Limitation period in SE disputes widens

The Securities and Exchange Board of India (SEBI) has issued directions to stock exchanges to amend their bye-laws to give discretion to the exchanges to extend the period of limitation for initiating claims under the arbitration mechanism of the exchanges, for a period of three months beyond the currently applicable limitation period of six months.

Under stock exchange bye-laws, any dispute relating to a transaction effected on the stock exchange is amenable to resolution by way of arbitration administered by the stock exchange. In terms of the bye-laws, a period of limitation for initiating a dispute is fixed at six months, as opposed to a period of three years under the general law of limitation applicable in India. In other words, once a dispute or difference of opinion arises between two brokers or between a broker and his client, a claim would have to be made within a period of six months of the disputed transactions being effected.

 

Limitation is a sacrosanct concept in law. Essentially, a period of limitation is the period within which one can assert a claim and exercise a right owed by another person. The law does not protect the indolent. It only protects one who is alert and conscious of one’s rights and exercises one’s rights in a timely manner.

It is important to ensure that parties to securities contracts do not rake up very old facts with which they have been at peace for a considerable period of time, and initiate disputes -- it is believed that a period of six months is adequate for such purpose.

Typically, the period of limitation would have to be computed from the point of time at which one discovers the alleged violation of contract. However, brokers are required in law to provide their clients with transaction statements for every transaction virtually immediately, and the clients are therefore put to notice of the transactions purported to have been effected by them. Therefore, a client having a cause of action to dispute a trade ought to be able to raise a dispute comfortably within six months.

SEBI has now directed that the six months ought to start from the end of the calendar quarter during which the disputed transactions occurred.

Moreover, SEBI has conferred discretion on the exchanges to permit an extension of unto three months beyond the six-month period, if the claimant provides sufficient documentary proof of reasons for the delay in initiating arbitration being outside the control of the party.

Therefore, if the dispute pertains to a transaction effected early in a calendar quarter, the standard limitation period available would be as long as nine months, in addition to which there a further three-month grace period for discretionary extension would take the effective length of limitation period to one year.

One often hears that arbitral tribunals under the stock exchange mechanism refuse to adjudicate disputes if the actual hearings do not commence within six months of the transactions.

This is a completely wrong approach. Limitation is a period within which a claim has to be made. Once a claim is made within the period of limitation, if parties engage in trying to resolve the dispute without having to commence hearings, the time spent on such conciliatory engagement ought to be wholly irrelevant for purposes of limitation.

While SEBI has clarified that the time taken for any dispute resolution effort should be excluded from the period of limitation, the real point that ought to be made is that a claim made within time would suffice to represent commencement of proceedings.

Besides, SEBI’s directive to exchanges seems to talk only about disputes between brokers and clients. There is no reason for such rationale to not be adopted for disputes amongst brokers and between brokers and sub-brokers.

(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own)

E-mail: somasekhar@jsalaw.com