FinTechNew Guidelines for Digital Investment Platforms: SEBI’s Dispute Redressal Mechanism and Its Impact on Online Trading

INTRODUCTION

The Securities and Exchange Board of India (hereinafter referred as SEBI) has always been invested to produce better grievance redressal systems for the investors. In pursuance of providing an alternate avenue for dispute redressal between digital investment platforms and retail & small-time investors, SEBI, vide circular SEBI/HO/OIAE/OIAE_IAD-1/P/CIR/2023/131, launched the Online Dispute Resolution portal (hereinafter referred as ODR) system.

The ODR portal will act as a second grievance redressal level after raising the initial complaint before the listed companies / specified intermediaries / regulated entities in the securities market (hereinafter referred to as “Market Participant”) themselves after which the complainant may apply to the current SEBI Complaint Redressal System (hereinafter referred as SCORES) or go right for an appeal before the ODR platform. It is interesting to note that the complainants can also approach the ODR option after exhausting the option of approaching SCORES as well, this makes ODR an alternative platform for market intelligence and also a proceeding platform for grievance redressal. This revolutionary initiative would make the process of grievance redressal more comprehensive, cost-effective and time-efficient.

The ODR will provide a wider scope which is explained in detail in a consultation paper released by the market regulator. SEBI argues that the ODR complaints related to make market price/volume manipulation or insider trading more arguable as, presently SEBI is only empowered to address individual investor grievances.

The ODR system would be established through an agreement between the listed Market Infrastructure Institutions (hereinafter referred as MII) like BSE, the NSE, the Multi Commodity Exchange of India and the Metropolitan Stock Exchange of India same and it will be supervised by SEBI. The significance of this agreement is for the collective adoption of the ODR system by all the MII entities which would govern the disputes between the investors and the digital investment platforms. The MII’s themselves would operationalise & develop the platform with its cost and responsibilities but would face inspections by the SEBI for proper functioning.

In this article we attempt to discuss about the introduction and impact of the online dispute resolution mechanism on the digital investment platforms, depository & stock brokers like Zerodha, Upstox, Groww etc. and further developments.

THE NEED OF ODR

During the past decade insider trading disputes have increased multitudinously. A separate portal was the need of the hour to distinguish between individual investor grievances and the market intelligence inputs which includes interpreting and analysing the market as these disputes need thorough investigation and supervision.

SEBI has issued consultation papers at various occasions to strengthen the grievance redressal process by taking up public suggestions. Adjudging the cases involving allegations of insider trading are challenging as it need circumstantial evidences to catch the offender which in turn need at the ground investigation which cannot be conducted by SEBI.

Recently in an insider trading case became popular for insider tips being leaked through WhatsApp; Shruti Vora, from the Institutional Sales Department of Antique Stock Broking Ltd. was fined by SEBI due to allegations of circulating sensitive information on various WhatsApp groups which could be considered insider information. Disputes such as these can be much better handled under the authority and regulation of the MII’s. This mechanism has been pointed as a revolutionary initiative in the securities market as its ambit covers expansive range of intermediaries including mutual funds, portfolio managers, depository brokers and stock brokers etc. In the era of tech & AI, it is crucial to bring digital investment platforms which are on a rise in the financial market under the ambit of regulation.

SCORES & ODR

Prior to the ODR platform SEBI had originally launched a web-based grievance redressal system named SCORES in 2011 through which investors could lodge their complaints online with an average resolution time of 31 days. This platform went through a lot of procedural additions and still falls short in handling the rising number of disputes.

It excludes the regulation of stock brokers, sub-brokers and depository participants(as defined under section 12(1A) of SEBI Act, 1992). This exception was made since the complaints against them would ultimately be channelled through the platforms of the relevant stock exchanges/depositories.

The introduction of the ODR system would be an addition to the already existing SCORES platform. This extends the adjudicating power of SEBI on third-party rights in the context of investigating & granting compensation or relief. The new platform would assist the existing mechanism with the SCORES platform and would have a hybrid approach for the online and offline procedure including the training of the conciliators and the arbitrators.

IMPACT ON ONLINE INVESTMENT COMPANIES

Digital investment platforms such as Zerodha, 5paisa, Upstox, Groww etc are listed as depository participants and stock brokers with SEBI. They are authorised by SEBI to act as intermediaries between the listed companies with assets available on such platforms and the investors by retaining their shares, mutual funds, debentures and securities. The rise of these Fintech companies has led to major developments, making the financial sector 2^nd most funded start-up sector in India. The main issues that have been plaguing the fintech sector currently however is weak Cyber security and non-existent data protection protocols.

Under SCORES, these intermediaries were not regulated and the dispute between them and investors would largely go unaddressed. Whereas with The implementation of the new ODR platform takes them under its ambit of dispute resolution and makes them answerable for their procedure and policies. The dispute between corporate clients and specified intermediaries can be resolved by initiating online conciliation on the platform or in any Indian arbitration institute.

All the new contractual agreements between the intermediaries/entities and the investor must have a grievance redressal clause which in turn would impact the nature of contracts by these depository or stock brokers. Furthermore, schedule B of the circular mentions that the continual contractual agreements between the intermediaries/entities and the investor should have their grievance redressal clauses updated within six months or it will be deemed to have exercised the same. This platform will help these entities/companies to resolve their disputes with corporate or investor clients as they can initiate the proceedings with a prior 15-day notice to the client.

In turn this new platform for dispute resolution will impact these intermediaries at an elementary level ensuring their proper functioning, transparency and fairness in the securities market.

AMLEGALS REMARKS

SEBI has taken a revolutionary step by enhancing the dispute resolution mechanism in the financial market making the new ODR system a pillar in the whole process. Earlier SCORES provided transparent and efficient process with keeping investors in mind but lacked a means to address the grievances of the intermediaries whereas now the ODR platform enhances its ambit to even cover the grievances of the intermediaries.

This would have a positive impact on the securities market making the public gain more trust in the digital investment platforms which are gaining popularity in the securities market assuring their rights and grievances addressed without fear which would only result in faster growth in the larger fintech sector.

-Team AMLEGALS, assisted by Ms. Khanak Sharma (Intern)

For any query or feedback, please feel free to get in touch with tanmay.banthia@amlegals.com or himanshi.patwa@amlegals.com