Sebi asks exchanges to change norms on investor claims

Wants exchanges to compensate investors from investor protection fund even if trading members are expelled

The Securities and Exchange Board of India (Sebi) has asked stock exchanges to change their byelaws to ensure investors are compensated from their investor protection fund (IPF) if a trading member or broker is expelled.

The current laws only entertain claims in case of broker defaults.

The issue arose after the BSE exchange refused to pay money from its IPF to aggrieved investors after the expulsion of Delhi-based broker Kassa Finvest last year. Its byelaws, it told them, allowed IPF money to be utilised only if a broker had defaulted.

However, the National Stock Exchange (NSE) began paying claims due to investors from its IPF last year, said a source. BSE owed only a few crores to investors, as 70-80 per cent of transactions done by the broker were through NSE, added the person. As of April last year, investor claims against Kassa Finvest reportedly amounted to about Rs 150 crore.

BSE says it had disbursed Rs 29.7 lakh from the assets of Kassa available with the exchange to 16 clients. “According to our guidelines, NSE refunds to investors when a member defaults or is expelled,” said an NSE spokesperson.

An exchange may expel a trading member if guilty of contravention, non-compliance, disobedience, disregard or evasion of any byelaw, rules or regulations of the exchange. Default can occur for failure to fulfil obligations, pay dues/penalties or abide by arbitration proceedings.

A default generally precedes an expulsion, with the latter being a more drastic measure, as the entity cannot again become a member.

Kassa Finvest was first expelled by NSE in April last year. A month prior to this, Sebi had barred Kassa and its top executives from accessing the securities markets, for raising funds by illegally selling securities of its clients/investors and promising assured returns.

Under present laws, the maximum compensation limit per investor, if found due and payable out of an IPF, is Rs 15 lakh. Investors have to lodge claims against a defaulting or expelled trading member within three months of a public notice put out by the exchanges. After going through a process of arbitration, the claims are examined by the Defaulters Committee of the exchange. The committee then recommends the IPF trustees to release the relevant amount.

According to experts, exchanges need to be more transparent in dealing with claims. “Exchanges often reject claims on certain grounds even if these conditions are not spelt out in existing guidelines. For instance, an exchange might reject a claim if it feels the investor is a intra-day trader, rather than a long-term investor. Such conditions need to be made part of the byelaws,” said a securities lawyer on condition of anonymity.