Sebi’s investor charter–Towards investor protection and grievance redressal

November 24, 2021 5:30 AM

Investor charters are a step in the right direction as they recognise and accentuate the role played by Sebi’s grievance redressal mechanisms

Both are aimed at protecting the interest of investors in securities market by enhancing awareness of their rights and responsibilities.Both are aimed at protecting the interest of investors in securities market by enhancing awareness of their rights and responsibilities.

By Sandeep Parekh

In the past few months, Sebi deliberated upon developing two types of investor charters: investor charter and investor charter of registered intermediaries and regulated entities. Both are aimed at protecting the interest of investors in securities market by enhancing awareness of their rights and responsibilities.

Sebi’s Investor Charter

As of November 17, 2021, Sebi issued its Investor Charter with a vision to protect the interest of investors by enabling them to understand the risks involved and invest in a fair, transparent and secure market, and to get services in a timely and efficient manner. It includes the rights and responsibilities of investors and dos and don’ts of investing in securities market. Its mission, inter alia, includes ensuring that Sebi-registered intermediaries adhere to their respective investment charters, including a grievance redressal mechanism.

Intermediaries’ Investor Charter

Sebi has proposed the development of investor charters for Sebi-registered intermediaries and regulated entities such as stock brokers, stock exchanges, real estate investment trusts, infrastructure investment trusts, research analysts, alternative investment funds and collective investment schemes, as well as for events such as initial public offerings (IPO), further public offerings (FPO), qualified institutional placements (QIP) and rights issues. Each of these charters will be required to be mandatorily published on the website of the concerned intermediaries and regulated entities upon notification.

Each of these charters broadly comprise vision and mission statements, details of services provided to investors as well as details of grievance redressal mechanisms and how to access it. Most include timelines pertaining to various services provided to investors including the grievance redressal process. While these timelines and obligations are already there in extant regulations, guidelines and circulars issued by Sebi, the charters are expected bring these out in a more streamlined and investor-friendly manner. The charters will enable investors to better exercise their rights and will ensure better compliance by regulated entities and intermediaries by virtue of their easy and streamlined nature.

The proposed investor charter for stock exchanges contains guidance pertaining to special circumstances related to market activities, such as default of brokers. It provides for steps that the exchange is mandated to carry out for investor benefit including dissemination of information about the default of brokers on the exchange website, issuance of public notice informing declaration of default by brokers and inviting and lodging investor claims within specified period and standard operating procedure for handling these claims. This investor charter is proposed to contain details of functioning of a multi-level dispute resolution mechanism starting with amicable resolution at exchange level, followed by referral to investor grievance redressal committee (independent entities set up for complaint resolution) in case of non-resolution, followed further by arbitration and appellate arbitration proceedings on need basis.

What seems to be in lieu of broker defaults in the past is indeed a good effort as the proposed investor charter for stock broker provides investors with expected timelines for all activities of the stock broker in servicing investors. These activities include client onboarding, order execution, allocation of unique client code, issuing copy of registration documents, issuance of contract notes and intimations regarding margin due payments, etc.

It also creates a two-levelled grievance redressal mechanism available to investors, where at first the investor must approach the stock broker at its designated grievance ID, and upon failure of grievance redressal, the investor can approach the stock exchange using its grievance redressal mechanism. If both fail, the investor may lodge a complaint on the Sebi Complaint Redressal System (SCORES).

The investor charter is also proposed for IPOs, FPOs, QIPs, rights issues as well as takeover, and provides for resolution of investor grievance. It must be noted that investor grievance is to be filed with lead manager who identifies the concerned intermediary and endeavours to forward the grievance to the concerned intermediary on the same day to be resolved in accordance with the applicable regulations by the concerned intermediary. Whereas investors’ charter for rights issue provides for investor grievance redressal mechanism covering grievances in relation to delay in unblocking of funds, non-allotment/partial allotment of securities, non-receipt of securities in demat accounts, etc.

Overall, this is a positive move by the regulator in creating awareness of rights and obligations of investors in a systematised manner and will give an impetus to investor activism. At this stage, however, the role of SCORES in effectively redressing grievances becomes of utmost importance. While SCORES has borne the brunt of long-drawn criticism, it seems Sebi is abreast with the shortcomings of its mechanisms. Investor charters are a step in the right direction as they recognise and accentuate the role played by Sebi’s grievance redressal mechanisms.

In the past few months, Sebi has undertaken several measures to strengthen grievance redressal through SCORES. It has enforced publication of status reports about the disposal of investor grievances received on SCORES portal on a monthly basis. Sebi has also started to publish names of companies, intermediaries and market infrastructure institutions (MIIs) having a longer pendency of investor grievances on its website on a monthly basis. Also, a mechanism has been established by Sebi requiring disclosures of average time taken by intermediaries and entities for redressal of investor grievances.

It has put in place an alternate dispute redressal mechanism for grievances against brokers, depository participants at the level of stock exchanges and depositories. Sebi is exploring prospects of establishing similar/apposite alternate dispute redressal mechanisms for various services provided by other registered intermediaries/entities.

While the investor charter is welcome, Sebi also needs to equip dealing officers with the capacity to evaluate and identify where redressals are unsatisfactory. Also, investor charters have missed an opportunity to effectively delineate the circumstances and events which entail Sebi’s interference during the grievance redressal process and its powers to take appropriate action basis lack of cooperation as due, to prevent miscarriage of justice.

We cannot lose sight of the fact that Sebi was set up to protect interest of investors, and investor protection is the aim of securities regulation. An effective grievance redressal is key not merely for aggrieved investors, but also to keep a check on market discipline, avoiding scams and promoting investor confidence in the securities market. An effective and able enforcement of investor charters and adequate capacity building by the regulator for redressal of investor grievances would go a long way in benefiting all stakeholders.

Co-authored with Raghuvamsi Meka, senior associate, and Manal Shah, associate, Finsec Law Advisors

Parekh is managing partner,
Finsec Law Advisors

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