Enhancing Investor Empowerment: SEBI’s Dispute Resolution Clause for Regulated Intermediaries

[By Vaibhavi Pedhavi & Divik Silawat]

The author is a student of Gujarat National Law University.

 

Abstract

SEBI holds significant importance in the regulatory landscape of India’s securities market. After recognizing the importance of effective dispute resolution, SEBI has introduced “SEBI (Alternative Dispute Resolution Mechanism) (Amendment) Regulations, 2023”. The new amendment introduced by SEBI aims to enhance investor protection through dispute resolution. It covers a wide range of intermediary regulations, emphasizes on mediation and conciliation alongside arbitration, and introduces measures such as reducing timelines and recognizing designated bodies for grievance monitoring. This amendment has resulted in substantial modifications to the existing regulations that govern different entities operating in the securities market, with the aim of empowering investors. The authors of this article examine the scope of this new amendment introduced by SEBI and its impact on investor protection, with a focus on promoting transparency, trust, and confidence in the securities market through effective dispute resolution mechanisms.

Dispute Resolution Mechanism of SEBI

In order to safeguard investor interests, build trust, transparency, and awareness in the securities market, SEBI has Alternate Dispute Resolution (ADR) mechanism. This mechanism aims to provide an effective resolution platform for disputes between investors and regulated entities, ensuring their protection and enhancing confidence in the market. SEBI has established an online platform called the “SEBI Complaint Redress System” (hereinafter, SCORES) which allows investors to approach SEBI directly for dispute resolution without having to exhaust other channels first. By providing an accessible online platform, it simplifies the complaint registration process for investors. Within the framework of SCORES, investors have the opportunity to resolve disputes through arbitration if they hold an account with a depository participant or a broker. This option provides investors with an alternative means of resolving conflicts, further enhancing the effectiveness of SCORES mechanism in addressing grievances in the securities market.

When an investor’s grievance remains unresolved by a stock exchange or depository due to disputes, the investor has the option to file for arbitration according to the rules and regulations of that specific stock exchange or depository. This mechanism provides for additional avenue for resolving conflicts and seeking fair resolutions in the securities market under  chapter 15 of the “Model Bye Laws of Stock Exchange”. SEBI’s ADR mechanism, facilitated through the SCORES platform, and the Model Bye Laws for Stock Exchange outline the procedure for arbitration in resolving investor disputes related to the securities market. These mechanisms establish the guidelines and framework for conducting arbitration proceedings, ensuring a structured and fair process for resolving conflicts between investors and market participants.

About the amendment

On July 4, 2023, SEBI introduced the “SEBI (Alternative Dispute Resolution Mechanism) (Amendment) Regulations, 2023”. These regulations were introduced to modify the existing 17 regulations that govern various SEBI-regulated intermediaries, such as Merchant Bankers, Mutual Funds, Credit Rating Agencies, Alternative Investment Funds, Investment Advisers, etc. For each category of market intermediaries, SEBI has formulated separate investor charters. These charters encompass crucial details regarding the services offered by intermediaries to investors, including specific timelines, significance of preserving relevant documents, and also outline the mechanism for resolving investor grievances.

Additionally, the SEBI (Listing Obligations and Disclosure Requirements) Regulations” for listed companies were also subject to amendments. The revised mechanism now includes clauses for “mediation, conciliation, and arbitration”, with the guidelines issued by the SEBI’s board for each intermediary. These amendments are primarily intended to create a thorough dispute resolution structure, which is essential in resolving any claims, disagreements or disputes that may arise between these entities and their clients or investors.

Procedural modifications through the amendment

  • Reducing timelines: This revamp includes reducing the timelines for resolving complaints, implementing an automatic routing system that directs complaints to the relevant regulated entities, and auto-escalating complaints when the prescribed timelines are not adhered to by the regulated entity. By implementing these provisions, the amendment ensures a more efficient and timely resolution of investor grievances, promoting transparency and accountability among regulated entities and ultimately enhancing investor protection in the securities market.
  • Recognizing designated bodies for monitoring: The new amendment has brought about investor protection enhancements through dispute resolution by recognizing designated bodies responsible for monitoring and handling grievances filed by investors against regulated entities. This recognition ensures that there are specific entities assigned to oversee the resolution of investor complaints, providing a dedicated and specialized approach to addressing investor grievances. By establishing these designated bodies, the amendment strengthens the investor protection framework and ensures that their concerns are effectively addressed in a timely manner.
  • Integration of SCORES and Online Dispute Resolution Platform: To enhance investor empowerment and improve the resolution of investor grievances in the securities market, SEBI has approved revamping of the SCORES. SCORES will be linked with an Online Dispute Resolution (ODR) platform, providing investors with an additional avenue for resolution. Lastly, a new portal will be created to collect market intelligence inputs.
  • Two Levels of Review: Additionally, designated bodies will be recognized for monitoring and handling investor grievances, offering a two-level review process. In this process, if an investor is unsatisfied with the resolution provided by the regulated entity, the designated body responsible for monitoring and handling investor grievances will conduct the first review. If the investor remains dissatisfied even after the first review, the second review will be conducted by SEBI.
  • Creation of a portal: This initiative is aimed at enhancing investor protection through dispute resolution by providing a platform for gathering valuable market insights. The new portal serves as a means to gather information and data that can contribute to a better understanding of market dynamics and potential issues that may affect investors. By utilizing this portal, regulators can stay informed and take proactive measures to address any emerging concerns, thereby strengthening investor protection in the securities market.

Enhancing Investor Protection

The new amendment introduced by SEBI differs from the previous framework in several significant ways. Unlike the previous framework, which may have had limited or specific provisions for dispute resolution, the new amendment covers all intermediary regulations. This means that it applies to a wider range of SEBI-regulated intermediaries, such as merchant bankers, mutual funds, credit rating agencies, alternative investment funds, and investment advisers, among others. The previous framework may have primarily focused on arbitration as the preferred method for dispute resolution. However, the new amendment emphasizes the inclusion of mediation and conciliation alongside arbitration. This provides additional options for resolving disputes, allowing parties to explore collaborative and mutually beneficial solutions. Furthermore, as part of its initiative to revamp the SEBI Complaint Redress System (SCORES), SEBI has also approved measures such as reducing timelines, implementing an automatic routing system for complaints, and escalating complaints when the prescribed timelines are not followed. These steps aim to enhance the efficiency and effectiveness of the complaint handling process, ensuring timely resolution and addressing grievances more promptly.

SEBI’s latest amendment marks a substantial leap in safeguarding investor interests with improved dispute resolution mechanisms. By streamlining timelines and endorsing designated bodies for grievance monitoring, the amendment bolsters investor confidence in the market. Additionally, integrating SCORES with an ODR platform and introducing a two-level review process further fortify the dispute resolution framework, while the establishment of a dedicated portal for market intelligence collection enhances regulatory oversight and transparency. These measures promote efficient resolution, specialized oversight, expanded avenues for resolution, and proactive regulatory action, ultimately strengthening investor protection in the securities market.

Conclusion

The significance of a strong and efficient capital market cannot be overstated as it forms a vital part of a country’s financial system. Given the rising competition and complexity within the capital market, it has become imperative to prioritize the resolution of customer disputes and effectively address securities market issues. The new amendment introduced by SEBI has a broader scope compared to the previous framework as it covers seventeen intermediary regulations. It enhances investor protection by providing a comprehensive dispute resolution mechanism for resolving claims, disagreements, or disputes between intermediaries and their clients or investors. The amendment includes provisions for mediation, conciliation, and arbitration, which offers more options for resolving conflicts. Additionally, the amendment emphasizes the importance of preserving relevant documents, specifies timelines for resolving grievances, and establishes separate investor charters for different categories of market intermediaries. Overall, the amendment strengthens investor protection by providing a more robust and standardized framework for dispute resolution, promoting trust, transparency, and confidence in the securities market.

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