Chapter 10: Code of Conduct and Investor Protection Measures (Part 2)
Learning Objectives
After studying this part of the chapter, you should:
- Understand the Investor Grievance Redressal Mechanism at the exchange level.
- Explore SEBI Complaints Redress System (SCORES) and the Online Dispute Resolution (ODR) framework.
- Clearly distinguish the Rights and Obligations of Trading Members and Clients.
- Master the Do's and Don'ts for Investors trading in the commodity derivatives market.
10.3 Investors Grievance Redressal Mechanism
The Investors Grievance Redressal Mechanism is a critical regulatory function under the SEBI (Stock Exchanges and Clearing Corporations) Regulations, 2012 (SECC). Maintaining an active, effective grievance system is also a mandatory, ongoing eligibility condition for a broker's membership on any exchange under the SEBI (Stock Brokers) Regulations, 1992.
Investors can lodge their complaints with the Investors Grievance Division (IGD) of the respective exchange. The exchange serves as a coordinating body to resolve disputes between the complainant and the trading member.
| Level | Authority / Platform | Process | Key Feature |
|---|---|---|---|
| 1️⃣ Member Level | 🏢 Member / Broker | Investor first lodges a direct complaint with the concerned member; the internal grievance/CRM team examines and addresses it. | First point of contact |
| 2️⃣ Exchange Level | 🏛️ Stock Exchange / IGD | If unresolved, the grievance may be taken up through the exchange's Investor Grievance Division (IGD), followed by applicable conciliation/arbitration mechanisms. | Exchange-level dispute resolution |
| 3️⃣ SEBI Level | 🛡️ SEBI – SCORES | Investor can escalate the grievance through SCORES, SEBI's web-based grievance redressal platform, subject to the applicable process and timelines. | Regulatory grievance mechanism |
A. Grievances Entertained by the Exchange
The Investors Grievance Division typically handles complaints against trading members involving:
- Document Discrepancies: Non-receipt of crucial documents such as the Member-Client Agreement (MCA), contract notes, quarterly/monthly statements of accounts, or order-trade logs.
- Margin Disputes: Non-refund of margin money or execution of trades without maintaining adequate upfront margins.
- Financial Delays: Delays in making payments or the complete non-receipt of payout funds.
- Unauthorised Squaring Off: Unilateral squaring up of positions without client consent, or failing to square up positions as requested, resulting in settlements at highly unfavourable Final Settlement Prices (FSP).
- Unauthorised Transactions: Trade executions conducted without the client's knowledge or consent.
- Execution Failures: Trades executed at prices that violate the client’s explicit telephone instructions, or general trading errors regarding order entry timing and missed price opportunities.
- Service and Operational Issues: Errors in online/offline transaction confirmations, statement summaries, or the calculation of realised/unrealised mark-to-market (MTM) gains/losses.
B. Guidelines for Filing Complaints
When investors encounter a dispute, they must follow SEBI's step-by-step guidelines:
- Primary Filing: Investors must first file their complaint directly with the concerned Exchange where the member is registered before escalating it to SEBI.
- Submission Format: The complaint must be submitted in writing (either in English, Hindi, or any regional language) and must be formally signed by the client.
- No Charge: The filing process is completely free; exchanges do not charge any fee to file a grievance.
- Exclusion of Frivolous Claims: Vague, anonymous, pseudonymous, or trivial (frivolous and vexatious) complaints are strictly rejected.
C. SEBI Complaints Redress System (SCORES)
If a client is unsatisfied with the exchange's resolution, they can escalate their grievance to SEBI's centralized portal, SCORES.
- Instant Tracking: SCORES is a web-based platform that instantly generates a unique complaint registration number for real-time tracking.
- Electronic Routing: The complaint is electronically forwarded to the concerned member or intermediary.
- Turnaround Time: The entity must upload an Action Taken Report (ATR) and completely resolve the complaint within 21 days of receiving the intimation from SEBI.
D. SMART ODR Portal (Online Dispute Resolution)
The SMART ODR Portal is a digital dispute resolution mechanism established by Market Infrastructure Institutions (MIIs) under SEBI’s guidance. It integrates with the SCORES portal to provide online conciliation and arbitration services.
Types of Grievances Handled by SMART ODR
The portal resolves disputes involving listed companies, stockbrokers, depository participants, and registrars, covering:
- Service-Related Complaints: Delays or non-receipt of account statements, execution issues, unauthorised account modifications, customer service failures, and technology-driven system downtimes/glitches.
- Trade Disputes: Discrepancies in order execution prices, alleged wrongful/unauthorised trades, and settlement delays.
- Fee Disputes: Overcharging of brokerage, misapplication of penalties, or charging hidden, unagreed fees.
- Product Misrepresentation: Providing misleading information about investment risks, benefits, or failing to adhere to contractual terms.
- DP and Registrar Issues: Transfer errors or registration discrepancies.
- Compliance & Ethical Violations: Regulatory standard breaches, breach of contract, insider trading allegations, and market manipulation.
SMART ODR Dispute Resolution Process
| Stage | Process | Timeframe / Trigger | Next Step |
|---|---|---|---|
| 1️⃣ | 📝 Direct Complaint to Member | Investor first approaches the concerned member/entity | If unresolved → SCORES Escalation |
| 2️⃣ | 📋 SCORES Escalation | Complaint is escalated through SCORES | If investor remains unsatisfied → MII Review |
| 3️⃣ | 🏛️ MII Review | Relevant Market Infrastructure Institution (MII) reviews the complaint | 21 days → Online Conciliation |
| 4️⃣ | 🤝 Online Conciliation | Parties attempt to resolve the dispute through online conciliation | 21 days → If unsuccessful, proceed to arbitration |
| 5️⃣ | ⚖️ Online Arbitration | Formal dispute resolution through the ODR mechanism | Arbitral resolution / award |
- Lodge Complaint: The investor first attempts direct redressal with the member. If unresolved, they escalate via SCORES. If still unsatisfied, they initiate dispute resolution on the ODR Portal.
- MII Review: The relevant MII reviews the complaint to attempt an amicable settlement. This review must be concluded within 21 calendar days.
- Conciliation: If unresolved, the ODR Institution appoints a neutral conciliator from its panel to assist the parties in reaching a consensual settlement within 21 calendar days.
- Online Arbitration: If conciliation fails, the dispute is escalated to online arbitration. An independent arbitrator (or panel) reviews the evidence and pronounces a binding arbitral award.
- Award Compliance: The defaulting member must make payments or perform the ordered obligations within 15 calendar days of the arbitral award's pronouncement.
- Challenging the Award: If a party intends to challenge the award under Section 34 of the Arbitration Act, they must submit their intention within 7 calendar days of receiving the award.
- Adherence on Stay Failure: If a legal stay order is not granted within 3 months of receiving the award, the member must fully comply with the arbitral award.
10.4 Rights and Obligations of Members and Clients
A. Major Duties and Obligations of Trading Members (Brokers)
Trading members must observe high ethical benchmarks as prescribed under Schedule II of the SEBI Regulations, 1992 and their client agreements:
- Integrity and Due Care: Act with due skill, promptness, care, and diligence across all business activities.
- Dealing Room Voice Recording: Members must maintain an active voice recording mechanism in their dealing rooms. All orders and trade-related conversations must be executed only through recorded telephone lines.
- Record Retention: Voice recordings must be preserved for the minimum period for which arbitration complaints are accepted. If a formal dispute is raised, the recordings must be kept until the final resolution of the dispute.
- Unbiased Research & Investment Advice: Brokers must not churn accounts to generate excessive brokerage. When offering investment advice, they must strictly comply with SEBI’s regulations for Investment Advisers (RIAs) and Research Analysts.
- No Asset Misuse: Clients' funds and commodities must never be used to fund the broker's proprietary trades or to meet the obligations of other clients.
- GST and Delivery Risk Warnings: Members must educate clients on delivery-related complexities, such as inter-state GST issues. If a buyer and seller are from different states and the buyer does not possess a GST Registration Number (GSTN) in the state where the delivery is offered, the buyer may face unexpected tax and administrative burdens.
- PMS Liabilities: Brokers are held legally liable for any financial losses suffered by a client due to the provision of unauthorised Portfolio Management Services (PMS), whether extended directly or indirectly (e.g., through an entity run by the broker's relatives over which they hold influence).
B. Legal Rights of Trading Members
To protect themselves against market and default risks, brokers hold several key rights:
- Information Demand: The right to demand necessary financial, identity, and beneficial ownership documents to comply with KYC and AML rules.
- Refusal to Deal: The right to refuse order execution or block fresh positions if the client has defaulted with another stockbroker, has outstanding margin shortfalls, or carries a high-risk default profile.
- Onboarding Refusal: The right to deny trading access if the client refuses to sign the mandatory Risk Disclosure Document (RDD).
- Lien on Commodities: The right to hold physical commodities purchased on behalf of a client to adjust against outstanding receivables or payment defaults.
- Default Buy-In & Square Off: In the event of a client’s delivery failure, the broker can purchase the required commodity from the client's account, square off their positions, and debit the client’s account for any losses, provided the client was separately intimated.
- No Unilateral Last-Day Square-Off: On the last trading day of a derivatives contract, the broker does not have a mandate to unilaterally square off a client's position without explicit instructions from the client. Clients cannot assume that a broker will automatically close out their open interest. The client is fully responsible for understanding the physical delivery, storage, and financing implications of letting a contract expire.
C. Rights and Obligations of Clients / Investors
| Client Category | Rights & Obligations |
|---|---|
| Obligations | 1. Promptly pay all agreed brokerages and required margins.2. Fulfill all financial payment obligations for purchases and delivery obligations for sales.3. Ensure sellers generate proper tax invoices inclusive of applicable GST.4. Provide verified and authentic personal details in the account opening form. |
| Rights | 1. Access to robust grievance cells at the member, exchange, and SEBI level (SCORES/SMART ODR).2. The right to register a complaint regarding service/operational issues even if no monetary compensation is sought.3. Receive timely contract notes, account ledgers, and daily margin statements. |
10.5 Additional Do's and Don'ts for Clients / Investors
To safeguard their investments, commodity derivatives investors must strictly follow these operational rules:
A. The "DOs" Checklist
- Verify Registrations: Execute transactions only through SEBI-registered stockbrokers and verify their credentials before onboarding.
- Understand Contract Terms: Familiarise yourself with the contract specifications, exchange bye-laws, and regulatory frameworks.
- Learn Devolvement and Pricing Mechanics: Ensure you fully understand the mechanics of options devolvement, spot price polling, margins, and physical delivery obligations.
- Analyze Before Trading: Take trading decisions based on objective fundamental/technical analysis rather than speculative tips.
- Secure Collateral Receipts: Demand and retain a formal, written acknowledgment of all cash and collateral securities deposited with your broker.
- Audit Correspondence: Regularly monitor all emails, SMS alerts, and contract notes sent by the broker or exchange, and raise immediate objections if any discrepancies are spotted.
B. The "DONTs" Checklist
- Never Share Credentials: Never share your online trading login IDs, passwords, or security PINs with anyone.
- Avoid Tips and Rumours: Do not make trading decisions based on market rumours, unsolicited investment tips, or misleading, high-return advertisements.
- Avoid Dabba Trading: Strictly avoid participating in Dabba Trading (unauthorised, parallel, offline trading outside the exchange), as it is highly illegal and carries no regulatory protection.
- No Cash Transactions: Never accept or pay cash for trading transactions; all fund transfers must route through bank accounts.
- Abstain from Market Abuse: Never engage in manipulative practices such as wash sales, reversal trades, or profit-transfer trades designed to evade taxes or manipulate prices.
- Avoid Delivery Defaults: Do not default on your delivery commitments, as delivery failures attract heavy penalties.
Key Terms & Exam-Relevant Concepts
- Investors Grievance Division (IGD): The dedicated cell at stock exchanges that handles primary member-client disputes.
- SCORES (SEBI Complaints Redress System): SEBI’s web-based grievance system that mandates a 21-day resolution timeframe for intermediaries.
- SMART ODR Portal: A unified, digital-first ODR platform developed by MIIs for online conciliation and arbitration.
- Arbitral Award Compliance: The requirement for stock market participants to execute arbitral awards within 15 calendar days.
- Section 34 of the Arbitration Act: The legal provision under which an arbitral award can be challenged within 7 days of receipt.
- Dealing Room Voice Recording: A mandatory broker requirement where all trade orders must be placed and recorded over secure phone lines.
- Unauthorised PMS Liabilities: Regulations holding brokers liable for client losses resulting from unauthorized portfolio management services.
- Dabba Trading: Unauthorised, illegal parallel trading conducted outside recognized stock exchanges.
Practice Questions
Question 1
Under the SMART ODR framework established by SEBI, what is the maximum timeframe permitted for the relevant Market Infrastructure Institution (MII) to conclude its initial review of an escalated complaint?
(a) 7 calendar days
(b) 10 calendar days
(c) 15 calendar days
(d) 21 calendar days
Answer: (d)
Question 2
When an arbitral award is pronounced through the Online Dispute Resolution (ODR) portal against a stockbroker, within how many days must the broker comply with the payment or performance obligations?
(a) 7 calendar days
(b) 15 calendar days
(c) 30 calendar days
(d) 90 calendar days
Answer: (b)
Question 3
Under SEBI rules, a registered stockbroker is required to record and maintain dealing room communications. What are the specific rules regarding the preservation of these voice recordings?
(a) They must be preserved for a flat period of 1 year, after which they can be permanently deleted.
(b) They must be maintained for the minimum period for which arbitration accepts complaints, or if a dispute is raised, until its final resolution.
(c) They must be deleted at the end of each financial year to protect client privacy.
(d) They only need to be preserved for high-risk accounts undergoing Enhanced Due Diligence.
Answer: (b)
Question 4
On the last trading day of a physically-settled commodity derivatives contract, what are the rights of a broker regarding squaring off a client's open position?
(a) The broker is legally obligated to automatically square off all retail positions to prevent delivery defaults.
(b) The broker cannot unilaterally square off the position unless they receive explicit instructions from the client.
(c) The broker can only square off the position if the client belongs to the High-Risk category.
(d) The broker must transfer the position to a nearby cash-settled contract.
Answer: (b)