NSE Cites SEBI Notification To Quash Anugrah Investors’ Plaints. What Does the Notification Say on Defaulters?
Several investors of Anugrah Stock & Broking Pvt Ltd are finding their arbitration complaints getting rejected by the National Stock Exchange (NSE). The reason? Many of the complaints are being quashed citing a notification issued on 1 July 2020 by the Securities and Exchange Board of India (SEBI). NSE is rejecting investor complaints stating that once the member is disabled or issued a show-cause notice (SCN) declaring a trading member (TM) or a clearing member (CM) a defaulter no further investor grievance redressal committee (IGRC) or arbitration meetings can be conducted.
In its reply to Anugrah investors, NSE says, “As the member has been disabled in all segments of the exchange vide Circular No.NSE/COMP/45536 dated 1 September 2020 and Circular No. NSE/COMP/45591 dated 4 September 2020, we are unable to take any arbitration application.”
However, during a webinar arranged by Moneylife Foundation on Wednesday evening, senior officials from NSE clarified that investors of Anugrah can continue to file their complaints with the Exchange. Nisha Subhash, head of NSE Investor Services say the Exchange is ready to share trading data with the investors, provided they can send an email to the NSE investor services cell (NISE).
The NSE team, including Ms Subhash, says that the Exchange will assess the assets of the defaulting broker and will settle claims of investors from the proceeds. Usually small amount claims are settled first. If there is not enough money to pay investors, then they can file claims to Investor Protection Fund (IPF).
For claiming investment from the IPF, the NSE officials say that they will send intimation and then investors need to file claim with the IPF. (For more details, investors can download Investor's guide to making a complaint form NSE website. Here is the link https://archives.nseindia.com/invest/resources/download/Investor_guide_complaint.pdf
Coming back to the SEBI notification which specifies a standard operating procedure (SOP) for defaults by a TM or a CM. Since NSE is rejecting investor complaints for arbitration, let us see what exactly does the SEBI notification say.
On 1 July 2020, the market regulator had notified the SOP in case of defaults by TM or CM. Earlier, SEBI had specified an early warning mechanism to prevent the diversion of a client’s securities and consequential actions to be initiated by the stock exchanges (SEs), clearing corporations (CCs), and depositories.
The SEBI notification says, "With the introduction of uniform membership structure of TM and CM across all segments, the TM shall make good the default of its clients to the CM and the CM shall make good the default of its clients to the CM and the CM shall make good the default the default of its clients / TM to the CC.
“The default of TM may not necessarily lead to default of CM, if the CM continues to fulfil the settlement obligation with the CC. To protect the interest of non-defaulting clients of a TM and /or non-defaulting clients/ TM(s) of the CM, in the likely event of default by TM or CM, there is a need for SOP enumerating the steps to be taken by the SEs, CCs/ depositories in such cases where SE or CC is of the view that TM or CM is likely to default in repayment of funds or securities to its clients."
Apart from the early warning mechanism, the regulator has also mentioned certain other triggers for initiating actions, including when there is a shortage of funds or securities payable to the clients by Rs10 crore. Stock exchanges might have a different criterion in terms of the quantum, the regulator says.
The SOP lays down the actions to be initiated by the stock exchanges or clearing corporations or depositories within a time frame after detection of the early warning signals and certain other triggers, as per the notification.
The actions have to be initiated by the initiating stock exchange, stock exchanges, clearing corporations and depositories.
As per the notification, another trigger would be that a trading or a clearing member has failed to meet the settlement obligations. Also, sudden increase in the number of investor complaints against a trading or clearing member for non-payment of funds and or transfer of securities is included among the triggers.
It says, "When a show cause notice is issued for declaring a trading or clearing member as a defaulter by any exchange, its subsidiary and associate companies, which are also members on other segments, exchange or clearing corporation, should also be put in suspension mode. Further, all their open positions shall be squared off and their assets shall be frozen."
However, until the default proceedings are completed, the stock exchanges cannot expel a trading member, the SOP says.
With the introduction of a uniform membership structure of the trading member and clearing member across all segments, SEBI says a trading member should make good the default of its clients to the clearing member.
Also, a clearing member should make good the default of its clients or trading members to the clearing corporation, it added.
In a circular, NSE says, "On account of the regulatory concerns observed, the relevant authority of the Exchange has decided to withdraw the trading rights of the member in all segments of the Exchange with immediate effect.
"Accordingly, in addition to the aforementioned segments, Anugrah Stock & Broking Pvt Ltd shall also be disabled in all other segments of the Exchange from 4 September 2020 before market hours."
Anugrah Stock and Broking, which secured a reprieve from the Securities Appellate Tribunal (SAT) on 17th August, was unable to deposit Rs165 crore with the NSE by 1st September. The Exchange then withdrew its trading rights and also seized its computers and books, the brokerage firm told investors thronging its office.
Last month, NSE had shut down the derivatives business of Anugrah. However, when Anugrah approached the SAT in August after its derivatives business was shut down by the NSE, the Tribunal noted that it has been running an unauthorised derivatives advisory scheme (DAS), which collected over Rs165 crore through an associate firm call Om Shri Sai Investments (OSSI). That scheme, the order noted, was shut down in 2019.
You may also wish to read...