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In the past few weeks, National Spot Exchange Ltd (NSEL) has been in the headlines for defaulting on payments to investors. Last week, it promised to make full payments to 608 small investors who were to receive up to Rs 2 lakh each, as of July 31. The exchange also said it would immediately pay half the dues to another 6,380 investors who were to receive Rs 2-10 lakh each. For the remaining dues, it would act according to the settlement plan.
About 13,000 investors have Rs 5,500 crore stuck in NSEL. The spot exchange has paid only Rs 100 crore, against its commitment of Rs 350 crore. Investors are concerned the funds might have been siphoned off.
The Saradha group, believed to have run a wide variety of collective investment schemes (CIS), collapsed earlier this year, causing huge losses to numerous depositors. Another such case last year was of emu farms in Tamil Nadu failing to make assured monthly payments, leaving investors in the lurch.
These are a few examples of cases in which small or individual investors' money is stuck. "General instances that could give rise to such disputes could include non-fulfilment of engagement or obligations or failure to pay any sum due to the clearing house or deliver any commodity or instrument on the due date," says Rakesh Nangia of Nangia & Company.
While authorities such as the Securities and Exchange Board of India (Sebi) and the Forward Markets Commission have, in many cases, come forward to facilitate quick payouts to investors, the battle for recovery is long.
R N Gupta, managing partner of S N Gupta & Company, says, "In most cases, filing a First Information Report (FIR) with the police is an effective way of getting the institution/company to the negotiation table. Next, investors can send a legal notice and take the matter to court through a civil case. If the company does not react to an FIR, they will definitely do so on getting a legal notice."
The battle to get back the money also depends on how one invests in a financial instrument or a company - directly through the company or through a broker.
Here are some options for investors:
Investor vs financial institution
You can invest in a financial instrument of insurance companies, mutual fund houses, banks or exchanges through the institution directly. In case something goes wrong---the company doesn't pay up, improper service or deduction of money in the garb of random charges for reasons unknown---you should first take up the matter with the institution. It is possible the company would provide a justification or resolve the problem.
If the problem remains unresolved, dispute resolution would depend on the contractual agreement between the financial institution and the investor, says Sajid Mohamed, partner at PDS & Associates. The redressal mechanism for disputes between two parties is stated in every company-client agreement, he adds.
Experts say many investment agreements have an arbitration clause for dispute resolution. Simply put, this is an out-of-court settlement route in which an arbitration tribunal with a third-party judge has to be formed; each party appoints an arbitrator to resolve the issue, under the Arbitration and Reconciliation Act, 1996.
Arbitrations can be either ad- hoc or institutional. In ad-hoc arbitration, the arbitrators are free to decide the procedure and administer the proceedings on their own. In institutional arbitration, an institution such as the Indian Council of Arbitration (ICA) or LCIA (India), administers the proceedings for a small fee and most procedural issues are provided for in their published rules. Institutional arbitrations have proven to be more efficient but unfortunately in India, institutionalised arbitration is uncommon due to the myth that it is costlier, says Naresh Thacker, partner at Economic Laws Practice (ELP).
If a contractual agreement does not mention arbitration, parties can agree to it post-dispute as well. However, it seldom happens. Therefore parties must provide for arbitration in their contracts in the widest possible terms, and possibly seek legal advice to ensure such clauses are effective, Thacker says.
While taking an institution to court, an investor has to decide which type of a case is to be filed. A civil suit can be filed only when money is to be recovered. In such cases, once the trial is over, the court awards an order that would have to be executed, even if it means liquidating the company's assets.
A criminal case is filed when there is breach of trust between the parties. To take this forward, the aggrieved party would have to file an FIR. For instance, in the NSEL case, if investors have transaction receipts from the exchange's godowns, they would be secure about their investment. Such investors might have only factored in losses by virtue of the underlying asset. In such a case, investors can take legal action against the exchange and its officials because the event of the exchange defaulting was unknown to them.
Investor vs broker/financial advisor
In this case, a contractual agreement is important for dispute resolution. As the investment is made through a broker, a dispute is mostly settled through a criminal suit filed in court for inducing to invest. However, this should be subject to brokers furnishing false information, either about investment returns or about the company. For instance, in the NSEL case, brokers could be pulled up for not informing investors of the non-availability of stock in warehouses.
Even without misrepresentation by the broker, you could take him to court for mediating a wrong investment. But in this case, the broker would not be responsible for your loss because he didn't underwrite the transaction, says Mohamed.
Legal experts say as many big brokerages combine a couple of instruments (across asset classes) to offer a diversified investment product for higher-than-normal returns, these brokers can be sued for criminal breach of trust. In the case of too many contracts, the complications would only increase, say experts. Sometimes, especially in the case of transactions on exchanges, brokers encourage investors to borrow and transact. In case of a dispute, the investor would have to go through the agreements with both the broker and the lender separately, before considering a resolution.
Investor vs CIS
Invested in a buffalo scheme that promised 100 per cent returns in two years? Well, you are not the only one. A recent Reserve Bank of India survey said most duped investors in the multi-crore emu contract farming scam in Tamil Nadu were literate, adding they had been lured by "greed". In such cases, a criminal case is the only option, as such companies indicate wrong returns to draw investors and don't come out clean on their backgrounds - this is criminal breach of trust. You should invest money only in registered firms, as there is no law to control unregistered firms.
Earlier, there was confusion about the regulator of collective investment schemes. Things, however, have changed recently after the Sebi was given powers to regulate these. There are a lot of fraudulent schemes but it is difficult to get back your money. As Gupta cautions, one can book companies for their wrongdoings. Investors might or might not be able to recover their money completely or even partially. The road to a complete recovery could be a long and difficult one.
WHAT ARE YOUR REDRESSAL OPTIONS ?
* Dispute resolution depends on the contractual agreement between the institution and the investors
* Many investment agreements have an arbitration clause, which is under the Arbitration and Reconciliation Act, 1996
* In India, institutionalised arbitration is rare; ad hoc one is common
* If a contractual agreement does not mention arbitration, one can take the institution to court
* To recover money a civil suit can be filed; a criminal case is filed for breach of trust
* When a broker is involved, a dispute is mostly settled through a criminal suit for misrepresentation of facts
* In case of a Collective Investment Scheme, one can only file a criminal case as it draws investors by luring them with unrealistic returns
* In most cases, filing an FIR is an effective way to get companies to the negotiation table
