Foulplay by your broker? Here's help

The law might every now and then be derogatorily considered an ass, but since it is the only recourse we have, it is best to know how it works and use it as a shield to safeguard our rights.

This mantra holds if you are an equity investor and end up a victim of a wrongdoing by your broker or depository participant. We present a primer on what legal recourse you have if all does not go well between you and your broker.

Let's start with the stock exchanges where your share transactions actually take place. The clearing corporations of the NSE and the BSE offer a settlement guarantee mechanism through which the buyer is assured of getting his shares and the seller his money.

But this guarantee is only on settlement and so, the shares and money are given to the broker and not directly to the investor. This is where things could get murky - the broker who receives the shares or the money from the exchanges may not deliver these to your account. The broker could also refuse to return the margin amount that you had kept with him.

Your demat account is the most important one for you since all your equity investments lie in it. This account would be with a depository participant of National Securities Depository or Central Depository Services. Your risk also lies in the potential that your shares could be fraudulently debited by an official or a franchisee of your DP.

The first step to take, if you notice a discrepancy, is to complain to your broker or DP and seek a resolution. If within a reasonable time, say 15 days, there is no solution forthcoming, you can write to the investor grievance cells of stock exchanges or depository. They will attempt to resolve your matter with your broker or DP.

Writing to the authorities is only the first step, whether your problem gets resolved or not is quite another issue. In a recent case, Guntur-based investors realised that even having the NSDL pass an order in their favour is not necessarily the end of the case.

After receiving complaints from 10-15 affected investors against UTI Securities in February about their shares being fraudulently debited from their accounts, NSDL investigated the issue. In early May, it ordered the DP to restore the shares in at least 7-8 investors' cases.

The DP defied NSDL and did not restore the shares. Strangely, on 5 July even the NSDL did a U-turn and wrote to the few investors telling them it had revoked its order against UTI Securities.

Arbitration or conciliation? If your broker or DP refuses to resolve your complaint and you get no help from the depositories, it brings you to the only recourse available - arbitration. So, how does this work? Arbitration comes under the Arbitration and Conciliation Act 1996.

The Act allows two options - conciliation and arbitration. Conciliation is similar to an out-of-court settlement where the parties find acceptable resolution and a stamp of legal finality is marked on the case.

Anand-based investors of CDSL DP, Edelweiss Securities, who saw shares vanishing from their demat accounts were pressurised by the DP to enter into a conciliation proceeding where the DP agreed to settle, in installments, a part of the value of the shares lost by the investors.

However, in return, investors had to legally sign off all future rights on these transactions against the DP. Conciliation is often not a winning proposition. Arbitration, on the other hand, is a quasi-judicial mechanism where arbitrators decide on a case (like a judge or a bench) and pass an order which is called an arbitration award.

The beginning. If your dispute is with a NSE broker you file an arbitration application in the NSE, with the BSE for its brokers, with the NSDL for its DPs or with the CDSL for its DPs. All the cases have to be filed within 6 months of the dispute arising. For the BSE and the CDSL, arbitration hearings take place only in Mumbai. For the others, cases are heard in Delhi, Kolkata and Chennai too.

There is an arbitration fee that you have to pay at the time of application. The fee varies with the value of the disputed shares (See Table: Your Cost of Arbitration). There could be calls for additional fees during the arbitration proceedings, so this could turnout to be an expensive process.

Along with the application form you have to submit a statement of case that describes all relevant details of your claim and the relief sought. To back it, you have to provide copies of demat account state-ments or contract notes, client-broker or client-DP agreement, copies of delivery instruction form (if the case is against your DP) and if required, other relevant documents like bank account statements.

You don't have to worry if you don't have a crucial document like your demat account transaction statement or trades' contract note because your broker never gave it to you. The exchange, depository or even the arbitrator during the first hearing will direct the broker or DP to provide these.

But, says Ravi Narain, NSE's managing director: "You have to provide some modicum of evidence. For example, payment made to your broker by a cheque can be shown through your bank statement or delivery given to your broker can be verified through your DP's transaction statement."

Who are the arbitrators? Anyone with expertise in capital market, banking, finance or legal sectors is eligible to be an arbitrator. Sebi had passed a directive in 1993, which said that any broker who had membership of a shock exchange could not be an arbitrator. This lacuna was fixed in August 2003, when it amended the 1993 order to allow broker representation in an arbitration panel.

The NSE has over 20 arbitrators in its panel while the NSDL has about seven.

If your arbitration claim amount is less than Rs 25 lakh (Rs 2.5 million) on the NSE (Rs 10 lakh in case of the BSE), then a single arbitrator will decide your case. If arbitration claims are higher than this amount then a panel of three arbitrators will decide the case. For the NSDL, only one arbitrator decides the case irrespective of the claim amount.

You can select arbitrators from a list provided by the exchange or depository at the time of application. Your broker or DP also gets to choose the arbitrator similarly and, if the two choices are same then that arbitrator is selected. Otherwise, the exchange or depository will select the arbitrator based on its internal parameters.

Quality of arbitrators. Says NSE's Narain: "There are good and poor arbitrators. A good one will ask a lot of questions to get to the bottom of the matter, whereas a poor one will not." This is important since you might miss out on a crucial element in the depository or exchange rules and regulations, but if the arbitrator is alert then his probing will cover this.

Says C Kamdar, a chartered arbitrator from UK-based FCIArb, and who is on the arbitrators' panel of the NSE: "As an arbitrator I am required to be thorough on the rules and bylaws since I have to completely reason out why I am giving out the award and this may be 40-50 pages long."

In the end. When the hearings commence, you have a right to present your case to the arbitrator. Otherwise, you can get an advocate to present your case.

There is a three-month time limit for arbitration hearings on the NSE, four months on the BSE and the CDSL and six months on the NSDL. This can be extended with the permission of the arbitrator or exchange/depository officials.

But, says NSE's Narain, "being a facilitator to the arbitration process, we see to it that the arbitration cases are taken up and resolved reasonably quickly; we try very hard not to have a queue pile up and see that the cases do not go beyond 90 days."

You will be surprised to see the number of arbitration cases taking place on the stock exchanges (See Table: Arbitration Cases on NSE). The ruling in an arbitration award can be appealed in a court within three months of the award date. So you still have a final recourse if the decision goes against you. If it is in your favour and if your broker or DP does not file an appeal in a court, then it becomes a decree of court and is final.