[Tirth Purani is a commercial lawyer based in Mumbai]
Recently, the Bombay High Court delivered its verdict in ABB India Limited v. Sunil Hariram Jaisingh. The Court set aside an arbitral award passed under SEBI’s Online Dispute Resolution Framework (“ODR Framework”) concerning a share transfer dispute by describing it as an improperly adjudicated and unduly expedited process that violated the basic principles of natural justice.
This article argues that the shortcomings identified by the Bombay High Court are not mere procedural errors but reflect deeper flaws in the design of SEBI’s ODR Framework. While the framework prioritizes speed and accessibility, it may not be able to address complex securities disputes requiring an appropriate adjudication. Unless these flaws are addressed, the arbitral awards passed under the framework may not withstand judicial scrutiny. Drawing on a comparison with the United States’ dispute resolution mechanism, this article examines how SEBI can balance efficiency with procedural fairness.
Background of the ABB India case
The case arose out of a dispute between ABB India Limited (“ABB”) and Mr. Sunil Hariram Jaisingh, whose father held 175 shares of ABB. Post his father’s death, Mr. Jaisingh, through his lawyer, applied for transmission of these shares in his name, but ABB’s then Registrar and Transfer Agent (“RTA”), Tata Consultancy Services, returned the original share certificates and demanded probate of the will to effect the transmission. Subsequently, Mr. Jaisingh stated that the original share certificates were misplaced by his lawyer and were found in 2021. When Mr. Jaisingh approached ABB’s RTA, KFin Technologies, seeking transmission of the shares, he was informed that the shares had already been transferred pursuant to the issuance of duplicate share certificates and had subsequently been dematerialized.
Subsequently, multiple corporate actions, including ABB’s demerger converted the original 175 shares into 1550 ABB shares and 310 shares of Hitachi Energy. Facing the issue of non-transferability, Mr. Jaisingh filed multiple complaints with SEBI, to which ABB responded that such complaints were time-barred and that the circumstances surrounding duplicate share certificates and their transfer indicated clear fraud, although the identity of the persons responsible remained undetermined. As the abovementioned complaints were not resolved, Mr. Jaisingh invoked SEBI’s ODR Framework, under which an Arbitral Tribunal (“Tribunal”) ruled in Mr. Jaisingh’s favour, directing ABB to restore his shares or to provide compensation.
The award was challenged before the Bombay High Court, which criticized the Tribunal’s rigid approach to disposing of the case within the prescribed 60-day timeline. The Court further noted that the Tribunal concluded the proceedings without proper framing of issues, provided inadequate hearings, under-appreciated the evidence, and held that the award was patently illegal.
ODR Framework and its substantive gaps
SEBI introduced the ODR Framework to streamline and expedite the existing dispute resolution process. The framework provides online conciliation and arbitration for resolution of disputes in the securities market between: (1) investors / clients and listed companies (including their registrar and share transfer agents) or regulated entities; (2) institutional or corporate clients and regulated entities. For resolution, an investor must first raise the grievance directly with the concerned market participant, and if it remains unresolved, it may be escalated to SEBI’s SCORES portal. Where the grievance remains unresolved through the SCORES portal, it may be referred to the ODR portal for conciliation and, if necessary, arbitration. However, the complainant has the flexibility to directly refer the dispute to ODR before the above-mentioned escalation.
Further, the framework appears to have been introduced with an objective of providing investors a swift and technology-driven process of dispute resolution. As mandating a jurisdictional test in every case could delay proceedings and increase costs, a simplified process reduces procedural barriers for retail investors, who may otherwise find the dispute resolution process cumbersome.
One of the major concerns with the ODR Framework is its implicit assumption that every dispute brought through ODR is fit for resolution through conciliation and arbitration. Although it excludes those disputes that are sub judiceand non-arbitrable under Indian law, the framework fails to prescribe any benchmark to determine arbitrability or institutional suitability before the dispute proceeds through the ODR process.
The framework also assumes that the true nature of the dispute is determinable at the stage of filing a complaint. Securities disputes may sometimes be heterogeneous in nature encompassing procedural lapses as well as violations of law and may involve allegations of fraud, forgery, money laundering, and competing claims over securities. The Supreme Court in Vidya Drolia v. Durga Trading Corporation established that allegations of fraud are not, by themselves, sufficient to render a dispute non-arbitrable. The real concern, therefore, is not arbitrability but institutional suitability. Much like ABB India, there have been disputes which initially appeared routine and later unfolded into frauds. For instance, in an investigation by the Directorate of Enforcement into BRH Wealth Kreators Pvt. Ltd., an investor claimed that her shares had been wrongly transferred. The investigation found that the depository participant had misused the investor’s power of attorney to effect the transfer of her shares, constituting misconduct.
Further, the ODR framework prioritizes speedy dispute resolution to improve accessibility. A dispute raised on ODR has to mandatorily go for conciliation. The conciliator has to reach an amicable solution within 21 days with a maximum extension of an additional 10 days. If the dispute remains unresolved, the investor may opt for arbitration. Once opted for, the arbitral tribunal has to pass the award within 30 days from the date of appointment, having the liberty to extend such a period for an additional 30 days. The framework mandates conciliation irrespective of the nature of the dispute, without an alternative of dispensing conciliation where a settlement is unworkable. A complex dispute may require extensive fact-finding and examination of evidence, which can take considerable time. Mandatory conciliation may add a procedural layer, thereby increasing the cost and time without reaching a resolution. The adjudication may also suffer in order to complete the process in such a short period of time. Therefore, a prior determination of a dispute’s nature can clarify whether a dispute is unsuitable for conciliation and should proceeded directly to arbitration or be excluded from ODR altogether.
Furthermore, the framework mandates that all existing and future agreements entered into between the investors and the market participants shall stand amended or be deemed to incorporate the ODR Framework. Even though such a mandate intends to bring uniformity and accessibility by streamlining dispute resolution clauses in contractual arrangements, it diverts from the foundational principle of party autonomy in the arbitration process. The entire arbitration framework derives its legitimacy from the consensus of the parties to resolve the dispute through a private dispute resolution forum. By statutorily deeming an arbitration clause into every agreement, the framework shifts the pith of arbitration from consent to regulatory mandate. Therefore, a need arises to re-evaluate the approach of opting for procedural efficiency at the cost of altering the very basis upon which arbitration rests.
United States (US) Dispute Resolution Framework and Lessons for India
The shortcomings identified in the ODR framework become clearer when compared with the dispute resolution framework of the US’ Financial Industry Regulatory Authority (“FINRA”) which prescribes arbitration and mediation for resolving securities disputes. While both frameworks provide an alternative mechanism, they substantively differ in their regulatory design.
Firstly, under FINRA, arbitration is limited to disputes that fall within the clearly defined jurisdictional parameters. For instance, under rule 12204(a), class action suits cannot be arbitrated. However, India considers the nature of dispute, contractual arrangement and its effect on third parties to determine arbitrability. The lesson for SEBI is not to replicate FINRA’s exclusions, but to ensure that disputes referred to ODR are scrutinized for their arbitrability and, if arbitrable, for their procedural suitability under the ODR Framework.
Secondly, under FINRA, while adjudicating a dispute, the arbitrator has the liberty to refer the dispute to another regulatory authority, if the nature of the dispute makes it non-arbitrable. Further, it provides a flexible timeline since the arbitrators are vested with discretion to regulate the conduct of proceedings depending on the complexity of the dispute and party autonomy. It ensures effective adjudication by incorporating safeguards such as document discovery, witness examination and oral hearings wherever necessary. Therefore, SEBI should introduce procedural autonomy in the form of discretionary powers for arbitrators and flexible timelines for effective adjudication.
Finally, under FINRA, arbitration is not mandated on the parties and can be adopted if required by the agreement or requested by the parties or under other such prescribed conditions. In light of this, under the ODR framework, arbitration should not be mandated directly or indirectly.
Thus, the objective should be to adopt the underlying principles such as jurisdictional gatekeeping, case-to-case procedural assessment, flexibility, and adherence to party autonomy. Adopting these principles would enable SEBI to maintain accessibility and ensure that efficiency and procedural fairness need not be competing objectives while dealing with complex securities disputes.
Conclusion and Way Forward
The Bombay High Court’s decision in ABB India should not be viewed as a criticism but as an early indication of changes required for dispute resolution. The case highlights the importance of a suitability threshold and an effective and efficient adjudicatory process capable of accommodating complex securities disputes. By taking guidance from FINRA’s principles, SEBI should refine the framework to strengthen procedural fairness and institutional legitimacy.
– Tirth Purani