Disputes between investors and trading members registered with stock exchanges under the Securities Exchange Board of India (SEBI) were previously resolved through arbitration, with the assistance of arbitrators appointed by the stock exchanges. The stock exchanges and depositories, now known as market infrastructure institutions (MIIs), strictly followed the Arbitration and Conciliation Act of 1996 (the Act), SEBI guidelines, and appointed arbitrators with the consent of the disputing parties, as required by the Act.
Before escalating the dispute to arbitration, the stock exchanges’ grievances redressal cells heard cases and attempted to resolve them quickly. The system ran smoothly, and neither investors nor trading members encountered any issues; however, Covid-19 necessitated remote hearings using commercially available video calling tools. The stock exchanges’ arbitration cells provided administrative support for conduct of arbitration by the arbitrators appointed by the parties with the support of MIIs.
While the system was working well, SEBI has shifted the responsibility for organising arbitration between disputing investors and stock brokers from MIIs to some selected private agencies that have or could hire information technology (IT) expertise to organise meetings between disputing parties and keep records of the arbitration proceedings. This decision was made through a SEBI circular dated July 31, 2023.
What was expected by SEBI?
Each MII will identify and appoint one or more independent online dispute resolution (ODR) institutions that can conduct time-bound online conciliation and/or online arbitration (in accordance with the Arbitration and Conciliation Act, 1996). The ODR portal must be connected to each ODR facility for these activities. All MIIs will participate on the ODR portal and provide clients, listed companies and specified intermediaries, regulated entities in the securities market access to resolve disputes through the portal.
SEBI also expected that the newly identified ODR facilities would seamlessly take over the work of the internal Grievance Redressal Committee (GRC), which served as the first point of contact for disputing investors and stock brokers. The work transferred from GRC to ODR is now referred to as ‘conciliation’. However, there has been no conciliation after enactment of the Mediation Act of 2023. SEBI has directed all stock exchanges and MIIs to share their panel of arbitrators with the newly engaged ODR facilities. The arbitrators who were previously assigned arbitration work were now being assigned conciliation work as well, albeit with a lower fee.
The major challenge in the outsourced ODR system is that it does not comply with the mandate of the Arbitration and Conciliation Act, 1996 which requires that the arbitrators shall be appointed by the parties themselves and not by a third party or agency until arbitration institutions are established in accordance with the guidelines of the Arbitration Council of India (ACI), and graded by it, and recognised by High Courts for domestic arbitration and the Supreme Court for international arbitration. While the MIIs were managing the arbitration, a list of arbitrators was given to the disputing parties to select their choice of arbitrators. That has been done away with now.
Secondly, there are complaints from the arbitrators that the ODR facilities lack knowledge of the procedures, and the ODR facilities wanted their names come in the first paragraphs of the award. Some of the conciliators are passing the orders as though it was an arbitration award. In fact, in a conciliation, the conciliator does not have any say. The conciliator is just a mediator. The arbitrator fee has been drastically reduced against the demand for a hike. The conciliation has ridiculously two scales of fee — one for the successful conciliation, and another for unsuccessful conciliation.
The system can be corrected by regulating the work and procedures of ODR facilities, and recognising them by ACI or High Courts. Following a standard fee for the arbitrators, in accordance with the Schedule IV of the Arbitration and Conciliation Act, 1996, will spur alternative dispute resolution.
The writer is a former International Senior Advisor, United Nations Development Programme