Wednesday, August 25, 2010

SEBI Circular to streamline arbitration mechanisms in stock exchanges

Securities and Exchange Board of India issued a Circular on August 11, 2010 to all stock exchanges to mandate the availability of arbitration mechanisms in stock exchanges for settlement of disputes between clients and members. It also seeks to streamline the existing mechanisms in this regard.

All stock exchanges are to maintain a panel of arbitrators consisting of as many persons as necessary to ensure timely settlement of disputes. The members of the panel are to be selected on the basis of (i) age, (ii) qualification in areas of law, finance, accounts, economics, management or administration and (iii) experience in financial services including securities market. Persons chosen to be members of the panel are to disclose any associations that they or their dependents have with the securities market. The stock exchange is to provide at least seven days of continuing education per year to the arbitrators and should appraise the performance of the arbitrators at least annually. A detailed nine-point code of conduct for the arbitrators has been provided. Any claim involving a sum upto `25 lakh will be heard by a sole arbitrator whereas any dispute involving a larger sum will be placed before a panel of three arbitrators.
The focus of the Circular appears to be ensuring time bound settlement of disputes. The provisions of the Limitation Act are made applicable to filing an application for arbitration under the Circular. The stock exchange is to ensure that the appointment of arbitrators is completed in thirty days from the date of request for arbitration. The arbitration is to be concluded in four months unless the period is extended by the Managing Director or Executive Director of the exchange for recorded reasons. Such extension has to be on a case to case basis and can be up to a further period of two months.

Any party aggrieved by an award has the option of appellate arbitration by a panel of three arbitrators which is to be completed in three months (or five months if the Managing Director or Executive Director grants an extension up to two months for recorded reasons). This will, unlike an application to set aside the award under Section 34 of the Arbitration and Conciliation Act, allow the aggrieved party to contest the award on specific allegations of error of law or fact. Section 6.7 of the Circular states that a party aggrieved by an appellate award may approach a competent court to set aside the award under Section 34 of the Arbitration and Conciliation Act. This raises an interesting question: Does the specific mention that a party aggrieved by an appellate award can approach court under Section 34 mean that a party aggrieved by an original award cannot seek setting aside of the award without proceeding to appellate arbitration? This appears to be a potential source of future litigation.

An interesting feature of the Circular is that the deposit of fee to be taken by the stock exchange is dependent on when the claim is filed. The fee charged if a claim is filed after the expiry of 6 months is three times the fee charged in other cases. This acts as an incentive for the parties to bring their claims at the earliest opportunity. Upon the award being rendered, the deposit of the party in whose favour the award is made is refunded and the deposit of the other party is appropriated as arbitration fee. 

The mechanism makes enforcement of awards easier as the stock exchanges are to transfer monies of the members held by them to the client if an award is made in favour of the client and against the member. 

A note on the Circular can also be found here.


  1. I am not sure if the issue as to appeals against arbitral awards and the validity of arbitral awards/ the appeal awards, if I may call it that, has so far not been resolved conclusively. A Division Bench of the Supreme Court was divided on the validity of two tier arbitral tribunals (and appeal awards). See, Centrotrade v. Hindustan Copper Ltd (the judgements of both the judges of the Division Bench can be accessed from the links given in the brackets( and ( But see this judgement ( in the case of Dowell Leasing v. Radheyshyam where the High Court of Bombay has validated two tiered arbitrations in the context of arbitration under the Bye laws of the Bombay Stock Exchange. In this case the High Court noted that the issue was referred to a larger Bench of the Supreme Court. The SC's website says that the matter (Civil Appeal 2562/2006) is still pending before a Three Judge Bench.

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