Investors’ rights, remedies and obligations

B Gopkumar

What can you do if there is an “unauthorised trading” done in your trading account? Or what can you do when your broker has cheated you?

Few months ago, a Mumbai-based investor Aditya Sharma (name changed) discovered that unauthorised transactions had led to a huge loss in his trading account and complained to the broking house about the same. But the broking house claimed he had authorised these transactions. Adamant, Aditya demanded proof and threatened to take these complaints with Securities and Exchange Board of India (SEBI) and the Stock Exchanges (National Stock Exchange of India (NSE) or Bombay Stock Exchange (BSE)).

That's when the broking house gave in and made good the loss he had incurred due to these unauthorised deals. Aditya won because the broker had no evidence to prove that the deals had been authorised.

However, not all investors are so lucky. Conversely, it is also true that all broking houses are also not always at fault, as at times, certain clients also either file frivolous claims or cause loss to the brokers and default in their payment obligations when they incur loss due to their own trading activity.

SCRA regulation

The Securities Contracts Regulation Act, 1956 (popularly known as SCRA), provides for resolution of disputes between brokers and clients through arbitration mechanism to be provided under the rules, bylaws and regulations of the stock exchanges, which are duly approved by SEBI/Central Government under the provisions of the said act.

Stock exchanges have appointed a panel of arbitrators who are independent persons and are generally professionally qualified persons such as chartered accountants, lawyers, retired high court judges, experts in capital markets, who adjudicate the disputes between brokers and clients. Hence, all disputes between brokers and clients are required to be adjudicated by the panel of arbitrators. The award passed by the arbitration tribunal is final and binding on the broker and client unless challenged in Appeal either in the Appellate Tribunal or Court of Law having jurisdiction.

Power of attorney issues

At the time of opening a trading account with a broker, as a norm, investors are given a lengthy application form and a voluminous agreement booklet with clauses. But very few investors have the patience to go through the fine print or the ability to decipher the legalese. Power of Attorney (PoA) is generally required to be given by a client to his depository participant which is most of the times his broker only to ensure smooth settlement of his trade obligations towards pay-in of securities on the exchange pursuant to the transactions executed by the client in his/her account. But the investor should ensure that no PoA should be given to the broker or any of its employee or agent which would entitle/authorise them to execute trades in the client’s accounts.

SEBI and stock exchanges have from time to time issued guidelines for PoA to intermediaries following large-scale complaints of misuse of PoAs. These new rules curtailed some of the actions that a broker could take on your behalf. Even so, a broker can transfer shares sold by you to the stock exchange, pledge stocks to meet your margin requirements, and apply for mutual funds, IPOs, rights, and offer of shares based on your specific  instructions.

The broker cannot execute trades without the client's consent. He also cannot transfer stocks for off-market trades or merge the balance from other accounts to nullify debit in any other trading account.

Where can one file a complaint?

The National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) have an Investor Service Centre that allows an investor to register complaints against trading members and companies listed on the exchange which can also be filed online by way of e-complaints. The complaints taken up by the Investor Services Cell of the exchange include disputes between the brokers and clients related to the trading account for doing trades on the exchange platform or anything incidental or ancillary thereto. Savvy investors should make good use of SEBI and its website. The market regulator has initiated a centralised online system for lodging and tracking complaints.

SEBI on its website provides a system called SCORES system on which you can file your complaints/grievances against your stock broker, which is a mechanism to resolve complaints in an easy way. It gives you the option to avoid the paper route complain directly to the brokerage or investment advisory firm in writing and keep a copy for your own records.

The author is CEO — Broking and Distribution Business, Reliance Capital. The views expressed in this article are his own