Sunday, May 24, 2009

Investor Protection Measures

Investor’s RightsInvestor’s Obligations
The right to get

The best price
Proof of price/brokerage charged
Your money/shares on time
Shares through auction where delivery is not received
Square up amount where delivery not received in auction
Statement of Accounts from trading member
The obligation to

Sign a proper Member-Constituent Agreement
Possess a valid contract or purchase/sale note
Deliver securities with valid documents and proper signatures
The right for redressal against

Fraudulent price
Unfair brokerage
Delays in receipt of money or shares
Investor unfriendly companies
The obligation to ensure

To make payment on time
To deliver shares on time
To send securities for transfer to the company on time
Forwarding all the papers received from the company under objections to the broker on time

In the modern world, stock markets have evolved as important drivers of national economy. Fair and clear-cut rules and regulations are enforced by governing bodies to ensure safety of all participants connected to the market. All stock exchanges have their own rules and regulations. Governing bodies take special care to protect interests of investors as this class is most widely dispersed, and generally more vulnerable to being taken for a ride. Additionally it is the investor class that infuses the capital into the market and hence bears higher risks than other participants. 

In India, SEBI is the principal regulatory authority for all secondary and primary market related activity. Other regulatory bodies and laws governing secondary market intermediaries are Securities and Contract Regulations Act 1956, Securities and Contracts Regulations Rules 1957; the Indian Stamp Act 1961 and the Bombay Stamp Act; the Central Excise Department; the Income tax; and the Reserve Bank of India. 

Various steps initiated by the Stock Exchanges for Investor protection are as follows :

Protection Measures on BSE

Trade Guarantee Fund
BSE has formulated a scheme to guarantee settlement of transactions of members, which form part of the settlement system. For this, BSE has constituted a Trade Guarantee Fund with the following objectives :
To guarantee settlement of transactions of members of the Exchange inter-se which form part of the Stock Exchange settlement system, so as to ensure timely completion of settlements of contracts and thereby protect the interest of investors and the members of the Exchange.
To inculcate confidence in the minds of secondary market operators generally and global Foreign Institutional Investors particularly, to attract larger number of domestic and international players in the capital market.
To protect the interest of investors.
The Scheme has come into force with effect from May 12, 1997. And the Defaulters’ Committee manages it, which is a Standing Committee constituted by the Exchange, the constitution of which is approved by SEBI. The declaration of a member, who is unable to meet his settlement dues, as a defaulter is a pre-condition for invoking the provisions of this Scheme. 

BSE has set up a separate Surveillance Department to keep a close watch on price movement of securities, detect market manipulations like price rigging, etc., monitor abnormal prices and volumes which are not consistent with normal trading pattern and monitor the member-brokers' position to ensure that defaults do not occur. It not only monitors the exposure of the members on a daily basis but also scrutinizes the prices and volumes of the securities on a daily basis. 
The large variation in the prices as well as the volumes of the securities is scrutinized and appropriate actions are taken. The securities, which reach new high or new low and companies, which have high turnover, are watched. Also the prices and volumes in the newly listed securities are monitored. In case certain abnormalities are noticed, then circuit filters are reduced to make it difficult for the price manipulators to increase or push down the prices of security within a short period of time. The Exchange imposes special margin in the securities where it is suspected that there is an attempt to ramp up the prices by creating artificial volumes. In cases where the abnormal movements continue despite the aforesaid measures, trading in the security is suspended. 
Detailed investigations are conducted in cases where price manipulation is suspected and disciplinary action is taken against the members concerned, if warranted. Where any security has been suspended for more than three days after obtaining necessary permission from SEBI, a detailed investigation report is prepared and sent to SEBI for further investigation/action, if any. 

'Z' Group
To protect investors from fraudulent companies listed on BSE has created a new group of securities known as ‘Z’ group category. The 'Z' group was introduced in the month of July 1999 and covers the list of companies, which fail to comply with listing requirements and also fail to resolve investor complaints. 

Investors' or Customers Protection Fund (IPF) 
In accordance with the guidelines issued by the Ministry of Finance, Government of India, BSE has set up an Investor Protection Fund (IPF) to meet the claims of investors against defaulter members. Further, as per the recent SEBI decision, auction proceeds in certain cases, where price manipulation / rigging was involved, have been impounded and transferred to the Investor Protection Fund. 

Redressal of Investor Grievances
The grievances of investors against listed companies or members are redressed by the Exchange. The Exchange also assists in arbitration process both between members & investors and member’s inter-se. 

Investors’ grievances against companies
BSE forwards the investors’ complaints against the companies to the concerned companies and a copy of the letter sent to the company is also forwarded to the complainant. He is advised to intimate the Exchange if his complaint is not resolved within 45 days. If a company fails to redress the complaint within 45 days, a reminder is sent. If a company still fails to respond to a large number of complaints pending against it, then a consolidated list of complaints is sent to it to resolve the same within 30 days. Inspite of the above efforts, if the complaints are not resolved, the company officials are asked to appear before the Investors’ Grievance Redressal Committee (IGRC) appointed by the Governing Board of the Exchange to resolve all the investors grievances. This Committee consists of five members including a retired judge of Mumbai High Court. The company officials are impressed by the committee members to resolve all the pending grievances immediately. 
Inspite of these efforts, if the complaints are not resolved then a show cause notice is issued by the Exchange and then the matter is placed before the Governing Board of the Exchange for necessary action against the company. 

Investors’ grievances against member-brokers of the Exchange
BSE handles complaints of investors against members and vice-versa. It forwards the complaints of investors to the concerned members to settle within 7 days from the receipt of the letter. In case no reply is received from a member, a reminder is sent and the member is informed that if he does not reply/resolve the complaint immediately, a fine of Rs.500/- is levied on him. He is also directed to settle the matter expeditiously. In order to resolve the complaints expeditiously the matter is placed before the IGRC wherein both the investors and members present their case. After hearing both the parties, the Committee gives a decision, which is binding on both the parties. In case a member fails to implement the decision of the IGRC, then the matter is referred to the Executive Director for taking disciplinary action against the member which includes referring the matter to the Disciplinary Action Committee. 

Resolution of complaints through arbitration
With a view to ensuring speedy and effective resolution of claims, differences and disputes between non-members and members and members inter-se, the Exchange has laid down a set of procedures for arbitration thereof. These procedures are duly embodied in the Rules, Bye-laws and Regulations of the Exchange, which have been duly approved by the Government of India/SEBI, under the Securities Contracts (Regulation) Act, 1956. 
Under the Rules, Bye-laws and Regulations of the Exchange, an in-house arbitration machinery has been provided to decide on:
dispute between members inter-se; and
Dispute between non-members (clients/investors) and members of the Exchange.
All contracts of sale and purchase of securities entered into on the trading platform of the Exchange are subject to Mumbai jurisdiction and any disputes arising in respect of such contracts are necessarily required to be submitted for arbitration. 
However, complaints from non-members (clients/investors) against members and complaints of member’s inter-se are in the first case generally investigated by the BSE. For the purpose of investigation, documentary proof like contract notes, bills, statement of accounts and relevant documentary proof are called for from the parties. If required personal meetings of parties are arranged, to resolve complicated issues. As a last resort, where there are claims and counter-claims and the matter cannot be easily resolved by the intervention of the Exchange officials, the parties are advised to file an arbitration reference. The Exchange has amended the Bye-laws relating to arbitration between members with effect from 29th August, 1998 after getting the approval from SEBI. 
At present members of the Exchange as well as outsiders act as arbitrators in the disputes and claims filed by the non-members against members of the Exchange and vice-versa. The Exchange has since appointed a panel of 24 outside arbitrators consisting of retired Judges, Chartered Accountants and other persons from the financial field in addition to 16 members of the Exchange. This is pursuant to instructions from SEBI to reconstitute the Arbitration Committee comprising of 40% of the members of the Exchange and 60% outsiders, i.e., those who are not members of the Exchange. 
BSE has recently amended Bye-laws relating to Client v/s. Member arbitration in conjunction with Arbitration and Conciliation Act, 1996, passed by the Government of India. Under the new amended bye-laws there is a panel of three arbitrators, one appointed by the applicant, one by the respondent and the third by the Exchange. In case the value of the disputed claim is less than Rs 0.1 million, then only one arbitrator is appointed and if the value is greater than Rs 0.1 million, then there are three arbitrators for the case. Under the new amended bye-law after getting the arbitration award, the aggrieved party can appeal to the arbitration tribunal for any typographical/computational error, if any occurred in the award within fifteen days from the receipt of the award. 
In the amended Bye-law which provides for an appeal whereby the aggrieved party within fifteen days of the receipt of the award can file to the arbitration tribunal for re-hearing the whole case. On receipt of the appeal, the Exchange appoints an appeal bench consisting of five arbitrators who re-hear the case and then give the decision. The judgment of the appeal bench is by a majority decision and binding on both the parties. The final award of the bench is enforceable as if it were the decree of the Court. Bye-laws of the Exchange provide that all arbitration references be closed normally, within a period of four months. 

Protection measures on NSE

Settlement Guarantee Fund
In order to guarantee settlement, it has set up a Settlement Guarantee Fund contributed by the clearing members of the Corporation. As counter-party to settlement obligations, NSE guarantees financial settlement. As a result, though there have been a few defaults by member firms, the Clearing Corporation has stepped in to complete settlement and avoided market disruption. 
Short deliveries and un-rectified bad deliveries are automatically auctioned by NSCCL so that settlement is completed within a well-defined time frame. 

Investor Grievances Cell
The Investor Grievances Cell (IGC) attends to various problems faced by investors in dealing with the two integral parts of the Capital Markets, Trading Members and Companies whose securities are traded on the Exchange. The investors can report their complaints/ grievances to the IGC through e-mails or through Complaint forms. All valid complaints are assigned a unique complaint no. and are entered into a database for easy follow up and necessary action. Most complaints are resolved within a period of 45 days. On exhausting all means, if the matter remains unresolved, it is referred to Arbitration. 

Arbitration is an alternative dispute resolution mechanism provided by the NSE for resolving disputes between the trading members and between trading members & constituents (i.e. clients of trading members), in respect of trades done on the Exchange. This process of resolving a dispute is comparatively faster than other means of redressal. 
The facility of arbitration on the Exchange can be availed by:
Investors who have dealt on the Exchange through its trading members and who possess a valid contract note issued by the trading member of the Exchange.
Investors who have dealt on the Exchange through registered sub-brokers of the trading members of NSE and who possess valid sale/purchase note issued by the registered sub-broker.
The Exchange provides a list of eligible persons approved by SEBI for each of the Regional Arbitration centers. The persons who form part of the list of Arbitrators are persons who possess an expertise in their respective fields including banking, finance, legal (judges) and capital market areas (brokers). 
The appointment of an Arbitrator is linked to the claim amount. If the claim amount is Rs 2.5 millions or less, then a Sole Arbitrator is appointed and if the claim amount is more than Rs 2.5 millions, then a panel of three arbitrators is appointed. 

The comprehensive approach to risk management taken by BSE and NSE encompassing the quality of clearing/trading members, tight monitoring mechanism, strict margining, efficient settlement systems have made the Secondary market in India comparable to any of the markets worldwide. 


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