Critical Analysis of SEBI’s Investor Grievance Redressal System in view of Board’s July Circular
[Hrishikesh is a student at Jindal Global Law School.]
Securities Exchange Board of India (SEBI) is a regulatory authority that has been established for the purpose of regulating stock exchanges in India. The regulation of the securities market is critical for the proper functioning of any economy as the stock market raises majority of the capital for listed companies which enable them to invest the same raised capital in pursuance of their primary and ancillary objects.
A regulator in India performs three main functions, that is, quasi-legislative, executive and quasi-judicial. The role is partly quasi-legislative because the regulator has the authority to formulate rules and regulations for the implementation of the object of its parent act (in case of SEBI, that is the SEBI Act 1992), and it is partly quasi-judicial because it also has quasi-judicial powers to adjudicate the matters before it in case any grievance that arises and the decision of the same can be appealed to the concerned tribunal. The SEBI Complaint Redress System (SCORES) is a system through which investor grievance can be registered with the Board of SEBI. It has been subject to criticism from the Securities Appellate Tribunal (SAT) which hears matters appealed from SEBI. This article addresses the issues SCORES has as an investor grievance redressal platform, keeping in mind SEBI’s circular published on 31 July 2023, which seeks to introduce online dispute resolution (ODR) to the present investor grievance redressal system.
SCORES and Its Fundamental Issues
SCORES is an online platform designed to help investors to lodge their complaints, pertaining to the securities market, online with SEBI against listed companies and SEBI registered intermediaries. Before looking into the deficiencies of the platform, let us first look into how the platform works. An investor/client who has a grievance against a listed company or a market intermediary can register their complaint on SCORES which shall forward the same to the entity against whom the complaint has been filed. The entity’s response shall then be forwarded by SCORES to the complainant.
While the idea of an online platform to register/redress grievances seems very useful, SEBI exercises unchecked arbitral power when it comes to accepting or rejecting the grievances raised through the portal. Furthermore, there have also been questions pertaining to the quality of redressal by the platform as there exists no mechanism to qualitatively assess the response by the entity against whom grievance has been filed. This makes the entire process of redressal much more murkier and opaque.
The SAT observed that SCORES’ management and adjudication procedure was a mere “eyewash”. This observation was in response to a case filed by a group of investors who alleged that SEBI had converted their complaint into “market intelligence” and refused to investigate or provide satisfactory information on the action taken. No rationale or reasoning was given behind the refusal of the complaint. SAT, in its ruling, said that they have no hesitation in stating that SEBI as a regulator in the instant case has not performed its duties and has kept the complaint pending for more than 6 years. The tribunal further stated that it fails to fathom as to why a complaint by an aggrieved investor/client could not be decided unless SEBI officials had a vested interest in not deciding the matter. These observations by SAT read along with the language used by the tribunal shows that this problem concerns not only this single case, but also a substantial number of cases which have been left ignored or addressed ineffectively, only to be overturned by the SAT in an appeal to the response by the SCORES platform.
Another dimension of SCORES which is problematic is the fundamentals of the platform itself. This issue came into spotlight when a petition was filed by Textport Creations and its director Samir Goenka before the Karnataka High Court. The petition filed alleged that the system fails to provide copies of replies sent by the party against whom a complaint has been lodged. Thus, no opportunity is given to the complainant to study the response of the party against whom a complaint has been filed. SCORES’ non-provision of reply is problematic as it raised doubts of the platform or the Board in general being biased towards a particular party to the case. This is not at all helpful as far as maintaining good investor word-of-mouth is concerned. Mr Goenka had invested a sum of INR 10 crores in the portfolio management service of ASK Investment Managers Limited. His father had invested an additional INR 25 crores and was promised a return of 18% on his investment. He was given the principal, but the interest given on the investment was massively undervalued. When Mr Goenka filed a complaint, the same was disposed of on the ground that no documentary evidence had been provided on the promise of 18% return. However, the platform only accepted a word limit of 1,000 characters and size limit of 2mb for attachments, thereby preventing any further attachment. The Karnataka High Court post hearing the petition also issued a notice to SEBI alleging poor handling of complaints through SCORES.
Since SEBI’s autonomy in 1992, the Board has been resolving investor grievances through the Securities Customer Complaint system which was, in 2011, automated and re-introduced as SCORES. Despite the ongoing controversies surrounding the platform, the number of pending complaints by grievant investors over the last decade has dropped massively. The platform has been extremely efficient and has recorded a redressal rate of 95%, the highest amongst global securities regulators.
In the financial year 2009-10, the pending complaints on SEBI’s investor grievance platform was 49,113. Post the introduction of SCORES, the number has dropped down to 3,094 in the financial year 2019-20. However, despite this efficient operation, the quality of the redressal has been a massive disappointment. The grievance redressal platform, whilst extremely efficient in disposing complaints, compromises the quality of disposal of the grievances. The platform merely forwards the complaint it receives to the concerned company or market intermediary seeking their response. Upon receiving the response, the platform reverts the same back to the complainant and closes the grievance without looking into whether the response is rational/justified. There exists no system in place to qualitatively assess the response of the concerned entity. Furthermore, former SEBI officials have also highlighted the lack of qualitative assessment of responses by SCORES and have remarked that a review of the response sent by the party against whom a complaint has been lodged by an external committee is the need of the hour.
SEBI’s Recent Circular: Ensuring Qualitative Redressal
The Board decided to introduce ODR as a medium to address ineffective administration of investor grievance through SCORES. Paragraph number 11 of the circular provides that the aggrieved investor shall first take up their grievance with Market Participants. As per Regulation 2(l) of SEBI (Central Database of Market Participants) Regulations 2003, a market participant means intermediaries, other entities, investors, listed companies and companies which intend to get their securities listed. Hence, the aggrieved investor, as per paragraph 11, shall first approach the participant with their complaint. If the complaint is not addressed satisfactorily, the same shall be escalated through SCORES. Post exhausting the same, if the investor is not satisfied with the outcome of the procedure, they can initiate dispute resolution via the ODR portal about which the SEBI circular further talks in great detail.
The introduction of ODR into investor grievance system goes a long way to ensure equitable and qualitative redressal. It further upholds the confidence public shareholders, who deal with listed securities on Indian stock exchanges, have on SEBI as a gatekeeper of their rights and interests, thereby boosting investor confidence. This will also ensure that SAT is not overburdened with continual appeals by aggrieved investors. Furthermore, it will also ensure that not all SEBI decisions are overturned by the Tribunal thereby further boosting the reputation of the Board.
The preamble of the SEBI Act of 1992 begins by stating that it is “an Act to provide for the establishing of a Board to protect the interests of investors in securities……”. SEBI was established for the welfare of public investors irrespective of their shareholding or any other power they hold. Hence, any injustice done to an investor should also be adjudicated effectively and equitably, that is, in tandem with the principles of natural justice. The inherent problems with SCORES and the adjudicatory mechanism of SEBI drives the investor to frustration as it is further involved in appeals to SAT or petition before higher courts, thereby reducing investor confidence in the long-run. SEBI’s decision to introduce ODR will ensure quick, efficient and effective redressal of investor grievances. This decision displays SEBI’s appreciable use of the powers conferred to it under Section 11(1) of the SEBI Act to protect the interest of investors in securities and promote fair market practices for the development of the securities market.