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National Law Institute University

Bhopal

Project

On

Civil Law III

Arbitration in the Stock Market

Submitted to: Submitted by:

Prof (Dr) S S Prakash Richa Lalwani

Professor of Law 2008 B.A., LL.B. 01

9th Trimester

TABLE OF CONTENTS
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S NO. PARTICULARS PAGE NO

1 Introduction 3

2 Investor’s Grievances Redressal Committee 4

3 Matters that can be referred 5

4 Parties that can refer Matters 6

5 Limitation Period 6

6 Place of Arbitrators 7

7 Panel of Arbitrators 7

8 Arbitration Fees 8

9 Engaging a lawyer 8

10 Awards and Appeal thereafter 9

11 Advantages 10

12 Conclusion 12

13 Bibliography 13

Introduction

The density of the Indian stock market is amongst the top three in the world. As soon as the
stock markets opens at 9.00 a.m., there is flurry of orders that are keyed - in from all over the
world and from all strata of economic background.
 
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In this hurly burly, frenzied and frantic market scenario, there are bound to be mistakes,
differences and disputes. These disputes can be between a broker, sub broker, constituents,
clearing member, depositories, authorized persons, etc. To deal with such disputes, stock
exchanges i.e. the National Stock Exchange of India Ltd. (NSE) and Bombay Stock
Exchange Limited (BSE) have devised a very sophisticated dispute resolution mechanism.
Though these forums are available; the most efficacious mechanism remains stock market
arbitration. Securities Exchange Board of India (SEBI) and NSE’s have recently issued
circulars (SEBI’s circular no. CIR/MRD/DSA/24/2010 dated August 11, 2010; NSE’s
circular no. NSEIL/ARBN/2010/003 dated August 31, 2010 and SEBI’s circular no.
CIR/MRD/DSA/29/2010 dated August 31, 2010), bringing about sweeping amendments to
the manner in which arbitrations were being conducted by the stock exchanges. 

Imagine going to a cardiologist for a foot fracture. Regrettably, this is what is happening as
far as stock market disputes are concerned. Aggrieved people are running pillar to post to
police stations and consumer courts, to redress their grievances, instead of invoking Stock
Market arbitration.

Arbitration as an alternate method of dispute settlement has long been recognized as

convenient, efficient and less expensive than the traditional lawsuit in court. These benefits
have always been a significant reason for the success of securities industry arbitration. In the
USA and many European countries the arbitration is the primary means of resolving disputes
in the securities market. The arbitration won that status because the public perception of its
fairness was of paramount importance.

Investor Grievances Redressal Committee (IGRC)

 
Both the stock exchanges provide for a designated committee – the Investor Grievances
Redressal Committee (IGRC), deals with investor’s complaints. This forum mediates
between the parties and attempts to resolve their claims, disputes and differences. Complaints
are to be filed in the format prescribed by the respective stock exchange.  The prescribed
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form broadly seeks details of the parties, nature of dispute / claim, quantum of claim,
supporting documents, etc. Thereafter, the IGRC, calls the parties for a personal meeting to
resolve their dispute. If the parties are unable to resolve their disputes, the mediator then
advises them to invoke arbitration under the Rules, Bye – laws and Regulations of the
relevant stock exchange.
 

Matters that can be referred to arbitration

 
All claims, difference or disputes between the trading members, constituents, sub – brokers,
clearing members and issuers arising out of or in relation to transactions made subject to the
Bye – laws, Rules and Regulations of the exchange can be submitted to arbitration.
 
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The very fundamental requirement of Arbitration Act, 1996 (“Arbitration Act”) is applicable
to Stock Exchange arbitration too, i.e. the existence of an arbitration agreement. It is pertinent
that the parties to arbitration have executed an arbitration agreement or any other agreement
which provides for arbitration and further that the arbitration be as per Bye – laws and
Regulations of the applicable stock exchange.
 
Vis-à-vis. a broker and its constituent, the Member Client Agreement, which is signed whilst
opening of trading account, provides for the arbitration clause. With respect to broker and its
sub broker, it is the Memorandum of Understanding or any other agreement that is signed
between them, which provides for such an arbitration clause. Thus, whilst entering into the
stock market, one must ensure that it has signed the relevant agreement to enable them to
initiate arbitration at a later date, if required.
 
Further, party invoking stock market arbitration must ensure that its disputes, claims or
dealings is within the jurisdiction of the stock exchange and within the parameters of Bye -
laws and regulations of the stock exchange. For example, a dispute between a broker and sub
broker with respect to loan / money dealings inter se, would not be subject to Stock Exchange
Arbitration, as such dealings are not subject to Rules, Bye – laws and Regulations.
 

Parties that can refer matter to arbitration/parties to arbitration

 
Disputes which are ordinarily referred to Stock Exchange arbitration includes:
 
 Between broker and its constituents;
 Between brokers  inter se;
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 Broker and its sub broker; 

 Constituent and its sub broker; 
 Constituent / broker and clearing member;
 Constituent / investor and issuer.

Brokers are liable for the acts of its sub broker. Therefore, where a claim, difference or
dispute arises between a sub broker and its client, the trading member to who the sub broker
is affiliated, is also to be pleaded as a party.
 
Limitation period
 
The recent circulars have brought about a paradigm shift on the aspect of limitation vis-à-vis.
stock market arbitration. Erstwhile, the timeline within which one could invoke Stock
Exchange Arbitration was six months.  Clause 5.1 of the SEBI’s circular dated August 11,
2010 suggests that the limitation period for filing arbitration reference shall be governed by
the law of limitation, i.e. The Limitation Act, 1963. Thereby, increasing the period of
limitation 6 times, i.e. from 6 months to 3 years! However, to encourage parties to judiciously
invoke arbitration, the circulars have suggested a lower arbitration fee incase the party
invokes arbitration within 6 months as compared to arbitration being invoked after 6 months. 
The 6 months is to be computed from the end of the quarter during which the disputed
transaction(s) were executed / settled, whichever is relevant for the dispute.
Earlier the manner of computing the period of 6 months was different at NSE and BSE. The
recent circulars have brought about uniformity in the manner of computing limitation in both
the exchanges (Until September 6, 2010, BSE has not issued any circular adopting SEBI’s
circular of August 11, 2010, thereby amending its Rules, Bye laws and regulations ).
 

Place of arbitration
 
Both the exchanges have created and provided four different seats of arbitration, in the cities
of Delhi, Kolkata, Chennai and Mumbai. Each of these seats of arbitration covers a number
of States. The parties may thus approach an appropriate seat in the manner prescribed by the
exchange.
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Panel of Arbitrator(s)
 
 Determination of the arbitral tribunal bench depends upon the quantum of the claim.
Arbitral Panel could either comprise of one or three arbitrators, as the case may be.
Earlier, NSE and BSE had a different pecuniary yardstick, for determining whether
reference is to be referred to a single bench or a panel of three arbitrators. SEBI’s
circular of August 11, 2010 has removed this distinction.
 
 Clause 5.2 of SEBI’s circular of August 11, 2010 states arbitration reference for a
claim / counter claim up to Rs. 25 lakhs shall be dealt with by a sole arbitrator, while
claim / counter claim above Rs. 25 lakhs shall be dealt with by a panel of three
arbitrators.
 
 A party aggrieved by an arbitral award may appeal to the appellate forum, which shall
consist of three arbitrators who would be different from the panel who passed the
arbitral award appealed against.
 

Arbitration Fee
Prior to the recent amendments, the arbitration fee was different for BSE and NSE. SEBI’s
recent circular has now standardized the same and it currently stands as:
 
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Constituent who has a claim / counter claim upto Rs. 10 lakhs and files arbitration reference
for the same within 6 months shall enjoy the exemption of paying the arbitration deposit
amount. It is explicit from the above table that, though SEBI has considerably extended the
period of limitation, it is still encouraging people to approach the forum within a period of 6
months.
 
In all the cases, on issue of the arbitral award the stock exchange shall refund the deposit to
the party in whose favour the award has been passed.
 
Engaging a lawyer
 
As per NSE’s Bye – laws, where both the parties to arbitration are brokers the parties are not
permitted to be represented by a counsel, attorney or an advocate. However, when one of the
parties is a constituent and if the constituent chooses to be represented by a counsel, attorney
or an advocate, only then can the broker appoint a lawyer for itself. BSE does not have
similar provisions. At BSE, arbitrating parties may appoint advocates to assist them in the
matter subject to permission of the arbitrators, which is ordinarily granted.
The recent circulars do not comment on this aspect. It could therefore be assumed that the
legal provision stands unchanged.
Award and appeal thereafter
 
Pursuant to the written and oral submission of the parties, the arbitrator(s) issue the award
which is in writing signed by the arbitrator(s). In case any of the party is dissatisfied with the
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award, there is a provision for appealing against the award. Formerly, only BSE had an
Appellate Bench and a party who was dissatisfied with NSE’s arbitral award, had no option
but to approach the High Court, under Section 34 of the Arbitration Act.
 
SEBI’s circular of August 11, 2010 now necessitates that both the stock exchanges provide
for an appellate forum. A party aggrieved by the appellate arbitral award may file an
application to a Court of competent jurisdiction in accordance with Section 34 of the
Arbitration Act. Petition under Section 34 of the Arbitration Act is to be filed in the
competent court nearest to the regional centre where the arbitration was conducted.
 

Advantages

Following are some of the advantages of the stock market arbitration:

 
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 One of the greatest advantages of Stock Exchange Arbitration is that there is time
frame within which the arbitration proceedings are to be heard and completed. Clause
5.4 of SEBI’s Circular states, “arbitration reference shall be concluded within four
months from the date of appointment of arbitrator(s)” (The Managing Director /
Executive Director of the stock exchange may for sufficient cause extend the time for
issue of arbitral award by not more than two months on a case to case basis after
recording reasons for the same).
 Even an appeal is to be disposed off within three months from the date of the
appointment of the appellate panel.
 Moreover, having dedicated tribunal facilitates, as the arbitrators are aware of the
subject, thereby considerably reduces the time and effort in resolving disputes.
 Unlike other legal proceedings, Stock Market Arbitration is less dogmatic, less
bureaucratic, flexible and entails very less paper work.
 Specialization in securities issues - There are two major aspects of this benefit of the
securities industry arbitration. First of all the regulations of stock market and the
issues which are usual for the professional participants of the stock market are, let us
be honest, out of competence of judges of state courts. Though the panel of the
arbitration court may be composed of lawyers who are specialists in the arbitration
procedures and the reputable participants of the market who have deep knowledge of
the securities industry but no legal background, such panel is able to consider the case
and issue a competent award. The second important matter is that the stock exchange
arbitration court is able to apply the rules of the stock exchange, which the state court
would normally use only as a subsidiary regulation. Let us take into account also that
business customs and practice may play a large role in the rendering of an arbitral
award; therefore, if companies are operating in conformity with customs and stock
market practice, arbitration may be preferable.
 Privacy - Arbitration, unlike usual legal proceedings, are private. This is a very
important issue for the participants of the stock market and those investors who do not
need publicity or do not want their private financial affairs publicly disclosed.
Litigation, being adversary in nature, tends to destroy business relationships which the
participants of the stock market and investors may wish to preserve for their on-going
and future projects despite their current dispute.
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 Speed of resolution and finality - An important benefit of securities arbitration is the

speed in which claims are resolved, due to the fact that the motions practice is rare in
arbitration. Depending on the jurisdiction and the court in which filed, legal
proceedings can take years to be resolved. At the arbitration court the claims are
usually closed within shorter period of time.

Conclusion
 
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Ignorance is not always bliss, especially when it comes to stock market related arbitration.
Being aware of your rights and remedies not only enables to secure one’s hard earned
monies, but also provides respite promptly. At the cost of repetition, it is reiterated, stop
going to Cardiologist for a foot fracture.

Bibliography
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BOOKS
• Van Den Berg, Yearbook Commercial Arbitration, Vol. XXXIII, 2008, Kluwer Law
International, 2009.
• Dharmendra Rautray, Master Guide to Arbitration in India, Wolters Kluwer India Pvt Ltd,
2008.
• Alan Redfern, Law and Practice of International Commercial Arbitration, Sweet &
Maxwell, 2004.

WEBSITES

• www.sebi.com
 http://www.rrfinance.com/PDF_Files/Arbitration%20Mechnism%20in%20Stock
%20Exchange.pdf
 http://www.thehindubusinessline.in/iw/2005/09/25/stories/2005092501481400.htm