ADR in Stock Exchange Market- Issues and Challenges

4th August, 2023 - 6:09 am Categories: Stock Exchange 0 Comments

With the middle-class Indians realising the benefits of stock markets and investments, and more emphasis by govt. and other advertisements, the role of SEBI has increased and have been in focus more than ever. SEBI is the chief regulatory body which deals with the securities market. The main functions of this Board is to control stock exchange activities, protecting interests of investors as well as working to harmonize the businesses with the statutory regulations for maintaining a healthy competition in the market.

The market has become intricate and highly competitive lately, resulting in rising number of disputes and in order to ensure the smooth running of the market, an effective mechanism for dispute resolution is the need of the hour. Therefore SEBI has come up with a new Standard Operating Procedure (SOP) for dispute resolution and introduced the arbitration mechanism for disputes between a listed firm or Registrars and the investors.

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This SOP was an absolute necessity, keeping in mind the wide reliance and success rate of ADR mechanism in various fields. The securities market has been relying on litigation and regulator of the administration to settle any dispute till now.[1] But as the market and shareholders base expands, and keeping in mind the already overloaded courts of India, to accelerate the dispute resolution, it is required that SEBI gives more emphasis on ADR. The guidelines state that ADR will be initiated after all other actions to resolve the contention are exhausted, but looking at the success rate of ADR and its ability to resolve matters amicably and faster, taking it as the last resort does not do justice to ADR.

It shows that the stock exchange market do not find out of court settlements reliable.[2] There are various reasons behind the securities market being not ready to adopt ADR for dispute resolution, and they are quite genuine from their point of view. Even though stock exchanges have already allowed disputes between brokers and investors to be arbitrated, in reality, brokers and investors keep stock exchange arbitration as their last resort. This is due to lack of awareness about working of ADR. Most people do not know that the awards issued by the arbitral tribunal are binding in nature, they think it is not binding and going for ADR will be a waste of their time, but instead it will save them a lot of time and capital.

The other issue is regarding disputes in insider trading, violation of code of conduct, fraudulent trading by market intermediaries. Since these disputes are considered serious and likely to affect the company’s reputation and performance in the market, they are usually dealt by the SEBI or settled without acknowledgement of guilt of the offender. In the securities market, the reputation of the company is important, how they treat and acknowledge their investors is an important factor to let people invest without any doubts about their profit and security. Therefore, the stock exchange market finds it appropriate to resolve problems as confidentially as possible.

Just implementing the ADR SOP is not enough when people have no clear idea of the basic mechanism and rules of it. The SOP further tells that even SEBI doesn’t find ADR as the ideal dispute resolution mechanism.[3] But the securities market need to appreciate the benefits of ADR as litigation is a costly and time-consuming affair, even the public interest associated with these cases are quite high, arbitrating them can help in maintaining confidentiality and providing expeditious solutions.[4]

To protect the interests of investors, build confidence, awareness, trust and transparency in markets, these issues and challenges need to be addressed. There is a need to understand how important and necessary confidentiality in such disputes. SEBI, entities and investors, everyone knows the nature of litigation. One suit is filed, and the whole world knows about it and it heavily impacts the reputation of the entity and trust is lost in the entity. This is one of the biggest drawbacks of litigation. ADR on the other side, keeps the disputes confidential and there is no question of damage to reputation.

The other issue- that the stock exchange market thinks that Arbitration is not binding on the parties, which will only waste their time as they will have to approach the court for executing the award or get their compensation. But it’s important for the securities market to know, that this being a closed affair is a simple and less time consuming resolution mechanism, which will help the entities in faster dispute resolving as courts take a lot more time due to large pendency of cases.

Grave instances of securities violation can also be dealt in the arbitration with ease. Therefore the arbitrators should be provided with the discretion to decide which nature of right will be beneficial. Taking in consideration the huge burden on the Courts and the SEBI for adjudication, Arbitration can help in easing out the burden a lot. Since it is a quasi-judicial process for settlement of disputes which finds it’s guidance from stock exchanges and SEBI guidelines, it will be a flexible process for both- the entities and the investors as they will help them reach on an amicable settlement, keeping in mind the interests and wants of both the parties.[5]

Having so many benefits, along with high rate of success and party’s satisfaction, the SEBI should take dispute resolution by ADR as the first choice, in consideration. Rather than keeping it the last option, where parties have exhausted all other means, as it will give the people a sense of confidence in Arbitration and will prove to be a good option for everyone.[6] Also the main aim with which ADR was built- to reduce the burden of courts, is the most necessary thing to be considered. And if the main issue is not taken into account, then there’s no use of introducing ADR in the first place. While every person is now preferring ADR over other dispute resolution mechanisms, even the stock exchange market should start believing in it.

Author: Kushagra Singh, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.

[1] Vijay Kumar Singh, Structural Reforms for Overcoming Delays in Justice Delivery: Increasing Role of the Commercial Tribunals and Courts, 42 Cochin University Law Review 2 (2018).

[2] Kshama Loya & Gowree Gokhale, Arbitrability of intellectual Property Disputes: a Perspective from India, 14 Journal of Intellectual Property Law & Practice 8 (2019).

[3] Amlegals.com. 2022. Dispute Resolution Mechanism of SEBI. [online] Available at: <https://amlegals.com/dispute-resolution-mechanism-of-sebi/#> [Accessed 13 August 2022].

[4] Sebi.gov.in. 2022. SEBI | Standard Operating Procedures (SOP) for dispute resolution under the Stock Exchange arbitration mechanism for dispute. [online] Available at: <https://www.sebi.gov.in/legal/circulars/may-2022/standard-operating-procedures-sop-for-dispute-resolution-under-the-stock-exchange-arbitration-mechanism-for-disputes-between-a-listed-company-and-or-registrars-to-an-issue-and-share-transfer-agents-_59345.html>.

[5] ICC Commission Report, Financial Institutions and International Arbitration, ICC (2018).

[6] Rick Fleming, Mandatory Arbitration: An Illusory Remedy for Public Company Shareholders, PLI SEC Speaks (2018).