Enhancing Investor Protection: A Comprehensive Overview of the New Online Dispute Resolution (ODR) System

Author: Ishita Mehta

Abstract-

SEBI, the market regulator in India, is enhancing investor protection through a comprehensive Online Dispute Resolution (ODR) mechanism. This innovative system aims to streamline and strengthen the current dispute resolution process within the Indian securities market. By providing accessible and efficient options for both investors and market participants, SEBI’s ODR initiative signifies a pivotal shift in addressing disputes.

Investors can begin the process by filing direct complaints with relevant market participants. If concerns remain unresolved, they have two avenues for escalation: the established SCORES Portal or the newly introduced ODR Portal. This empowers investors to seek prompt resolution through digital channels.

Market participants can also trigger the dispute resolution process via the ODR Portal, but a 15-day notice period is required to allow collaborative efforts in resolving disputes amicably. However, certain scenarios restrict the initiation of the process, including ongoing SCORES complaints, pending legal actions, and disputes not arbitrable under Indian law.

SEBI’s meticulous phased implementation plan requires all market participants to register on the ODR Portal by September 15, with complaints against them accepted from September 16. This strategic approach ensures a smooth transition to the new mechanism.

The ODR mechanism embodies SEBI’s commitment to investor welfare and market integrity. Through technological advancement, expeditious resolutions, and adherence to regulations, SEBI is reshaping a fairer, transparent, and efficient securities market. As the financial

landscape evolves, the ODR mechanism represents progress, highlighting SEBI’s dedication to safeguarding investor interests and strengthening the foundation of the Indian capital market.

Keywords: SEBI, Online Dispute Resolution, Investor Protection, Securities Market, ODR Mechanism, Comparison

Introduction

The Securities and Exchange Board of India (SEBI), the market regulator, has recently released a circular with the aim of simplifying the current dispute resolution process within the securities market. The market regulator has been relentless in its pursuit of justice for investors. It already had a robust grievance redressal mechanism in place with SCORES. Beyond this, investors who were not satisfied with the outcome of their complaints could approach Investor Grievance Redressal Committee. And, now SEBI is set to widen the scope of this investor protection mechanism. And now, an upcoming online dispute resolution (ODR) system is in development for the capital market.

Embarking on the next transformative phase, SEBI is poised to revolutionize dispute resolution through the imminent introduction of an online dispute resolution (ODR) system. This visionary initiative, a product of collaboration with stock exchanges and depositories, collectively known as Market Infrastructure Institutions (MIIs), will culminate in the creation of a unified ODR portal. This pioneering approach harnesses the prowess of digital conciliation and arbitration techniques, poised to seamlessly settle disputes that arise within the complex realm of the securities market. It aims to leverage digital conciliation and arbitration and to streamline the existing dispute resolution mechanism in the Indian securities market.

The implementation of the circular is to be done in phases and by September 15, all other market participants must be registered on the ODR Portal and the registration of complaints against them must commence from September 16. This article presents a comprehensive exploration of the earlier dispute resolution framework, highlights variations between the consultation paper and the circular, and delves into the intricacies of the novel ODR mechanism.

Previous Dispute Resolution Mechanism Before ODR:

In accordance with the circular issued on November 06, 2020, the dispute resolution system preceding the Online Dispute Resolution (ODR) was structured as follows:

Stock exchanges had a 15-day window from the complaint submission date to resolve the issue. In case additional information was required from the complainant, the stock exchange had 7 days to request it, with the 15-day period starting after the additional information submission.

If the complainant remained unsatisfied with the stock exchange’s resolution, the matter could be escalated to the Investor Grievance Redressal Committee (IGRC). However, the Chief Regulatory Officer of the Stock Exchange had to provide written reasons for this escalation.

The IGRC had 15 days to amicably settle the grievance through conciliation. If more information was sought from the complainant, the IGRC’s resolution duration could be extended to a maximum of 30 days.

At the conclusion of IGRC’s conciliation, the admissible claim value for the complainant was determined.

In civil disputes between members and clients related to Stock Exchange transactions, the complaint had to be directed to the IGRC or the Stock Exchange’s arbitration mechanism before pursuing other legal options.

If a member disagreed with the arbitral award, they could appeal to an appellate tribunal composed of three members. The appeal had to be resolved within three months of the tribunal’s appointment.

The current SCORES mechanism is as follows-

Direct Complaints:

In scenarios where an investor files a complaint directly on SCORES without initially addressing the matter with the relevant company or intermediary, the complaint will be directly sent to the respective entity. As this is the first instance of the issue being raised with the concerned entity, these “Direct complaints” will be resolved by the entity itself, and the response will be conveyed to the investor without SEBI officials intervening.

The entity in question is obligated to send a response directly to the investor within 30 days. Should the entity fail to provide a response within this timeframe, the complaint will automatically be forwarded to SEBI. Consequently, the complaint will acquire a new registration number within SCORES.

If the investor is dissatisfied with the resolution offered by the concerned entity, they need to indicate their dissatisfaction with the complaint. Following this indication, the complaint will be escalated to SEBI. However, if the investor does not express dissatisfaction within 15 days from receiving the company’s response, it will be presumed that the investor is content with the resolution, and the complaint will be closed.

Normal Complaints:

In instances where an investor submits a complaint on SCORES after initially addressing the issue with the relevant company or intermediary, the complainant is required to provide the date of initial engagement with the complaint and the address where the last communication occurred.

Subsequently, the complaint will be directed to SEBI. After a thorough examination, SEBI will forward the complaint to the concerned entity, along with advice to furnish a written response to the investor and to file an action taken report in SCORES.

3. Upcoming ODR Mechanism

According to the circular, the ODR system has been established by SEBI in the following manner.

3.1. Initiating the Dispute Resolution Process

When it comes to initiating the dispute resolution process, investors and clients are strongly advised to address their concerns head-on by directly lodging a formal complaint with the relevant market participant. Should their concerns remain unaddressed through this initial avenue, investors are provided with two distinct pathways for escalating the dispute resolution procedure: they can opt to navigate the established SCORES Portal, adhering to the stipulated

guidelines, or alternatively, they can avail the technologically advanced ODR Portal.

Market participants, on the other side of the equation, retain the pivotal choice to initiate the dispute resolution process via the ODR Portal. However, prior to embarking on this course, they are required to extend a considerate notice period of a minimum of 15 calendar days to the investor or client involved. This judicious allowance is deliberately designed to offer both parties the chance to engage and collaboratively resolve the dispute amicably. If, regrettably, the dispute persists unmitigated during this stipulated timeframe, the market participant is then granted the authority to proceed with the ODR process. This magnanimous time allowance underscores a final, diligent attempt towards achieving a harmonious resolution by both parties. And even in circumstances where the dispute demonstrates tenacity beyond this interval, the market participant is still empowered to advance the dispute to the ODR process.

However, concern must be drawn to the fact that initiating the dispute resolution process via the ODR Portal is restricted in the following cases:

If there is an ongoing consideration or pending status of any complaint or dispute according to SCOREs guidelines.

Before the commencement of any arbitration procedure, legal action in court, a tribunal, or a consumer forum.

If the complaint or dispute is deemed non-arbitrable as per Indian law.

The option to initiate dispute resolution through the ODR Portal becomes available when it falls within the applicable statute of limitations. This time frame is calculated from either the date of the issue’s occurrence that led to the complaint or the date of the last transaction, whichever is more recent. This provision ensures that disputes remain meticulously confined within a carefully regulated time frame, meticulously safeguarding fairness and effectively preventing undue elongation.

3.2. ODR Portal and allocation system

A complaint or dispute that is initiated using the ODR Portal will be directed to an ODR

Institution that has been approved by a Market Infrastructure Institution (MII). The distribution of these cases among the empanelled ODR Institutions will follow a market-wide round-robin system, ensuring that each dispute is allocated fairly among all such approved institutions.

The selection of ODR Institutions will occur subsequent to an examination of the complaint or dispute by the respective MII. The objective of this evaluation is to achieve an agreeable resolution. This review process will be completed within a span of 21 calendar days

3.3. Conciliation Process

The Conciliation process enumerated is as under:

Upon receiving a complaint or dispute referral, the ODR institution will appoint a single conciliator from its conciliator panel within 5 days. This appointed conciliator must possess the required qualifications or expertise and must maintain impartiality by not having any affiliations with the involved parties in the dispute.

The designated conciliator will guide the disputing parties to seek a harmonious resolution, and this process should ideally be concluded within 21 calendar days from the conciliator’s appointment. However, an extension of up to 10 calendar days can be granted with the mutual agreement of the disputing parties.

When successful, the conciliation process will be formalized through a properly executed settlement agreement between the parties. In cases where the agreement mandates the Market Participant to compensate the investor/client, the MII will oversee the payment and adherence to the settlement terms, ensuring compliance until the investor/client receives their due payment or the terms are fulfilled.

If the conciliation process doesn’t yield resolution within the specified timeframe, the conciliator will determine and communicate the appropriate claim value deemed payable to the investor/client. This information will be shared with the disputing parties, the ODR Institution, and the MII.

In scenarios where conciliation proves unsuccessful, either the investor/client or the market participant retains the option to commence online arbitration.

3.4. Initiation of arbitration

If a dispute remains unresolved after a conciliation attempt, an investor/client has the option to proceed with online arbitration. This is subject to fulfilling the applicable fees for online arbitration.

Should a Market Participant opt for online arbitration, they are required to submit 75% of the recognized claim value to the relevant Market Infrastructure Institution (MII) before initiating the online arbitration process. Additionally, the necessary arbitration fees should also be paid.

Upon an investor/client’s request, the relevant MII can release a portion of the deposited amount, not exceeding Rs 5,00,000/-, from the received deposit. However, prior to disbursing this amount to the investor/client, the MII must obtain the appropriate commitment, guarantee, or security from the investor/client. This ensures the reimbursement of the released amount if the arbitration ruling goes against the investor/client

3.5. Arbitration

In case the aggregate amount of claim or counterclaim-

Is Less Than Rs 30 Lakhs:- the ODR Institution shall appoint a sole arbitrator from its panel of arbitrators within 5 calendar days of reference

Exceeds Rs 30 Lakhs:- The matter shall be referred to an Arbitral Tribunal consisting of three Arbitrators

In case the value of claim and/or counter-claim is in excess of Rs 1,00,000/- , the Sole Arbitrator or Arbitral Tribunal shall conduct one or more hearing/s and pass the arbitral award within 30 calendar days of their appointment (when matter requires detailed consideration the sole arbitrator or arbitration tribunal may for reasons to be recorded extend the time for up to further 30 days)

In case that value is lower than 1,00,000/- ,the Sole Arbitrator shall conduct a document-only arbitration process and pass the arbitral award within 30 calendar days. However, the arbitrator, for reasons to be recorded in writing, may grant a hearing to the parties to the dispute.

On issuance of the arbitral award, when such arbitral award requires payment of any amount by the Market Participant or performance by it of a certain nature, then such payment shall be made by the Market Participant within a period of 15 calendar days from the date of the arbitral award (unless such award requires payment sooner), and/or performance within such period as specified by the arbitral award.

On issuance of arbitration award, the party against whom it is issued, will be required to within 7 days submit its intention to challenge the award u/s 37 of the Arbitration Act and shall adhere to the terms of arbitral award if a stay is not granted within 3 months from the date of receipt of award.

(Market Participant must deposit 75% of the amounts payable in terms of the arbitral award with the relevant MII prior to initiation of the challenge)

3.6. Arbitration Process

Claim Value Threshold

For claims or counterclaims amounting to less than Rs 30 Lakhs: The ODR Institution will designate a single arbitrator from its pool of arbitrators within 5 calendar days of receiving the referral.

If the total claim or counterclaim surpasses Rs 30 Lakhs: The matter will be directed to an Arbitral Tribunal comprised of three Arbitrators.

Hearing and Award Timeframe

If the claim and/or counterclaim value exceeds Rs 1,00,000/-, the Sole Arbitrator or Arbitral Tribunal must conduct one or more hearings and deliver the arbitral award within 30 calendar days of their appointment. This duration can be extended by up to an additional 30 days, with the reasons documented.

In cases where the value is less than Rs 1,00,000/-, the Sole Arbitrator will carry out a document-based arbitration procedure and present the arbitral award within 30 calendar days. However, the arbitrator can, in writing, decide to grant a hearing to the involved parties.

Award Implementation

Upon issuance of the arbitration award, if the award mandates payment from the Market Participant or their execution of a specified action, the Market Participant is obligated to make the payment within 15 calendar days from the date of the award (unless otherwise specified), or perform the required action within the timeframe dictated by the award.

Challenging the Award

Upon receiving the arbitration award, the party against which the award is directed has 7 days to declare its intention to contest the award under section 37 of the Arbitration Act. If a stay is not granted within 3 months from receiving the award, the party must adhere to the terms outlined in the arbitral award.

Challenge Deposit

Before initiating a challenge, the Market Participant must deposit 75% of the awarded amounts with the relevant Market Infrastructure Institution.

3.7. Form of Proceedings

The process of conciliation and arbitration will take place in a digital manner through the ODR Institutions. This involves the online engagement and participation of the investor/client, the Market Participant, and the respective conciliator or arbitrator through audio-video communication, as suitable. The investor/client also has the option to engage in these online conciliation and arbitration procedures by utilizing the services offered by any of the Market Infrastructure Institutions’ Investor Service Centers (ISCs).

3.8. Phases For Implementation Of The Circular

The provisions of the Circular will be implemented in following phases:

Implementation Phases

The implementation of the Circular’s provisions will be carried out in the following stages:

Phase One:

The initial phase will encompass the following actions:

a. Development of the ODR Portal

Empanelment of ODR Institutions by the Market Infrastructure Institutions (MIIs). Selection of conciliators and arbitrators by these ODR Institutions, to be completed on or before August 1, 2023.

b. Enlistment of Trading Members and Depository Participants on the ODR Portal, with a deadline of August 15, 2023.

c. Commencement of the registration and resolution of complaints/disputes against brokers and depository participants, starting from August 16, 2023

The second phase shall include:

Registration of all other Market Participants on the ODR Portal by September 15, 2023 commencement of registering of complaints/disputes against all other Market Participants and their resolution on and from September 16, 2023, and implementation of related processes and requirements envisaged in this Circular shall be an effect by September 16, 2023

The phased implementation of the circular adds a layer of meticulous planning to this progressive journey. As the final phase approaches, by the eve of September 15, all market participants, regardless of their stature, will find their place within the embrace of the ODR Portal. From this pivotal juncture on September 16, the portal will become the conduit through which complaints against these participants are registered, initiating an era of expeditious resolutions.

4. Differences Between Consultation Paper and Circular:

Upon comparing the consultation paper dated May 19, 2023, and the circular dated July 31, 2023, the following variations were identified:

The consultation paper discusses the creation of a separate Market Intelligence Portal for investor grievances related to market manipulation, but this is not mentioned in the circular.

The consultation paper suggests a two-step review process involving First Level Regulators and SEBI before reaching the ODR stage. However, the circular outlines a single review level conducted by the Market Infrastructure Institution (MII) within 21 days before referring to ODR institutions.

The consultation paper mentions a hybrid dispute resolution mode utilizing offline and online mediums facilitated by Investor Service Centers (ISCs) of MIIs. However, the circular does not mention this offline mode of grievance resolution.

5. Conclusion

The evolution of the dispute resolution mechanism in the capital market has taken a significant stride with the introduction of the Online Dispute Resolution (ODR) system. This transformative approach, initiated by the Securities and Exchange Board of India (SEBI), aims to streamline and enhance the process of resolving grievances arising within the securities market. By centralizing the resolution process through a unified ODR portal, SEBI intends to offer investors a more efficient and accessible means of seeking redress.

Through a meticulous examination of the circular and consultation paper, it is evident that the ODR system marks a departure from the previous dispute resolution framework. The mechanism provides expedited avenues for addressing complaints, introduces digital conciliation and arbitration methods, and emphasizes investor involvement throughout the process. With clear phases for implementation, transparent procedures, and stringent timelines, the ODR system demonstrates SEBI’s commitment to promoting investor confidence and safeguarding their interests.

While certain variations between the consultation paper and the final circular have been identified, the core principles of providing swift resolutions and ensuring fairness remain intact. The circular underscores the importance of direct complaints, expeditious response timelines, and the pivotal role of Market Infrastructure Institutions (MIIs) in ensuring a seamless transition to the ODR framework.

In essence, the introduction of the ODR system signifies a progressive step toward creating a more investor-friendly environment in the capital market. By leveraging technology and streamlining processes, SEBI aims to empower investors, bolster market integrity, and uphold investor protection—ultimately contributing to the overall health and credibility of the securities market in India.

In essence, the introduction of the ODR system signifies a progressive step toward creating a more investor-friendly environment in the capital market. By leveraging technology and streamlining processes, SEBI aims to empower investors, bolster market integrity, and uphold investor protection—ultimately contributing to the overall health and credibility of the securities market in India.