Part 7: NISM Series VII SORM - Investor Grievances, Arbitration, and Other Broker Services

NISM Series VII SORM – Chapter 7: Investor Grievances, Arbitration, and Other Broker Services

This is the final chapter of the NISM Series VII Securities Operations and Risk Management (SORM) short notes. Chapter 7 covers investor grievance handling, SEBI's SCORES system, arbitration at stock exchanges, the Investor Protection Fund, and the wide range of additional services offered by brokers (IPO, Mutual Funds, PMS, Depository Services, and Margin Trading).

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Investor Grievances – How Are They Handled?

When an investor has a grievance related to securities market transactions, the resolution follows a three-tier hierarchy:

Tier 1: Trading Member (Broker Level)

The investor must first approach the concerned intermediary/trading member directly. SEBI mandates that stock brokers prominently display at their offices and websites the contact details of:

Compliance Officer of the stock broker
Depository Participant (DP)
CEO / Partner / Proprietor

Tier 2: Stock Exchange

If the investor is unsatisfied with the broker's resolution, they can escalate their complaint to the stock exchange of which the broker is a member. The exchange independently takes up the grievance and advises the trading member to redress it.

Tier 3: SEBI

If still unresolved after approaching the exchange, the investor can file their grievance with SEBI directly.

SEBI Complaints Redressal System (SCORES)

SCORES (SEBI Complaints Redressal System) is SEBI's web-based platform for handling investor complaints against listed companies and registered intermediaries.

Key Features of SCORES

Available 24x7 online
Investors can lodge complaints and track their status online
An email acknowledgement is sent automatically when a complaint is lodged
Market intermediaries and listed companies can receive and respond to complaints electronically
Investors can track their complaint using the unique complaint registration number
Every complaint has a complete audit trail and is stored in a central database
When a complaint is successfully resolved, the entity is advised to send a reply to the complainant

Investor Protection Fund (IPF)

The Central Government has directed stock exchanges to set up an Investor Protection Fund (IPF) — also called Customer Protection Fund (CPF). Key facts:

Purpose: To protect the interests of investors whose trading members have been declared defaulters or expelled
Covers legitimate, non-speculative investment claims against defaulting members
Administered through a Trust created by the exchange for this purpose

Arbitration at Stock Exchanges

Arbitration is a quasi-judicial, alternative dispute resolution (ADR) mechanism prescribed under the Arbitration and Conciliation Act, 1996. It aims at quicker legal resolution of disputes between investors and trading members.

When Is Arbitration Used?

Either party may choose arbitration when they are unsatisfied with the complaint resolution process at the trading member level, or at the Exchange's Investor Services Cell (ISC) or Investor Grievances Redressal Committee (IGRC).

Arbitration Timeline

The arbitration reference must be concluded with an arbitral award within 4 months from the date of appointment of the arbitrator(s)
The MD/ED of the stock exchange may extend this period by a maximum of 2 more months on a case-by-case basis, with recorded reasons

Appellate Arbitration

A party aggrieved by an arbitral award may appeal to the Appellate Panel of Arbitrators of the exchange
The appeal must be filed within 1 month from the date of receipt of the arbitral award
The appellate panel consists of 3 arbitrators — different from those who passed the original award
The stock exchange must complete the appointment of the appellate panel within 30 days from receiving the application for appellate arbitration

Other Services Provided by Brokers

Modern stock brokers have evolved into comprehensive financial services companies. They offer a wide range of services beyond basic equity trading:

Standard Services Offered at a Stock Broker's Outlet

Investment advice, research reports, and market reviews
Depository (demat) services
Direct Market Access (DMA)
Mobile trading and Smart Order Routing (SOR)
Algorithmic trading
IPO and Mutual Fund distribution
Internet-based Online Trading (IBT)
Margin funding

IPO Applications and ASBA

An IPO (Initial Public Offering) is the process by which a company offers its shares to the public for the first time.

SEBI introduced ASBA (Application Supported by Blocked Amount) as an alternative payment mode for IPO applications:

The application money remains in the investor's bank account (blocked, not debited) until the basis of allotment is finalised
The amount is only debited from the account when shares are actually allotted
This protects investors from losing interest on unallotted application money

Brokers' back office systems must efficiently handle large volumes of IPO data and facilitate the entire IPO process for clients.

Trading of Mutual Fund Units

Brokers can facilitate mutual fund investments for clients — either online or by phone. Key rules:

Trading members must hold an AMFI Registration Number (ARN) and have passed the relevant NISM certification exam
They must be registered as a distributor with each mutual fund company they wish to facilitate
Mutual fund distributors registered with AMFI and permitted by the stock exchange can also participate
Eligible members can place orders only for mutual fund companies where they are registered as distributors

Portfolio Management Services (PMS)

Many stock brokers offer Portfolio Management Services (PMS) to their clients.

A separate PMS licence must be obtained from SEBI
PMS is typically offered to High Net Worth Individuals (HNIs)
The portfolio manager makes investment decisions on behalf of the client and manages their portfolio
The manager decides the mix of securities in which the investor's funds are deployed
Brokers also offer advisory services for clients who prefer to make their own investment decisions

Research Reports

Brokers publish regular research reports to help investors make informed decisions. Types of research reports include:

Fundamental Research
Stock Research (buy/sell/hold recommendations)
Daily / weekly / fortnightly / monthly newsletters
Special Reports (for specific investor segments)
Sector Reports

Depository Services Offered by Brokers

Brokers can also provide depository (demat) services to investors. To offer these services, the broker/trading member must:

Register as a Depository Participant (DP) under the SEBI Act 1992 and Depositories Act 1996
Under the Depositories Act 1996, a DP is described as an agent of the depository
Eligibility criteria to become a DP are prescribed by the SEBI (Depository & Participants) Regulations, 1996 and the depositories' bye-laws

Margin Trading

Margin Trading means trading with borrowed funds or securities. It is a leveraging mechanism that allows investors to take positions larger than what their own capital would normally permit.

Key Rules for Margin Trading

Only corporate brokers with a minimum net worth of ₹3 crore are eligible to provide margin trading facilities
The broker and client must enter into a written Margin Trading Agreement in the SEBI-prescribed format before availing this facility
SEBI prescribes eligibility conditions and procedural details for margin trading from time to time

Internet Based Trading (IBT) and Securities Trading Using Wireless Technology (StWT)

Investors can place orders through:

IBT (Internet Based Trading): Orders placed via an internet trading terminal go through automated risk management validations before being sent to the exchange
StWT (Securities Trading Using Wireless Technology): Orders placed via mobile phones

Once an order is accepted or a trade is executed, the investor receives an instant notification on their IBT terminal.

Quick Revision – Key Points for NISM VII Chapter 7

Investor grievance hierarchy: Broker → Stock Exchange → SEBI
SCORES is available 24x7 and generates an email acknowledgement when a complaint is lodged
IPF protects investors against defaulting or expelled trading members
Arbitration award must be issued within 4 months; extendable by 2 more months
Appellate arbitration appeal must be filed within 1 month of receiving the award
Appellate panel = 3 arbitrators (different from original panel); appointment within 30 days
ASBA: Application money stays in investor's bank account until allotment is finalised
For mutual fund trading: ARN registration + NISM certification + distributor registration mandatory
PMS requires a separate SEBI licence; primarily for HNIs
Margin trading: Only corporate brokers with net worth ≥ ₹3 crore are eligible

NISM Series VII SORM – Complete Chapter Summary

Chapter	Topic	Key Exam Focus
1	Introduction to the Securities Market	Market types, product types, derivatives, SGB tenor, IDR
2	Market Participants	MIIs, PCM/TCM, custodians, SEBI regulations, regulators
3	Securities Broking Operations	Trade life cycle, order types, KYC/UCC, brokerage rules, accounting
4	Risk Management	VaR, SPAN, BMC, risk reduction mode, cross margining, CSGF
5	Clearing Process	Novation, multilateral netting, clearing banks, DPs
6	Settlement Process	T+2, MTM settlement, auction, close out, corporate actions in F&O
7	Investor Grievances and Other Services	SCORES, IPF, arbitration timelines, ASBA, PMS, margin trading

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