Online Resolution of Disputes in the Indian Securities Market

The Securities and Exchange Board of India issued a circular dated July 31, 2023, providing the guidelines for online resolution of disputes in the Indian Market.

The SEBI ODR Circular introduces a comprehensive and all-encompassing framework designed to effectively tackle a diverse array of potential conflicts that are anticipated to arise within the dynamic landscape of the securities market. The primary goal of this circular, as envisioned by the Securities and Exchange Board of India (SEBI), is to elevate the efficacy of the dispute resolution process within the established structure of Stock Exchanges and Depositories, which are collectively known as Market Infrastructure Institutions (MIIs).

In line with this objective, the circular seeks to achieve a twofold enhancement: firstly, by streamlining the mechanisms employed for the resolution of disputes, and secondly, by expanding the scope of responsibilities vested in these vital MIIs. By entrusting these institutions with a broader mandate, the SEBI ODR Circular envisions a more proactive and influential role for Stock Exchanges and Depositories in the overarching governance of the securities market.

The Circular encompasses the complete procedure for resolving disputes, encompassing guidelines for commencing the online dispute resolution process, the operations of the ODR platform, and the diverse range of dispute resolution mechanisms accessible to investors and other participants in the market.

As per the circular, a Common Online Dispute Resolution Portal has been introduced. The MIIs shall establish and develop a common Online Dispute Resolution Portal. The MIIs will enter into an agreement amongst themselves outlining the nature of their responsibilities amongst themselves, the cost of development, operating, upgradation and maintenance. The SEBI is entitled to undertake an inspection of the ODR Platform from time to time in order to ensure the orderly functioning of the ODR Portal.

Every Market Infrastructure Institution (MII) must identify and establish a selection of independent Online Dispute Resolution (ODR) organizations. These entities should possess the capacity to conduct prompt online conciliation and/or arbitration processes in accordance with the stipulations outlined in the Arbitration and Conciliation Act of 1996, along with relevant legal statutes.

INITIATION OF DISPUTE THROUGH ODR PORTAL

The investors or clients shall first take up their grievances with the Market Participant by lodging their complaints directly with the concerned market participant. If the grievance raised with the market Participant is not redressed satisfactorily, then the grievance may further be escalated on the SCORES Portal. In case the investors are still not satisfied with the outcome, then they can further initiate with the dispute resolution on the ODR Portal.

 Additionally, the concerned Market Participants also have the power to initiate dispute resolution through the ODR Portal after having given due notice of 15 calendar days to the investors or clients for resolution of disputes which have not been satisfactorily resolved between them.

Any complaint or dispute initiated through the ODR Portal will be referred to an ODR Institution empanelled by a MII, and the allocation of cases would be done on the market-wise basis on a round robin system.

CONCILIATION

Upon receiving the reference of complaint or dispute, the ODR Institution shall appoint a sole independent and neutral conciliator from its panel of conciliators. The conciliator upon being appointed, shall conduct one or more meetings for the disputing parties so that the disputing parties can reach an amicable and consensual resolution within 21 calendar days, unless the time is extended by a maximum period of 10 calendar days. The ODR institution is required to appoint the conciliator within a period of 5 days of receipt of the complaint or dispute.

It is the duty of Conciliator so appointed to facilitate a consensual resolution of the complaint/dispute. Additionally, it is also the duty of the Conciliator to advice the Market Participants to render the required service in case of service-related complaints or disputes.

On successful resolution through the conciliation process, the process shall be concluded by a duly executed settlement agreement between the disputing parties.

ARBITRATION

In case any dispute is pursued by an investor or client through the process of online arbitration, then the ODR Institution is required to appoint a sole, independent, and neutral arbitrator within a period of 5 calendar days from the date of receipt of reference.

The Arbitration proceedings are dependent upon the value of claim or counterclaim. If the aggregate of the claim and/or counter claim exceeds Rs. 30,00,000 or such amount as may be specified by SEBI, then the matter will be referred to an Arbitral Tribunal consisting of three Arbitrators within a period of 5 calendar days of receipt of reference. In case the value of claim or counterclaim is more than Rs. 1,00,000, the Sole Arbitrator is required to conduct one or more hearings and pass the arbitral award within a period of 30 calendar days. On the other hand, if the value of claim or counter claim is less than or equal to Rs.1,00,000, then the Sole Arbitrator is required to conduct document-only arbitration and pass the arbitral award within a period of 30 calendar days of appointment in the matter.

Upon the issuance of arbitral award, in case the party against whom the order has been passed intends to challenge the award so granted, then the concerned party will be required to submit such an intention within 7 calendar days. However, in the course of such a challenge, in case a stay on the said award is not granted within a period of 3 months from the date of receipt of such award, then complete adherence to the terms of the arbitral award is required to be done. Further, if the Market Participant wishes to challenge the arbitral award, then the Market Participant is first required to deposit 75% of the amounts payable in terms of the arbitral award.

The ODR Institutions are required to conduct the arbitration and conciliation through online mode which enables the investors or clients to participate through online or audio-video means.

ROLE PLAYED BY MARKET PARTICIPANTS

The Market Participants shall play a very important in the entire Online Dispute Resolution process. All agreements, contractual frameworks or relationships entered by the Market Participants with the Investors or clients in the Indian Securities Market which are presently existing, or which will be entered after the introduction of ODR mechanism shall be deemed to be amended and include the provisions of online conciliation or online arbitration.

It is also the responsibility of the Market Participants to duly train their staff in attending to the complaints or disputes raised and further handling the references arising from the SCOREs portal or the ODR Portal.

The ODR Institutions are required to conduct conciliation and arbitration in the online mode, which enables the investors or clients to participate through online or audio-video mode. The investors or clients may also participate in the online conciliation and arbitration by accessing or utilizing the facilities of Investor Service Centers (ISCs) operated by the MIIs.

For online proceedings, the venue and seat of the online proceedings shall be deemed to be the place where the relevant MIIs have their registered office.

Moreover, the MIIs (Market Intermediaries) and the Online Dispute Resolution (ODR) organizations authorized by the MIIs have the responsibility to maintain a balanced ratio between the count of conciliators and arbitrators within the ODR organization's panel, relative to the volume of complaints or disputes received. This approach aims to handle a reasonable quantity of complaints effectively at the same time, ultimately leading to prompt resolution within the designated timeframe. The conciliators and arbitrators who are instituted on the panel of ODR institutions are required to undergo training and certification programs or they should possess sufficient experience so that such an arbitrator or conciliator can be regarded as qualified or expert in online dispute resolution.

RESPONSIBILITIES AND ACCOUNTABILITY OF ODR INSTITUTIONS

 ·         MII shall ensure that ODR Institution abides by norms for furthering transparency.

·         MIIs shall inspect and/or audit the ODR Institution.

·         MIIs shall ensure that ODR Institutions abide by the SEBI regulations, circulars, and advisories.

·         Any complaints/grievances against the ODR Institutions w.r.t their services shall be resolved as per the agreements between ODR Institutions and MIIs.

     This Article has been Compiled by Akash Gupta (Principal Associate).

     You can direct your queries or comments to the author at info@factumlegal.com

     Disclaimer-

     The contents of this article should not be construed as legal opinion. This article is            intended to provide a general guide to the subject matter. Specialist advice should be    sought about your specific circumstances. We expressly disclaim any financial or other  responsibility arising due to any action taken by any person on the basis of this article.

 

 

 

 

The Jan Vishwas (Amendment of Provisions) Act, 2023: A Brief Primer

The Jan Vishwas (Amendment of Provisions) Act, 2023, was passed in Lok Sabha on 27th June 2023, Rajya Sabha on 2nd August 2023 and received President’s assent on 11^th August 2023. The Act amends a total of 183 amendments across 42 Acts administered by 19 Ministries to reduce the compliance burden on individuals and businesses with the twin objectives of ease of doing business and ease of living for the citizens. The Act proposes a number of changes to the existing laws, including but not limited to: (a) decriminalizing various offences; (b) revision of various fines and penalties; (c) appointment of Adjudicating Officers; (d) establishment of Appellate Authorities; and (e) increase in the fines and penalties periodically. The Act offers scope and horizon to identify areas for reforms and improve the local business environment as well as easing the lives of individuals simultaneously.

The necessity to introduce the Jan Vishwas (Amendment of Provisions) Bill as mentioned in the Report of the Joint Committee on the Jan Vishwas (Amendment Of Provisions) Bill 2022 is to reduce the compliance burden. As trust is a prerequisite and fundamental for democratic governance. The fear of imprisonment for minor offences is a major factor hampering the growth of the business ecosystem and shattering the confidence of entrepreneurs. The Jan Vishwas (Amendment of Provisions) Act, 2023, as introduced, has endeavoured to identify a large number of offences of minor nature and decriminalize them with monetary penalties. The endeavour is not only to make lives and businesses easier but also to reduce judicial burden.

Moreover, as per the Jan Vishwas (Amendment of Provisions) Act, 2023, the Government of India may appoint one or more adjudicating officers for the purpose of determining penalties. The adjudicating officers may summon individuals for evidence and conduct inquiries into violations of the respective Acts. For instance, the Agricultural Produce (Grading and Marking) Act, 1937, the Air (Prevention and Control of Pollution) Act, 1981, the Environment (Protection) Act, 1986, and the Public Liability Insurance Act, 1991 are the Acts among others which provide for the appointment of Adjudicating Officer.

The Jan Vishwas (Amendment of Provisions) Act, 2023 also specifies the appellate mechanisms for persons, aggrieved by an order passed by an adjudicating officer/authority. For instance, under the Cinematograph Act, 1952, the provision to prefer appeal has been provided. Similarly, under the Merchant Shipping Act, 1958, provision to prefer appeal before the Director General within 30 days has been provided. Under the Air (Prevention and Control of Pollution) Act, 1981 and the Environment (Protection) Act, 1986, appeals may be preferred to the National Green Tribunal within sixty days from the date of order.

This Article has been Compiled by Ayushi Misra (Senior Associate) and Arun Gupta (Managing Partner). 

You can direct your queries or comments to the author at info@factumlegal.com

Disclaimer-

The contents of this article should not be construed as legal opinion. This article is            intended to provide a general guide to the subject matter. Specialist advice should be    sought about your specific circumstances. We expressly disclaim any financial or other  responsibility arising due to any action taken by any person on the basis of this article.

 

Company under winding up process under Section 271 of the Companies Act, 2013 can apply for corporate insolvency resolution process: NCLT Mumbai

The National Company Law Tribunal, Mumbai Bench in Sheeba Rajan V/s Trans Tech Turnkey Private Limited [CP (IB) No. 223/MB-IV/2023] vide Order dated 25.07.2023 held that even a company undergoing winding up process under Section under 433 of the Companies Act, 1956 in High Court can now apply under for corporate insolvency resolution process.

Facts of the case

The Application was filed by Ms. Sheeba Rajan, the Financial Creditor against Trans Tech Turnkey Private Limited, Corporate Debtor, for initiating Corporate Insolvency Resolution Process (CIRP).

The Corporate Debtor had approached the Financial Creditor in the year 2014 for seeking financial assistance and in lieu of the same, the Financial Creditor provided an unsecured loan of Rs.11,00,00,000/- out of which an amount of Rs. 9,50,00,000/- (Rupees Nine Crore Fifty Lakh Only) was paid by the Corporate Debtor. No payment has been received by the Financial Creditor against the debt so due and the Corporate Debtor has admitted its liability and acknowledged the debt due.

That a Company Petition No. 33 of 2016 was preferred and filed against the Corporate Debtor by one M/s. Flaktwoods ACS (India) Private Limited, before the Hon'ble High Court of Judicature at Bombay under Section 271 of the Companies Act, 2013 for winding up of the Corporate Debtor and vide order dated 19.04.2018, the Hon'ble High Court passed an order for winding up of the Corporate Debtor. Till date no developments have taken place in the liquidation process of the Corporate Debtor under the Companies Act, 2013.

It is submitted by the Financial Creditor that the Corporate Debtor is a valuable company and there are investors that are willing to invest in the company and the Corporate Debtor will get a better value and will be able to maximize the value if it is sold as a going concern.

Held

The National Company Law Tribunal, Mumbai Bench relied upon the decision of the Hon'ble Apex Court in the matter of A. Navinchandra Steels Pvt. Ltd. v. SREI Equipment Finance Ltd (Civil Appeal Nos. 4230-4234 of 2020], wherein it was held that Section 7 is an independent proceeding, as has been held in catena of judgments of this Court, which has to be tried on its own merits. Any "suppression" of the winding up proceeding would, therefore, not be of any effect in deciding a Section 7 petition on the basis of the provisions contained in the IBC.

The said judgement makes it clear that an application for initiation of Corporate Insolvency Resolution Process under Section 7 or 9 of the Insolvency and Bankruptcy Code, 2016 is to be independent proceedings which shall remain unaffected by the winding-up proceedings filed by the same company.

In view of the above, it was held that there exists a debt and default of the said debt on the part of the Corporate Debtor and such debt falls within the definition of “Financial Debt” u/s. 5(8) of the Insolvency and Bankruptcy Code, 2016. Moreover, The Corporate Debtor has admitted the said debt in the ledger of the Financial Creditor maintained by it on 01.04.2018. Hence, the present case was admitted under section 7(5)(a) of the Insolvency And Bankruptcy Code, 2016.

This Article has been Compiled by Ayushi Misra (Senior Associate) and Arun Gupta (Managing Partner). 

You can direct your queries or comments to the author at info@factumlegal.com

Disclaimer-

The contents of this article should not be construed as legal opinion. This article is            intended to provide a general guide to the subject matter. Specialist advice should be    sought about your specific circumstances. We expressly disclaim any financial or other  responsibility arising due to any action taken by any person on the basis of this article.

 

IBC overrides Electricity acts Non-Obstante Clause: Supreme Court

Case Details: Paschimanchal Vidyut Vitran Nigam Ltd V. Raman Ispat Private Limited & Ors.

Citation: Civil Appeal No. 7976 of 2019

Hon'ble Judges/Coram: S. Ravindra Bhat and Dipankar Datta, JJ.

Decided On: 17.07.2023.

Introduction

A division bench of Justices S Ravindra Bhat and Dipankar Dutta of the Hon’ble Supreme Court held that the provisions of the Electricity Act, 2003 take precedence over the provisions of the Insolvency and Bankruptcy Code of 2016 (“IBC”). The Court clarified that under the IBC, secured creditors have priority in debt recovery above dues payable to state or central government.

 The decision came while dismissing an appeal filed by Paschimanchal Vidyut Vitran Nigam Limited (“PVVNL”), which questioned the release of attached property in favour of the liquidator managing insolvency proceedings. The Court supported the National Company Law Tribunal (“NCLT”) and National Company Law Appellate Tribunal's (NCLAT”) decisions, emphasising the waterfall process under Section 53 of the IBC, which defines the order of debt repayment. The Court also rejected reliance on a previous ruling that favoured the primacy of the Electricity Act, claiming that it ignored the IBC requirements. The appellant was given ten weeks to file their claims as a secured creditor.

Background of the Case

PVVNL is a subsidiary company of Uttar Pradesh Power Corp. Ltd. The dispute arrised out of outstanding electricity bills due to Raman Ispat Pvt. Ltd. to PVVNL. As a result, PVVNL obtained an order of attachment of Raman Ispat's property in its favour.

At the commencement of the liquidation process of Raman Ispat, the liquidator argued before the Hon’ble NCLT that the attached property should be freed since any dues owed to PVVNL will be allocated in accordance with the IBC. The liquidator had requested that the property be released so that it may be auctioned and the earnings used to settle outstanding debts in accordance with the IBC. The Hon'ble NCLT, Allahabad Bench, in its, affirmed the Liquidator's views and observed the asset belongs to the Corporate Debtor's Liquidation Estate.

The matter was then Challenged before Hon’ble NCLAT, the bench agreed with the liquidator's assessment and ordered the property to be released. Dissatisfied with this ruling, PVVNL moved to the Supreme Court, claiming that the Electricity Act took precedence over the IBC and that it could reclaim its dues under the act independently, even outside of the liquidation process.

The Hon’ble Supreme Court Held

The court addressed a specific legal question, whether dues accruing to a Distribution Licensee can be recovered under the mechanism envisaged under the Electricity Act, 2003 and the UPERC Electricity Supply Code, 2005, and thus override the liquidation proceedings and the waterfall mechanism of dues repayment provided under the IBC.

The Hon’ble court observed that the mechanism for recovering outstanding electricity dues under the Electricity Act and the Supply Code cannot function while the borrower is in insolvency or liquidation proceedings as a result of the moratorium period granted to the Corporate Debtor under the IBC.

The Court centred its consideration on the 'Waterfall Mechanism' outlined in Section 53 of the IBC. In liquidation processes, this method defines the order of priority for debt payments. Notably, government obligations, including those owed to the Central and State Governments, are prioritised lower than those owed to secured creditors.

The bench opined that the provisions of the IBC have precedence over the requirements of the Electricity Act, even though the latter contains particular provisions with non-obstante clauses. The Court emphasised that the earlier case, Rainbow Papers Ltd. (State Tax Officer v. Rainbow Papers Ltd., 2022 (13) SCR 808) did not considered the 'waterfall mechanism' under Section 53 which envisages higher priority given to the secured creditors.

Conclusion

This judgement clarifies and strengthens the IBC's hierarchy of creditors claim, providing a fair and equitable distribution of assets during the liquidation process. The Supreme Court’s interpretation has emphasized that the IBC accords higher footing to the dues payable to secured creditors compared to dues payable to the Central or State Government. The Hon’ble Court held that electricity dues from the said corporation do not from part of Government dues and has placed it as a secured creditor, thereby PVVNL cannot be classified under the Government dues within the meaning of section 53(1)(e) of the IBC. The waterfall mechanism under section 53 of IBC ensures that the creditors of a company are paid in a fair and orderly manner thereby protecting the interests of the stakeholders.

This Article has been compiled by Anurag Tewari (Associate)

You can direct your queries or comments to the author at info@factumlegal.com

Disclaimer-

The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.

 

LIABILITY OF DIRECTORS UNDER SEBI ACT AND RELATED REGULATIONS

Securities and Exchange Board of India (SEBI) is a regulatory body established under the Securities and Exchange Board of India Act, 1992 (“the Act”). That one of the main functions of SEBI is to regulate the securities and commodities market which is also mentioned in the Preamble of SEBI and is reproduced hereinbelow:

"...to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto.”

To carry out the said function SEBI has issued various regulations such as prohibition of fraudulent and unfair trade practices, issue and listing of securitized debt instruments and security receipts, prohibiting insider trading, issue of capital and disclosure requirements, etc. for the purpose of closely monitoring the companies and the way they handle and use these securities. The Act and the related regulations provide for the directors’ liability (whether managing/ nominee/ independent director) in cases generally where fund was illegally mobilized, secretly or illegally inside crucial information of a company was revealed to any outsider or where public announcement of new issue of listed securities was not made.

Important provisions pertaining to directors’ liability.

·         Section 27 of the SEBI Act provides where an offence has been committed then person in-charge of the said activity or having specific individual involvement will be held liable unless the person proves otherwise that he was not involved in such act and that he had no knowledge or had not consented to the act and should not be held liable. This person can be any officer, director, manager or secretary and their involvement shall be treated and punished in the same exact manner.

·         Regulation 25 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 provides for the duties of independent directors as they review the performances of the remaining board and shall only be held liable in cases when the independent director had the knowledge, and the act was performed with his consent/lack of diligence/connivance and not otherwise.

·         Regulation 26 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 prohibits any director or officer or shareholder to enter into any contract by himself or on behalf of another person related to securities of listed entity without prior approval.

·         Regulation 3 of SEBI (Prohibition of Insider Trading) Regulations, 2015 prohibits revealing of any unpublished price sensitive information regarding the securities to anyone including other insiders as well until and unless it is for legal obligations. The person doing so even if a shareholder or a director shall be held liable for contravention. Setting a code of conduct for fair disclosure as per Regulation 8 and formulating and getting approved the trading plan along with making the unpublished price sensitive information generally available to public also set upon the liability of persons disobeying the provisions.

·         SEBI (Issue and Listing of Debt Securities) Regulations, 2008 provides for a stronger and closely monitored debt securities market where in order for the issuer (company, public sector undertaking or statutory corporation) to issue debt securities to the public at large (public issue), it has to issue an offer letter (prospectus or shelf-prospectus) whereby subscription to debt securities are invited from the public. The issuer can never be a defaulter or a person “debarred by the SEBI” be it any officer, promoter, shareholder or a director.

·         The SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market), Regulations, 2003 prohibits any kind of act which is fraudulent or deceptive and which induces any person generally a potential investor to deal or apply with the securities of that company whether directly or indirectly. Misleading prospectus or announcements for the same are also covered under this Regulation. The directors and officers must not fail from the duties assigned to them and they are collectively held responsible/liable so far, their involvement in the said act is concerned.

The board of directors needs to exercise more control and monitoring wherein funds are being raised by the public so that unfair practices and trading is not followed. It is not just the managing or executive director who is responsible to look after the affairs of the company but also the entire the board of directors as the board represents the interest of the company, shareholders and promoters which make them the trustees and in-charge of the company. Any disobedience of the duties shall attract liability which is although limited but can land them in prison if committed under the personal capacity such as fraud or willful misrepresentation.

Relevant Judgments

Following case laws have discussed a director’s liability under the SEBI Act and related regulations.

·         Sayanti Sen v. SEBI (2019): [1]- The said case dealt with the issue of secured redeemable non-convertible debentures and whether the company Silicon Projects India Limited “SPIL” made public issue of securities without complying the provisions of the Companies Act, 1956 and SEBI Act, 1992. The company made an offer of non-convertible debentures which was in violation of SEBI Act and Companies Act. The directors of the company were found to be indulging in fund mobilizing activities and following this SEBI released its order against the directors of the company regarding their debarment and refunding the monies to the investor. These directors included appellant and several other directors. The appellant, however, in the show cause notice said that she was never made any signatory to the board meetings and never attended one. The other director was, however, directly responsible for the said allegations and the whole-time director asked the faulty director to first pay off the amount found to be illegally raised and afterwards called appellant and other directors also to do the same. To this appellant used her defense of non-involvement and succeeded where the court held that a director can only be made liable when he/she is directly involved and had the knowledge of the act which appellant did not have and therefore, calling her to pay off the liability will be violating Section 27 and 11B of the SEBI Act. The section only involves those who were in-charge of the said act. There is no vicarious liability automatically on the directors (whether managing/ nominee/ independent director) when the company is an offender. Only the directors at default can be called to pay for the alleged amount.

·         Pranab Kumar Roy v. The Securities Exchange Board of India (2023): - [2] This case deals with the non-compliance of the regulations mentioned in Companies Act, 2013 and 1956 and of SEBI Act and SEBI Regulations by company’s directors. The accused no. 1 is this case is the company which neither filed the prospectus of public issue of security nor the Draft Red Herring Prospectus. The DRHP is a comprehensive document companies have to file when they wish to get the shares listed on the stock exchange via an Initial Public Offering (IPO). This prospectus generally contains the information about the business operations of the company, financial statements, and stock holding information, risks that would potentially arise while investing in the company, the objectives on which the company operates and so on.

The accused no. 2-11 are the directors/promoters/manager/key management personnel/persons in charge of the business of the accused company and are responsible for the day-to-day affairs of the company. The accused directors joined the Board after the allotment of the said Non-Convertible Debentures.

The petitioner in this case did not know anything about the said allotment and did not even attend the meeting for said allotment. Soon after such an allotment the directors who were accused resigned and it was revealed that the issue of securities was not as per the compliances and hence the company was asked to return the money taken from the investors back to them.

It was held by the Hon’ble Calcutta High Court that such a director or officer cannot be made an officer in default when he had no knowledge of the act. Section 27 of SEBI Act and Section 2(60) of the Companies Act, 2013 does not apply to the Petitioner. As no materials could be placed before this court that the petitioner was involved in the day to days affairs of the accused No. 1/Company, the petitioner cannot be held liable.  

 

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[1] Sayanti Sen v. Securities Exchange Board of India, 2019 SCC OnLine SAT 132.

[2] Pranab Kumar Roy v. Secirities Exchange Board of India, 2023 SCC OnLine Cal 731.