ARBITRATION IN RECOGNISED STOCK EXCHANGES

[Mr. M. GOVINDARAJAN]

INTRODUCTION:

The recognized stock exchanges are allowed to frame their own bye-laws. Sec. 9 of Securities Contracts (Regulation) Act, 1956 provides that any recognized stock exchange may, subject to the previous approval of the Securities and Exchange Board of India ('SEBI' for short) make bye laws for the regulation and control of contracts. Sec.9 (2)(n) provides for making by law on the method and procedure for the settlement of claims or disputes including settlement by arbitration.

MASTER CIRCULAR:

SEBI has prepared master circular on allotment of codes to stock exchanges, subsidiary management by stock exchanges, governance of recognized stock exchanges and arbitration in recognized stock exchanges vide Circular No. MRD/DSA/10/2010, dated 06.04.2010. This master circular consolidates the circulars/directions issued by SEBI in this regard up to 31.03.2010 and shall come into force from the date of issue of circular i.e., 06.04.2010.

EXPEDITIOUS DISPOSAL:

The circular provides that the bye-laws of the stock exchanges relating to arbitration proceedings shall be in accordance with the Arbitration and Conciliation Act, 1996. The Circular instructed to incorporate the following in the bye laws of the stock exchange in order to ensure expeditious disposal of arbitration proceedings:

* Adjournment, if any, shall be granted by the arbitrator only in exceptional cases, for bona fide reasons to be recorded in writing;

* The arbitration(s) shall pass the arbitration award normally within 3 months from the date of entering upon the reference;

* The time taken to pass the award may be extended by the Chief Executive, not beyond three times, on an application by either of the parties or by the arbitrator, as the case may be. Notwithstanding the extensions granted in the above manner, the arbitrator shall pass the arbitration award within a period of six months from the date of entering into reference i.e., extension of time of award can be for a maximum period of three months;

* The arbitrator shall be deemed to have entered upon a reference on the date on which the arbitrator has held the first meeting.

SELECTION OF ARBITRATORS:

The stock exchanges have to adhere the guidelines for the selection of arbitrations which are as under:

* Person with background of law, finance, management, administration and experience in the areas related to securities market may be preferred over other candidates;

* Both educational qualification and experience should be considered as factors for selection;

* A declaration should be obtained by the Stock Exchanges from the Arbitrators along with bio-data regarding the following:

* Confirming that he/she was not involved in any act of fraud or dishonesty or moral turpitude or found guilty of any economic offence;

* Disclosing the names of his dependents that are associated with the securities market as Trading Member/sub-brokers or major investors;

* While considering re-nomination of arbitrators, the past experience with the arbitrator may be looked into, such as time taken for passing awards, quality of awards passed, complaints received, if any, against the arbitrators etc.,

CODE OF CONDUCT:

The Master circular gives the guidelines for fair practices/code of conduct for arbitrators to ensure that the arbitration matters at the stock exchanges are conducted in a fair, uniform and effective manner.

According to the guidelines, the arbitrators shall-

* act in a fair, unbiased and objective manner;

* maintain the highest standards of personal integrity, truthfulness, honesty and fortitude in discharge of his duties in order to inspire public confidence and shall not engage in acts discreditable to his respondents;

* avoid any interest or activity which is in conflict with the conduct of his duties as an arbitrator;

* perform his duties in an independent and objective manner and avoid activities that may impair, or may appear to impair, his independence or objectivity;

* disclose his interest or conflict etc., in a particular case i.e., whether any party to the proceeding had any dealings with or is related to the arbitrator;

* ensure that all the provisions of the Arbitration and Conciliation Act, 1996, SEBI Act, 1992, Securities Contracts (Regulation) Act,1956 and the Rules, Regulations and Bye-laws framed there under and the circulars, directions issued by the Government/SEBI in respect of arbitration and dealing in securities are followed;

* endeavor that the arbitral award is passed within the minimum period stipulated by the Bye-laws, Rules and Regulations of the Exchange;

* endeavor that adjournments, if any, are granted as an exception rather than a rule and after recording the reasons thereof in writing;

ensure that the awards are detailed and well reasoned;

ensure that the principles of natural justice are followed.

LIMITATION PERIOD FOR REFERENCE:

The Secondary Market Advisory Committee (SMAC) reviewed the existing provisions in the Exchange Byelaws, which specify a limitation period of six months for reference of a complaint/claim/differences/dispute for arbitration. While computing the said limitation period, the time taken in amicable settlement of claims, complaints, differences, disputes through the Investors Grievances Redressal Committee mechanism of the Exchange under its Rules, Bye-laws & Regulations is excluded.

Based on the recommendations of the committee, it has been decided that the limitation period of six months shall be computed from the end of the quarter during which the disputed transactions were executed. Along with the exclusion mentioned above and subject to sufficient documentary proof, the period of one month from the date of receipt of complaint/claim/difference/dispute by the trading member of the actual time taken by the trading member from the date of receipt of complaint/claim/difference/dispute by the trading member to the date of receipt of the trading member's last communication by the investor, to resolve/counter the complaint/claim/difference/dispute, whichever ends earlier, shall also be excluded.

Apart from the above, in certain instances it was observed by SEBI that the arbitration applications are being rejected on the grounds of having exceeded the limitation period, without going into the circumstances leading to the arbitration not being filed within the time stipulated. In such cases for reasons beyond the control of the party, rejection of the same is not in the interest of the investors. Therefore SEBI decided that the limitation period can be extended in certain cases for a further period of three months by the stock exchange. It is further decided that the stock exchange can decide on extending the limitation period for a period of three months, only after obtaining sufficient documentary proof in this regard and recording the reasons for the same in writing.  For this purpose the party shall provide to the stock exchange sufficient documentary proof for the delay in filing the arbitration case. On receipt of such request the stock exchange shall examine and if the reasons/documentary proof submitted for not filing the arbitration within the limitation period were indeed beyond the control of the party.

DEBITING THE AWARD AMOUNT:

Under the provisions of Arbitration and Conciliation Act, 1996 the award of the arbitrator shall be final, if appeal is not filed within the stipulated period and it can be executable as if it is a decree. SEBI goes one step further in implementation of the award of the arbitration. It requires that the Bye-laws, Rules and Regulations of the stock exchange shall be amended to provide that-

* the stock exchange shall on receipt of the arbitration award, debit the amount of the award from the security deposit or any other monies of the trading member, against whom an award has been passed and keep the amount in a separate account. A confirmation may be obtained from the concerned trading member that he has not filed any appeal within the stipulated time under Sec. 34 of the Arbitration and Conciliation Act, 1996 and only then the payment may be made to the awardee. If an appeal is filed and the same is pending in a Court of Law, the amount so kept in the separate account shall be paid to the awardee in accordance with the court orders;

* at the time of debiting the amount, the stock exchange may, if so desire inform the trading member that the exchange will not be liable for loss of interest, business etc., in case the award is modified by the Court. The exchange may also indicate that if any amount of interest is still payable to the awardee e.g., from the date of debiting the trading member's account till the date of payment of the award amount to the awardee, the same shall be recoverable from the concerned trading member and the stock exchange shall not be liable in this regard.

PRESERVATION OF ARBITRATION RECORDS:

* The preservation of arbitration records is as follows:

* The original arbitration award with acknowledgements shall be preserved permanently;

* Other records pertaining to arbitration shall be preserved for five years from the date of award, in case the appeal for setting aside the award is not filed till such time;

* In case, an appeal is filed, the records shall be preserved for five years from the date of final disposal by the Court;

* The destruction of records shall be subject to the previous order, in writing of the Chief Executive of the Exchange;

* The exchange shall maintain a register wherein the brief particulars of the records destroyed along with the certification regarding the date and mode of destruction.