Default settlement norms of exchanges lack clarity

There is a lot of confusion over the new criteria of stock exchanges with regard to the settlement of investor claims against defaulting brokers.

A public notice by the National Stock Exchange (NSE) on January 14, 2020, in the context of a defaulting broker, said there would be a cap or limit per member for settling claims from the investor protection fund (IPF). In a subsequent notice issued in February, the NSE did not mention any such criteria. While the January circular of the NSE said the deadline for filing claims had been set at three months, the February circular said claims would be accepted for six months.

Between November 2019 and February 2020, the exchange has issued a number of public notices with regard to brokers, including Allied Financial Services, Fairwealth, BMA and VRISE. Each of these notices has set different criteria, which did not find mention in the latest notice issued in February.

Time to file claims

Investors protesting against the lack of clarity told BusinessLine that if there is a cap per broker member in settling investor claims, it is restrictive. Also, the exchange said that claims against defaulters have to be filed within three months against two or three years earlier.

The NSE did not respond to e-mail queries, but a source close to the exchange said that the February circular, “which does not mention any cap per member”, should be considered reflective of NSE’s position on the subject.

The exchange committee will consider all the claims and has the right to make suggestions. The source added that ₹25 lakh was the maximum claim that an investor can get from the IPF.

“With regard to the deadline for filing of claims, there are plenty of SEBI circulars and none of them say it is unconditional. Even though the NSE has said that the deadline was six months for filing of claims, the exchange will accept claims beyond that time period if the investors can give adequate explanation for the delay in filing for claims. The NSE wants clients to act early infiling for claims as everybody would want their money as early as possible,” the source said.

₹25-lakh cap per investor

Since brokers are members of the exchange which is responsible for due diligence and regulations, investors are allowed to claim money from the IPF maintained by the particular exchange.

So far, there were no restrictions at the NSE on claims that can be made against a member who has been declared a defaulter. There was only a cap of ₹25 lakh per investor. The IPF corpus of both the NSE and the BSE has not grown above ₹2,000 crore in the past two decades since the contribution to this fund is very less, experts say.

Bhagirath Parsana, a Gujarat-based investor who has been protesting against the new criteria for IPF settlement, told BusinessLine that the public notices issued by the NSE between November 2019 and February 2020 are confusing and answers from the Securities and Exchange Board of India are not forthcoming.

“I, along with few investors, have been protesting at SEBI’s regional office in Ahmedabad and even NSE’s office to get answers with regard to how the norms were suddenly changed. We have sent e-ails to SEBI but there is no response. We have not got any clarity if we should believe the January circular or any other,” said Parsana, who spoke to BusinessLine over the phone.

No limit on claims

When contacted, the BSE said there is no cap per broker member on its platform. “The BSE has never had a cap or limit for settlement of claims from the IPF, per defaulter member. There is only a cap of ₹15 lakh per client of the defaulter member for compensation of eligible claims The time limit for filing claims was and continues to be three years per SEBI circular no. CIR/MRD/DP/ 28/2014 dated September 29, 2014.”

A Mumbai-based securities lawyer said: “Putting a cap per broker itself is like lowering compensation to investors. There is a dire need to substantially increase the exchange contribution towards the IPF as the net profit of the exchanges over the years is way beyond the total IPF corpus. Investors have little or no protection.”

However, JN Gupta, former ED, SEBI., said compensation should not be equated with insurance.

“First, it is not clear why there is a difference in public notices issued by the exchange. Still, there is a limit to investor protection that can be offered. Expecting 100 per cent of loss compensation is not possible, which is why there is ₹25 lakh limit per client. Similarly, the compensation amount payable for one defaulter is limited so that the entire fund is not used up for a single member default. But there is a need for SEBI to re-look into the rules,” said JN Gupta, former ED, SEBI.

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