After the first wave of Corona virus onslaught tamed down, stock markets in most major economies rebounded from an unprecedented global slump towards the end of last year. The media too went on an overdrive to boost investor sentiment with stories of bull run. The outbreak of the second wave of the pandemic around March 2021 made the markets volatile, putting the economic recovery in uncertainty.

The economic and financial conditions set the ideal backdrop for spurious agents to mis-sell products across various segments of the capital market and insurance. Such volatile markets also put at risk the investments of thousands of people. In Mumbai alone, more than 20 stock brokers had defaulted last year, leaving investors under stress as they fought to regain their hard-earned money.

Brokers lure investors showing the bright prospects of trading in equities. Once the investor is in, without knowing his risk appetite, he invests in futures and options (F&O) segment. This is nothing but a way of mis-selling. Trading in the derivatives segment is considered a risky proposition for an average investor who is not even conversant with the simple cash market trading.

“The Securities and Exchange Board of India (Sebi) should put such measures in place that retail investors are not allowed to trade in F&O unless he gains proper and adequate knowledge of the subject. Also, it should fix certain upper age limit, say persons above 60 years of age, who do not understand intricacies of such trades, should be barred from trading in derivatives,” says Jagdish Bhatt, an advocate practising securities markets law in Mumbai.

“I have seen many senior citizens and even professionally qualified senior citizen investors holding chartered accountant (CA) degree, who have lost their life time savings in such trading.”

The crisis makes one wonder about the recourse available to such investors who have been misguided by their brokers and what they are expected to do to reclaim the losses for no fault of theirs.

The markets regulator has set up an online mechanism for redressal of investors’ complaints. SCORES  or Sebi Complaints Redress System is available on www.scores.gov.in where investors can lodge their complaints related to the securities market. The complaints can be against listed companies and Sebi-registered intermediaries, including brokers and mutual funds (MFs).

The investor who lodges a complaint online on SCORES can view the status of every complaint online on the SCORES website and also the status can be obtained from a toll-free helpline. The accused entity and the complainant investor can seek or provide clarification on the complaint online. SCORES generates unique complaint registration number for future reference and tracking. All the complaints received by Sebi against listed companies and registered intermediaries are dealt through the redressal mehanism.

Investors can also lodge complaints on issues that are covered under the Securities Contract Regulation Act (SCRA), Sebi Act, Depositories Act, and rules and regulations made there under and Relevant Provisions of Companies Act, 2013.

A complaint can be filed with SCORES within three years from date of cause of the matter, where the investor has approached the listed company or a registered intermediary for redressal of the complaint and, concerned listed company or registered intermediary rejected the complaint or, the complainant hasn’t received any communication from the listed company or intermediary concerned or, the complainant is not satisfied with the reply given to him or redressal action taken by the listed company or an intermediary.

For lodging a complaint with SCORES, personal information of the investor that is mandatorily required include the name, address, e-mail, Permanent Account Number (PAN) and mobile number. Sebi has also developed an app for the convenient use on smartphones which enables investors to track status of the complaint redressal.

“When Sebi was set up in 1992, investors were routing their complaints through registered associations like ours. Those days, the nature of complaints was related to cumulative investment schemes (CIS), physical shares (duplication, non-transfer of shares, delay in share transfer, fake shares etc), delay in payment of dividends and so on,” recalls Hinesh Doshi, Vice-President of the Investor Grievances Forum (IGF).

“Now Sebi has become the interface with respect to lodging of complaints and its redressal, through SCORES. Investors have no physical access, even to the Sebi headquarters in the Bandra-Kurla Complex (BKC) in Mumbai. The entire process of grievance redressal has lost a personal touch with the investors,” he says, suggesting that Sebi should also open investor facilitation centres across the country.   

Those whose money gets stuck up in the process when a broker defaults, the investor has the right to recover his or her money through the process of arbitration. These proceedings take place at the stock exchanges.

“These are very cumbersome, legal and lengthy process. Also, these proceedings are non-transparent and were carried out in an opaque manner earlier. Though in recent times, there seems to be some transparency in the process at the behest of the regulator,” says Saya Prakash Shah, Secretary of Mumbai-based Investor Education and Welfare Association (IEWA).

Also, the process is complicated, as every default needs to be screened through forensic audit. The retail investor gets baffled by the term forensic audit and falls sick, Shah says.

The rules and regulations framed by the regulatory authorities and stock exchanges with respect to broker defaults needs to be practical. For example, one of the provisions with respect to retrieving the money from the broker says the client should not keep the money with the broker for more than 90 days. If it is found that the client’s money is lying in broker’s account for more than 90 days, his claim cannot be entertained. In practice, most of the investors (clients) keep their shares and money with the broker for years based on their relationship.

The regulator follows disclosure-based process for the primary market with respect to raising of capital. There has to be complete transparency with respect to disclosures in the secondary market and investor protection fund (IPF), which is tapped to compensate investors in case of broker defaults.  The regulator and stock exchanges need to clarify that who (which investor) is eligible for compensation from the IPF.

The authorities need to clarify certain points

• What kind of claims are entitled under IPF.
• Justification for entitlement and non-entitlement of claims under IPF.

The exchanges should clarify on these issues and come clear on them The matter stops at the exchange level first as this is the first-level regulator as far as protection of investors’ interest is concerned, says Shah.

The IPF set up at the exchange level has an inadequate corpus. It is difficult for the investor to get compensated from the IPF because of lengthy and cumbersome processes. Like the term deposits with banks are insured by the Deposit Guarantee Corporation of India (DGCI), Sebi should ensure that certain amount of investors’ money be guaranteed to be returned from the IPF in case the broker defaults, suggests Shah. 

The regulator’s views on the matter could not be secured despite repeated attempts. “Stock exchanges as first-level regulators are putting in their best efforts to curtail any mishap in the capital markets. Investors are also expected to play a pro-active role on their part as far as their hard-earned savings are concerned. The investors should regularly monitor messages they receive from the exchanges and depositories with respect to transactions and holdings in their accounts. It is incumbent upon the investors to remain alert with respect to the funds and securities deployed with their brokers,” says a spokesperson for the National Stock Exchange (NSE).

Sebi has been doing an excellent job of regulating the capital market but it is the market intermediaries, be it brokers, sub-brokers, authorised persons in broker’s office or other entities, that try to find out loopholes in the rules and regulations, Shah says. “In fact, the regulator is always on alert looking to avert every kind of fraud that can hit the market. As far as investor protection measures are concerned, we are fortunate enough to have such a dynamic regulator.”

To make investors aware and cautious with respect to their dealings in markets, the bourses should also provide disclosures on certain aspects such as:

• How many brokers have defaulted and the amount that is in dispute.
• Stock exchanges should also make public details of small investors who are in trouble because of defaulting brokers.
• Action taken by the exchanges against defaulting, erring and violating brokers.
• Results or outcomes of forensic audits carried out on the defaulting brokers.

Experts suggest that the action taken by the stock exchanges with respect to all these should be made public and put on the exchange’s website prominently so that it catches investors’ attention when they visit the site and can maintain a safe distance in future with such brokers.

Scamsters are always one step ahead of the first and second level regulators. To make them ineffective, the veil of secrecy should be unveiled and the level of disclosures and transparency should be brought to the global standard, Shah says.

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Be Aware of Arbitration

• Arbitration is a quasi-judicial process of settlement of disputes between trading members (TM, Broker) and an investor.
• Arbitration matters are handled from all 24 centres, where the stock exchange has its regional offices across the country. The process of arbitration is governed by the board sub-committee of the exchange called Regulatory Oversight Committee. It looks after claim value of up to Rs 10 lakh, where the arbitration fees are borne by the exchange.
• For selection of the arbitrator, a Centralised Arbitrator Appointment Process (CAAP) is followed. Ruling by the single arbitrator can be appealed to the Appellate Arbitration.

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The Process

• In the first step, the applicant (complainant, investor) submits arbitration application to the exchange. It has to be filed within three years from the date of dispute. The office verifies the application and is sent to the respondent (broker in this case).
• The arbitrator conducts the hearing of the complaint and then passes the award.
• If the value of the claim is up to Rs 25 lakh, the case is heard by the sole arbitrator. If the value of the claim exceeds Rs 25 lakh, than it goes to a panel of three arbitrators.
• Hearing in arbitration cases is conducted by the arbitrator with the parties and judgement is passed in form of award. For claim amount under Rs 25,000, hearing isn’t compulsory, but the arbitrator may call for hearing, if required.
• Awards announced by the arbitrator, if it is in favour of the investor, it is implemented by the exchange and if the amount is under Rs 25,000, it is taken from trading member and paid to the investor.
• If any of the party (investor or Broker) is not satisfied with the arbitration award, then an appeal can be filed and the interim amount is paid out of the Investor Protection Fund (IPF) to the investor, if the broker wishes to appeal further in the appellate arbitration.

Yagnesh @outlookindia.com