which violates the SEBI Act and its regulations then it is an onerous duty of SEBI to direct the company, registered intermediary or recognized Market Infrastructure Institution to sort out the complaint or initiate proceedings for violation of the securities laws.”

 

Thus, as far as the Indian securities market is concerned, the need to have an independent look at the resolution of investor complaints against companies and market intermediaries has been longstanding. In all practicality, this stems from SEBI’s assessment of its limited power to take action under the parent law, i.e., power to take action being limited to suspension and cancellation of registration or imposition of monetary penalty, which does not resolve the grievance of investors nor give any compensation to them, a fact that SEBI itself has long realised.

 

This issue was not fundamentally resolved even by SCORES, which still can be credited to have created a sense of responsibility amongst the regulated, for the threat of underlying penal actions associated with a failure to resolve complaints on SCORES somehow. It becomes pertinent to analyse and assess whether the ODR mechanism does indeed address this need for effective investor resolution and considers the challenges faced by its predecessors.



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