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Code of Conduct and Investor Protection Measures

Code of Conduct and Investor Protection Measures

Code of Conduct and Investor Protection Measures (Part 1)

  • Code of Conduct for Brokers: The SEBI (Stock Brokers) Regulations, 1992 prescribe a code of conduct for securities brokers, which includes:
    • Maintaining high standards of integrity, promptitude, and fairness in business conduct
    • Acting with due skill, care, and diligence in all business activities
    • Avoiding manipulative, fraudulent, or deceptive transactions or schemes
    • Complying with statutory requirements and regulations
  • Duty towards Investors: Stock-brokers have a duty to:
    • Faithfully execute orders for buying and selling securities at the best available market price
    • Inform clients about the execution or non-execution of orders and make timely payments
    • Issue contract notes for all transactions in the specified format
    • Maintain confidentiality of client information and not disclose or misuse it
    • Not encourage sales or purchases of securities solely to generate brokerage or commission
  • Duty towards Other Stock-Brokers: Stock-brokers have a duty to:
    • Cooperate with other stock-brokers in comparing unmatched transactions and resolving disputes
    • Extend fullest cooperation to other stock-brokers in protecting client interests
    • Carry out transactions with other stock-brokers and comply with settlement obligations
    • Not advertise their business without permission from the stock exchange
  • Investor Grievance Redressal Mechanism: A mechanism is in place to address investor grievances, which includes:
    • Investor Grievance Handling at the Trading Member Level: Trading firms have a designated cell/person to redress investor grievances, and investors can approach them first
    • Investor Grievance Handling at the SEBI and Stock Exchanges: If the investor is unsatisfied with the redressal process at the trading member level, they can take their grievance to the stock exchange or SEBI
    • SEBI Complaints Redressal System (SCORES): A web-based centralized system to capture investor complaints against listed companies and registered intermediaries, allowing online tracking of complaint status
  • Key Concepts:
    • SCORES: A web-based system for investor complaints, providing a centralized database, online movement of complaints, and online tracking of status
    • Investor Charter: A document detailing services provided to investors, rights of investors, and grievance redressal mechanisms, which stock brokers are required to display on their websites and provide to clients
    • Risk Disclosure: Stock brokers are required to disclose risks associated with investments to their clients
    • KYC (Know Your Client): A process for stock brokers to verify the identity and suitability of their clients

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Code of Conduct and Investor Protection Measures

  • Definition: The Code of Conduct and Investor Protection Measures are guidelines set by SEBI to protect the interests of investors in the securities market.
  • Details: These measures include the establishment of Investor Service Centres (ISCs) by stock exchanges, the introduction of the SEBI Complaint Redressal System (SCORES), and the provision of a grievance redressal mechanism.

Investor Complaint Redressal Mechanism

  • SCORES: The SEBI Complaint Redressal System (SCORES) is an online platform for investors to lodge complaints against listed companies or registered intermediaries.
  • Key Features:
    • Complaints can be lodged within one year from the date of the cause of the complaint.
    • The complaint will be automatically forwarded to the concerned entity for resolution.
    • The entity must resolve the complaint within 21 calendar days and upload the Action Taken Report (ATR) on SCORES.
    • The complainant can request a review of the resolution provided by the entity within 15 calendar days.
    • The Designated Body (e.g., stock exchange) may seek clarification on the ATR submitted by the entity.

Revised Framework for Redressal of Investor Grievances

  • SEBI Circular: SEBI vide circular SEBI/HO/OIAE/IGRD/CIR/P/2023/156 dated September 20, 2023, provided a revised framework for the redressal of investor grievances through SCORES.
  • Key Features:
    • The complaint will be automatically forwarded to the concerned entity for resolution.
    • The entity must resolve the complaint within 21 calendar days and upload the ATR on SCORES.
    • The complainant can request a review of the resolution provided by the entity within 15 calendar days.
    • The Designated Body may seek clarification on the ATR submitted by the entity.

SCORES 2.0

  • Launch: SEBI launched the new version of the SEBI Complaint Redressal System (SCORES 2.0) w.e.f. April 01, 2024.
  • Key Features:
    • Reduced and uniform timelines for redressal of investor complaints across the securities market (21 calendar days).
    • Introduction of auto-routing of complaints to the concerned regulated entity.
    • Monitoring of the timely redressal of investors' complaints by the Designated Bodies.
    • Providing two levels of review: first review by the Designated Body and second review by SEBI.

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Investor Service Centres (ISCs)

  • Establishment: SEBI advised all stock exchanges to open or maintain at least one Investor Service Centre (ISC) for the benefit of investors.
  • Key Features:
    • Providing counseling services and basic minimum facilities to investors.
    • Having a dedicated desktop or laptop with internet connectivity to access relevant information.
    • Facilities for receiving investor complaints in both physical and electronic form.
    • Facilitation desks to assist investors in the dispute resolution process.

Online Dispute Resolution (ODR) Platform

  • Introduction: SEBI introduced the Online Dispute Resolution (ODR) platform to streamline the dispute resolution mechanism in the Indian securities market.
  • Key Features:
    • Expansion of the scope of Market Infrastructure Institutions (MIIs) to establish a common online dispute resolution platform.
    • The platform will provide a efficient and transparent mechanism for resolving disputes between investors and intermediaries.

Code of Conduct and Investor Protection Measures (Part 3)

  • Definition: The Online Dispute Resolution (ODR) Portal is an online platform that facilitates the resolution of disputes between investors/clients and listed companies or specified intermediaries/regulated entities in the Indian securities market.
  • Details: The ODR Portal uses online conciliation and/or online arbitration to resolve disputes in a timely and efficient manner.

Key Concepts

  • Dispute Resolution: Disputes between investors/clients and listed companies or specified intermediaries/regulated entities can be resolved through the ODR Portal.
  • Eligibility: Disputes between institutional or corporate clients and specified intermediaries/regulated entities can be resolved through the ODR Portal or through independent institutional mediation, conciliation, and/or online arbitration.
  • Empanelment of ODR Institutions: Market Infrastructure Institutions (MIIs) shall empanel one or more ODR Institutions as service providers and enter into relevant agreements with them.
  • Common Online Dispute Resolution Portal: MIIs shall establish and operate a common ODR Portal to resolve disputes between investors/clients and listed companies or specified intermediaries/regulated entities.

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ODR Portal Features

  • Enrolment: All market participants shall enroll on the ODR Portal within the specified timelines.
  • Complaint Filing: Investors/clients can file complaints on the ODR Portal, which will be reviewed by the relevant MII.
  • Conciliation: The ODR Institution shall appoint a sole independent and neutral conciliator to facilitate a consensual resolution.
  • Arbitration: If conciliation is unsuccessful, the dispute can be referred to online arbitration, which will be administered by the ODR Institution.

Important Terms

  • ODR Institution: An independent institution that provides online conciliation and/or online arbitration services.
  • MII: Market Infrastructure Institution, which includes stock exchanges, clearing corporations, and depositories.
  • SEBI: Securities and Exchange Board of India, the regulator of the Indian securities market.
  • SCORES: SEBI Complaints Redress System, a portal for lodging complaints against market intermediaries.

Code of Conduct and Investor Protection Measures (Part 4)

  • Investor Protection: The Stock Exchange may impose consequences on Market Participants who fail to comply with investor protection measures.
  • Deposit Release: The MII may release a deposit of up to Rs 5,00,000 to an investor/client, subject to an undertaking/indemnity/security to ensure return of the amount if the challenge is decided against the investor/client.

Key Concepts

  • Fees and Charges: The costs of the dispute resolution mechanism on the ODR Portal will be borne by the Market Participant, with no fees for registration of a complaint/dispute.
  • Conciliation Process: Fees for conciliation process will be Rs 4800 for successful conciliation and Rs 3240 for unsuccessful conciliation, with an additional ODR Institution’s fee of Rs 600.
  • Arbitration: Arbitration is a quasi-judicial process, with fees ranging from Rs 0 to above Rs 1 Crore, depending on the claim amount.

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Arbitration Process

  • Arbitrator Appointment: The ODR Institution shall appoint a sole independent and neutral arbitrator within 5 calendar days of reference and receipt of fees.
  • Arbitral Award: The Sole Arbitrator or Arbitral Tribunal shall pass the arbitral award within 30 calendar days of appointment, with the possibility of extension up to a further period of 30 calendar days.
  • Challenge to Arbitral Award: The party against whom the order has been passed must submit its intention to challenge the award within 7 calendar days, with a deposit of 100% of the amounts payable in terms of the arbitral award.

Form of Proceedings

  • Online Mode: The ODR Institutions shall conduct conciliation and arbitration in the online mode, enabling online/audio-video participation by the investor/client, the Market Participant, and the conciliator or the arbitrator.
  • Venue and Seat: The venue and seat of the online proceedings shall be deemed to be the place where the investor resides permanently or where the investor is registered in India.

Code of Conduct and Investor Protection Measures (Part 5)

  • Arbitrator's Fee: The fee for arbitrators is as follows:
    • ₹4,800 to ₹6,000 for claims up to ₹50,000
    • ₹8,000 to ₹10,000 for claims between ₹50,001 and ₹1,00,000
    • ₹12,000 to ₹15,000 for claims between ₹1,00,001 and ₹2,00,000
    • ₹16,000 to ₹20,000 for claims between ₹2,00,001 and ₹5,00,000
    • ₹60,000 to ₹1,20,000 for claims above ₹5,00,000
  • ODR Institution's Fees: In addition to the arbitrator's fees, the ODR institution's fees are as follows:
    • ₹600 to ₹1,000 for claims up to ₹50,000
    • ₹1,000 to ₹1,500 for claims between ₹50,001 and ₹1,00,000
    • ₹1,500 to ₹2,000 for claims between ₹1,00,001 and ₹2,00,000
    • ₹2,000 to ₹2,500 for claims between ₹2,00,001 and ₹5,00,000
    • ₹7,500 to ₹15,000 for claims above ₹5,00,000
  • Applicable GST, Stamp Duty, etc.: Applicable GST, stamp duty, and other charges will be added to the above fees.
  • Late Fees: Late fees will be charged for arbitration initiated after one month of failure of conciliation, with the fees payable being double the non-refundable fees specified in the table above.
  • Responsibilities of Market Participants: Market participants are required to:
    • Incorporate provisions for online conciliation and arbitration in their agreements with investors/clients
    • Attend to all complaints or disputes raised by investors/clients promptly
    • Train their staff in attending to complaints/disputes and handling references from the SCOREs portal or the ODR Portal
    • Cooperate and coordinate with MIIs and ODR institutions
  • Investor Protection Fund (IPF): The IPF is a fund established and maintained by stock exchanges to protect the interests of clients of defaulting trading members.
    • Contributions to IPF: Stock exchanges are required to make contributions to the IPF, including 1% of listing fees, interest earned on security deposits, and penalties collected from trading members.
    • Utilization of IPF: The IPF will be utilized to meet legitimate investment claims of clients of defaulting trading members and to pay interim relief to investors.
    • Review of IPF Corpus: Stock exchanges will conduct half-yearly reviews to ascertain the adequacy of the IPF corpus and enhance it if necessary.
  • Execution of Power of Attorney (PoA): SEBI has issued guidelines for the execution of PoA by clients in favor of stock brokers and depository participants.
    • Standardization of PoA: The guidelines aim to standardize the norms for obtaining PoA from clients and ensure that clients are aware of the terms and conditions of the PoA.

Code of Conduct and Investor Protection Measures (Part 6)

  • Power of Attorney (PoA): PoA is optional and should not be insisted upon by the stock broker for opening a client account. It can be utilized for specific purposes such as transfer of securities, pledging/re-pledging of securities, and limited purposes like applying for mutual funds or public issues.
  • Demat Debit and Pledge Instruction (DDPI): DDPI is a separate document that authorizes the stock broker to access the client's BO account for meeting pay-in obligations for settlement of trades. It serves the same purpose as PoA but mitigates its misuse.
  • Risk Disclosure to Client and KYC: The client onboarding process involves filling up the Know Your Client (KYC) form, providing documents like PAN, proof of address, and bank account details, and obtaining the client's express consent for online KYC.
  • KYC Norms: SEBI has prescribed KYC norms for financial institutions and intermediaries, including verification of identity, address, financial status, and occupation. The KYC process requires collecting and verifying Proof of Identity (PoI) and Proof of Address (PoA) from the investor.
  • Unique Client Code (UCC): UCC is a unique identity assigned to each client by the broker, which is mapped with the client's PAN number. It is mandatory for brokers to use UCC for all clients while entering orders on their behalf.
  • Client Categorization: SEBI has advised members to categorize clients as Low Risk, Medium Risk, and High Risk based on due diligence or KYC documents. This helps in effective monitoring and due diligence to prevent illegal transactions.
  • Anti-Money Laundering (AML): KYC and Customer Due Diligence (CDD) policies are the foundation of an effective AML process. SEBI has issued circulars and guidelines on AML, including the use of technology innovations for online KYC.

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Code of Conduct and Investor Protection Measures (Part 7)

  • Client Information: Stock Brokers shall ensure that separate mobile number/E-mail address is uploaded for each client. However, under exceptional circumstances, the stock broker may upload the same mobile number/E-mail address for more than one client belonging to the same family or authorized person of an HUF, Corporate, Partnership, or Trust.
  • KYC Registration Agency (KRA) Regulations:
    • All members must be registered with a KRA registered by SEBI.
    • KYC for New Clients: The member must perform initial due diligence, upload KYC information, and furnish scanned images of KYC documents to the KRA.
    • KYC for Existing Clients: The member must upload KYC information with proper authentication on the KRA system and retain physical KYC documents.
  • Digital KYC for Persons with Disabilities: Intermediaries must ensure that the digital KYC process is accessible to persons with disabilities, allowing for account opening with a guardian's signature and eKYC with alternate parameters.
  • Trading Preferences by Clients: Stock brokers must register new clients on all active stock exchanges and offer existing clients access to all active stock exchanges for segments already opted for.
  • Risk Disclosure:
    • Risk Disclosure Document: The member must ensure that the client signs a Risk Disclosure Document before onboarding, which specifies key risks in derivatives trading.
    • Risks in Derivatives Trading: Price fluctuation, macroeconomic scenarios, liquidity risk, basis risk, and broker's credit risk are some of the key risks involved.
  • Risks in Exchange Traded Interest Rate Derivatives (ETIRD) Markets:
    • Market Risk: The risk of losses due to adverse movement of interest rates or prices of interest rate instruments.
    • Liquidity Risk: The risk of lower liquidity in some derivatives contracts, resulting in partial or non-execution of client orders.
    • Leverage Risk: The risk of significant losses due to the small margin required for ETIRD transactions.
    • Execution Risk: The risk that buy or sell orders may not be executed at the desired price due to high price volatility.
    • Basis Risk: The potential risk that arises from mismatches in a hedged position, resulting in residual risk.
  • Suspicious Transaction Reporting (STR) to Financial Intelligence Unit (FIU):
    • Monitoring Transactions: Intermediaries must monitor client transactions to identify suspicious trades, such as reversal trades or profit transfer trades.
    • Reporting to FIU: Brokers must report suspicious transactions to FIU through an online mechanism, without informing the client.

Code of Conduct and Investor Protection Measures

  • Suspicious Transaction Reporting: The Principal Officer must record reasons for treating any transaction or series of transactions as suspicious within 7 days of arriving at a conclusion. The Non-Profit Organization Transaction Reports (NTRs) must be submitted to FIU-IND by the 15th of the succeeding month.
  • Voluntary Freezing/Blocking of Trading Accounts: To enhance ease of doing business and investment, the framework for Trading Members to provide the facility of voluntary freezing/blocking of online access to trading accounts will be laid down by the ISF, in consultation with SEBI. This framework will contain guidelines on:
    • Detailed Policy: Including modes for clients to request blocking, acknowledgement, and time period for processing the request.
    • Action by Trading Member: Process for re-enabling clients for trading/transfers and intimation to clients about the facility.
  • Investor Protection: Investors can have grievances against brokers, intermediaries, and companies. The Investor Protection Fund is created to take care of legitimate investment claims of clients of defaulting members.
  • Arbitration: Is a quasi-judicial process.
  • Power of Attorney: Execution of Power of Attorney by the client in favor of the stock broker is optional.
  • KYC Information: Must be uploaded by the broker in the KRA (KYC Registration Agency) system subsequent to KYC.
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