Formalising the Online Dispute Resolution Industry

I have a piece with Parker Karia and Manas Dhagat on the newly introduced online dispute resolution system introduced by SEBI in today's Financial Express linked here and produced below:

 

In a significant step towards its broad objective to ensure a fair and transparent securities market and in tandem with the mission to promote digitization, SEBI recently revamped the investor grievance redressal mechanism and has replaced it with an Online Dispute Resolution (ODR) framework. The result of the framework is ‘SMART ODR’, which stands for ‘Securities Market Approach for Resolution Through ODR Portal’, a portal established by stock exchanges and depositories, in collaboration with certain ODR institutions, which are to be empanelled with an MII.

The ODR framework prescribes the dispute resolution mechanism between investors or listed companies, and intermediaries registered with SEBI (such as fund managers and asset management companies, brokers, portfolio managers, RTAs, investment advisers and research analysts, etc.). Further, the ODR framework provides for disputes between institutional or corporate clients and certain intermediaries, for which SEBI has allowed for any other institutional mediation, conciliation or online arbitration institution.

In terms of the new framework, the grievance/ complaint will be first filed with the concerned intermediary. In the event of an unsatisfactory resolution, the complaint may be escalated to SEBI’s existing SCORES (SEBI Complaints Redress System) portal. Alternatively, the investor may opt for the ODR framework directly. The concerned market participant may also initiate the ODR process by providing the requisite notice.

Upon triggering the ODR mechanism, the complaint or dispute is to be reviewed by the relevant MII within 21 days with the aim to amicably resolve the matter, and is thereafter referred to an ODR institution.

Among the salient features of the new framework is the focus on conciliation as a means of dispute resolution. Upon a bare perusal of the master circular governing the ODR framework, it would appear that conciliation is to be the default option for resolution of disputes, unless the relevant party/ies choose to pursue arbitration, or in the event arbitration is commenced due to failure of conciliation. Interestingly, in the event of failure of conciliation, the admissible claim amount is to be determined by the conciliator.

In the event of escalation to arbitration, while investors would be required to pay the applicable arbitral fees, market participants would be required to pay the admissible claim amount in full as well. The composition of the arbitral tribunal and the number of hearings or the nature of arbitration depends on the admissible claim. To elucidate, for claims less than Rs. 1 lakh, ordinarily, no hearings would be conducted and a ‘document-only’ arbitration shall be carried out. For claims exceeding Rs. 1 lakh, there may be one or more hearings, and the arbitral award is required to be passed within 30 days. In the event the claim amount exceeds Rs. 30 lakh, a panel of 3 arbitrators would have to be appointed.

Further, SEBI has prescribed strict timelines in relation to time granted for conciliation, arbitration, etc. and while providing for extension of the timelines, SEBI has also laid down the maximum extension that may be granted. Further, upon issuance of an arbitral award, in the event that any party desires to appeal the award, their intention to that effect must be recorded within 7 days. These measures would ensure speedy resolution of disputes.

The previous MII-led process displayed a limited scope, catering solely to specific segments such as stock brokers, commodity brokers, depository participants, listed companies, and registrars and share transfer agents. This approach inadvertently sidelined other market participants, raising concerns about fair treatment and equal access to resolution mechanisms. Physical engagement was a hallmark of the former process, leading to higher costs, more friction and extended timelines. This not only posed financial constraints for some but also resulted in prolonged resolution periods with the cost of arbitration exceeding the claim amount. The slow pace of traditional methods stirred inconvenience among stakeholders, urging a swifter and more accessible approach. Further, the multi-layered structure introduced complexities, featuring stages like the Investor Grievance Redressal Committee (IGRC), Arbitration, and Appellate Arbitration. Although designed to ensure comprehensive solutions, this layered system sometimes led to confusion and undue delays, calling for a more streamlined and straightforward path.

Key Advantages:

Inclusivity: By expanding the scope beyond stock brokers, commodity brokers, and other specific segments, SEBI has made the dispute resolution mechanism more inclusive. This inclusion of other market participants like asset managers, investment advisers, and proxy advisors is crucial for a fair and transparent securities market.

 

Speed: The stipulated 21-day period for an MII to review the complaint or dispute and the strict timelines for conciliation and arbitration speed up the overall process.

Flexibility: The provision for alternate institutional mediation, conciliation, or online arbitration, and the option to escalate to SEBI’s existing SCORES portal offer flexibility to stakeholders.

Cost-Effectiveness: The move from physical engagement to an online mechanism reduces the costs for investors and other market participants, making the process more accessible.

Transparency: The ODR framework aims to make the process more transparent by having clearly defined roles for Market Infrastructure Institutions (MIIs), intermediaries, and ODR institutions.

Areas for Improvement:

Complexity: While the ODR framework simplifies many elements of dispute resolution, it also introduces its own set of complexities, such as the criteria for selecting ODR institutions and the mechanics of the arbitration process based on claim size.

Acceptance: As with any new system, acceptance by the market participants and their willingness to fully adopt the ODR mechanism will take time and will require adequate education and training.

Technology Readiness: The success of the ODR framework also hinges on the readiness of the technology infrastructure, including issues of cybersecurity and data privacy.

In conclusion, the ODR framework marks a significant leap in the securities market dispute resolution landscape. The modernized approach aims to tackle the shortcomings of the previous dispute resolution mechanism by seeking to offer a one stop solution for grievance redressal in the securities market. This move has levelled the playing field, catering to a broader range of stakeholders and delivering timely, transparent, and effective solutions to disputes. As India’s financial landscape evolves, this progressive step can be expected to bolster trust, transparency, and efficiency within the securities market.