An Examination of SEBI’s Progressive Approach towards ADR Mechanism

Introduction

The Securities and Exchange Board of India has taken remarkable strides in transforming how disputes are resolved in the Indian securities market. The traditional court-based litigation system, while necessary, often proves time-consuming and expensive for investors seeking redressal of grievances. Recognizing this challenge, SEBI introduced a structured Alternative Dispute Resolution (ADR) framework through its 2023 amendments, marking a pivotal shift in investor protection mechanisms. This progressive approach demonstrates SEBI’s commitment to creating an accessible, efficient, and technology-driven dispute resolution ecosystem that balances the interests of investors and market participants.

Evolution of SEBI’s Dispute Resolution Framework

Before 2023, SEBI’s Dispute Resolution relied primarily on the SCORES platform and traditional arbitration mechanisms embedded in individual intermediary agreements. However, these systems lacked uniformity and often left investors navigating fragmented processes. The consultation papers released in December 2022 and May 2023 laid the groundwork for a transformative change. These papers proposed establishing an Online Dispute Resolution Portal and integrating it with the existing SCORES system to create a seamless grievance redressal mechanism.

On July 3, 2023, SEBI notified the Securities and Exchange Board of India (ADR Mechanism) (Amendment) Regulations, 2023 [1]. This notification represented a watershed moment in securities market regulation, introducing mandatory ADR provisions across seventeen different SEBI regulations. The amendments incorporated mediation, conciliation, and arbitration as standardized dispute resolution mechanisms for market intermediaries and investors.

Regulatory Framework and Amendments

The 2023 amendments touched multiple regulations governing various market participants. The Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992, now includes provisions mandating that all disputes between merchant bankers and clients must be submitted to a dispute resolution mechanism encompassing mediation, conciliation, or arbitration. Similarly, the Securities and Exchange Board of India (Registrars to an Issue and Share Transfer Agents) Regulations, 1993, and the Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993, were amended to incorporate identical ADR clauses [2].

The scope extends to other critical market participants as well. The Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, the Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999, and the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, all now mandate ADR mechanisms for dispute resolution. This sweeping reform ensures that whether an investor deals with portfolio managers, investment advisers, research analysts, or vault managers, a consistent dispute resolution framework applies across the board.

The Three-Tier Dispute Resolution Architecture

SEBI has established a hierarchical three-tier system that progressively escalates disputes based on their complexity and the satisfaction level of the parties involved. This structured approach ensures that simple grievances are resolved quickly while more complex disputes receive appropriate attention through formal ADR proceedings.

First Tier: Direct Resolution with Intermediaries

The first level requires investors to approach the concerned intermediary directly for resolution. Every SEBI-registered intermediary must designate officials responsible for handling investor complaints and compliance matters. This initial stage encourages dialogue between parties and often resolves straightforward issues without requiring formal intervention. The regulations mandate that intermediaries maintain robust internal grievance redressal mechanisms and respond to investor concerns within stipulated timelines.

Second Tier: SCORES Platform Escalation

When direct resolution fails to satisfy an investor, the grievance can be escalated to the SEBI Complaint Redressal System. SCORES has been operational since 2011 as an online platform enabling investors to file and track complaints against listed entities and SEBI-registered intermediaries [3]. The upgraded SCORES 2.0 framework introduced automated routing of complaints to concerned entities, which must respond with an Action Taken Report within twenty-one days. If investors remain dissatisfied, they may seek a First Level Review within fifteen days, during which complaints remain classified as pending even after ATR submission. For unresolved grievances following the First Level Review, investors can request a Second Level Review by SEBI itself.

Third Tier: Online Dispute Resolution Portal

The culmination of SEBI’s progressive ADR mechanism is the SMART ODR Portal, accessible at smartodr.in. This portal represents India’s first comprehensive online dispute resolution mechanism specifically designed for securities market disputes [4]. The ODR mechanism operates through two distinct stages: conciliation and arbitration. Market Infrastructure Institutions, including stock exchanges and depositories, administer this portal under SEBI’s guidance. When a dispute is registered on SMART ODR, the assigned MII attempts amicable resolution within twenty-one calendar days during what is termed the Pre-Conciliation Period. If this fails, parties can initiate formal online conciliation proceedings.

Conciliation and Arbitration Process

The ODR mechanism mandates that disputes follow online conciliation before proceeding to arbitration. SEBI issued Master Circular No. SEBI/HO/OIAE/OIAE_IAD-1/P/CIR/2023/145 on July 31, 2023, which was subsequently updated through additional circulars on August 4, 2023, and August 11, 2023 [5]. These circulars provide detailed procedures for conducting online conciliation and arbitration proceedings.

For conciliation, SEBI has established qualification criteria for empaneled conciliators. The circular dated July 31, 2023, updated on December 28, 2023, specifies relevant qualifications and expertise requirements for conciliators and arbitrators handling securities market disputes. ODR institutions like Erdac Solutions Private Limited (CADRE) have been empaneled by market infrastructure institutions to facilitate these proceedings. Conciliators must maintain the highest standards of independence, impartiality, ethics, and confidentiality while conducting proceedings.

When conciliation fails to resolve a dispute, the dissatisfied party may initiate arbitration through the SMART ODR Portal. The arbitration proceedings are conducted online, following the principles established under the Arbitration and Conciliation Act, 1996. The arbitral tribunal issues binding awards that have the same force as court judgments. However, aggrieved parties retain the right to challenge arbitration awards before competent courts under Section 34 of the Arbitration and Conciliation Act, 1996, which permits setting aside awards on limited grounds including procedural unfairness, excess of jurisdiction, or conflict with public policy.

Scope and Exclusions

The ODR mechanism covers disputes arising between investors and twelve categories of SEBI-registered entities. These include stockbrokers, depository participants, portfolio managers, investment advisers, research analysts, merchant bankers, registrar and transfer agents, debenture trustees, mutual funds, alternative investment funds, credit rating agencies, and vault managers. The mechanism applies to monetary disputes arising from these entities’ activities in the securities market.

However, certain disputes fall outside the ODR framework’s scope. Disputes are not arbitrable during moratorium periods under the Insolvency and Bankruptcy Code, 2016, or when intermediaries undergo liquidation or winding-up proceedings. The mechanism also does not apply to matters where appeals lie before the Securities Appellate Tribunal. Complaints against unregistered entities, matters pending in courts, or cases involving quasi-judicial proceedings cannot be processed through the ODR portal. These exclusions ensure that the ADR mechanism operates within appropriate legal boundaries without conflicting with other statutory frameworks.

Judicial Perspective on Securities Arbitration

Indian courts have consistently recognized the importance of arbitration while maintaining necessary oversight. In National Stock Exchange of India Ltd. v. Moneywise Financial Services Pvt. Ltd., decided in 2015, the Bombay High Court upheld the validity and enforceability of arbitration agreements between brokers and clients mandating arbitration before stock exchanges [6]. This judgment affirmed that properly drafted arbitration clauses in client agreements are legally binding and enforceable.

However, courts have also clarified that arbitration agreements do not eliminate SEBI’s regulatory jurisdiction. In Angel Broking Ltd. v. Sejal Glass Ltd., decided in 2017, the Securities Appellate Tribunal held that arbitration clauses in client agreements do not bar SEBI from exercising regulatory jurisdiction over disputes arising under securities laws [7]. This distinction is crucial – while contractual disputes may be arbitrated, regulatory violations remain within SEBI’s enforcement domain. The judgment ensures that private dispute resolution mechanisms do not undermine regulatory oversight necessary for market integrity.

The case of Securities and Exchange Board of India v. Sahara India Real Estate Corporation Ltd., decided in 2012, further illustrates SEBI’s regulatory authority. The Securities Appellate Tribunal upheld SEBI’s order directing refunds to investors for bond schemes violating securities laws. Such regulatory orders fall outside the scope of private arbitration and require separate enforcement mechanisms.

Integration with SCORES and Automated Escalation

SEBI’s September 20, 2023, circular on “Redressal of investor grievances through the SEBI Complaint Redressal (SCORES) Platform and linking it to Online Dispute Resolution platform” established clear protocols for integrating these systems [8]. When complainants opt for ODR while a complaint remains pending on SCORES, the SCORES complaint is automatically treated as disposed. This prevents parallel proceedings on the same dispute across multiple platforms. Designated bodies submit Action Taken Reports indicating matters pending or concluded on smartodr.in, maintaining transparency across platforms.

The integration includes automated escalation mechanisms ensuring entities adhere to prescribed timelines. When regulated entities fail to meet deadlines, cases automatically escalate to the next level, emphasizing accountability and timely action. This automation reduces manual intervention and ensures consistent application of procedural timelines across all complaints.

Progressive Features of SEBI’s ADR Mechanism

Several features distinguish SEBI’s ADR mechanism as genuinely progressive. First, the mandatory nature of ADR clauses across all intermediary categories ensures universal coverage. Unlike voluntary arbitration clauses that parties might negotiate differently, SEBI’s regulations standardize dispute resolution procedures, creating predictability for investors.

Second, the hybrid mode of conducting proceedings provides flexibility. Parties can participate in conciliation and arbitration remotely, reducing costs and geographical barriers. This accessibility particularly benefits retail investors who might find traditional court proceedings prohibitively expensive or inconvenient.

Third, the two-tier resolution within ODR (conciliation followed by arbitration) maximizes chances of amicable settlement before formal adjudication. Conciliation encourages parties to find mutually acceptable solutions with assistance from neutral facilitators, preserving business relationships where possible. Only when conciliation fails does the mechanism resort to binding arbitration.

Fourth, the time-bound nature of proceedings addresses one of litigation’s most significant drawbacks. Each stage operates within defined timelines: twenty-one days for initial resolution, specific periods for SCORES reviews, and prescribed timelines for conciliation and arbitration. This structure ensures disputes do not languish indefinitely.

Challenges and Future Considerations

While SEBI’s ADR mechanism represents significant progress, certain challenges merit attention. The effectiveness of online proceedings depends on parties’ technological literacy and access to reliable internet connectivity. SEBI and market infrastructure institutions must ensure that digital divide issues do not disadvantage certain investor segments, particularly senior citizens or those in remote areas with limited internet access.

The quality and impartiality of empaneled conciliators and arbitrators critically influence the mechanism’s success. Continuous training programs and strict adherence to independence standards remain essential. SEBI’s circulars establish qualification criteria, but maintaining quality standards as the system scales requires ongoing vigilance and periodic review of empaneled professionals’ performance.

Another consideration involves the balance between standardization and flexibility. While uniform procedures benefit consistency, securities market disputes vary significantly in complexity and subject matter. The framework must retain sufficient flexibility to address unique circumstances while maintaining procedural fairness and efficiency.

The relationship between ODR awards and judicial review also requires careful navigation. Section 34 of the Arbitration and Conciliation Act, 1996, permits challenging arbitral awards on specific grounds. Courts must exercise restraint in interfering with arbitral awards while ensuring fundamental fairness and adherence to law. Recent Supreme Court decisions emphasizing minimal judicial intervention in arbitration matters support this approach, but the balance requires constant calibration as jurisprudence evolves [9].

International Comparisons and Best Practices

SEBI’s approach aligns with international trends toward online dispute resolution in securities markets. Jurisdictions including France, Australia, and Italy have implemented similar mechanisms with varying degrees of success. However, India’s approach of comprehensively delegating grievance redressal responsibility to market infrastructure institutions represents a relatively unique model. By making stock exchanges and depositories active participants in investor protection, SEBI creates additional accountability layers beyond regulatory oversight.

The success of these international models offers valuable lessons. Effective marketing and investor education prove crucial for adoption rates. Many investors remain unaware of available dispute resolution mechanisms or perceive them as ineffective compared to traditional courts. SEBI must prioritize awareness campaigns explaining the ADR framework’s benefits and accessibility.

Transparency in outcomes also enhances credibility. Publishing aggregated data on complaint volumes, resolution rates, and average resolution times helps stakeholders assess the system’s effectiveness. Such transparency builds confidence among investors and incentivizes intermediaries to maintain high compliance standards to avoid negative publicity from unresolved complaints.

Conclusion

SEBI’s progressive approach toward Alternative Dispute Resolution (ADR) mechanisms marks a transformative phase in Indian securities market regulation. The 2023 amendments establishing mandatory ADR provisions across seventeen regulations, combined with the integrated SCORES-ODR architecture, create a robust framework for investor grievance redressal. This three-tier system progressing from direct resolution through intermediaries, to SCORES escalation, and finally to online conciliation and arbitration, ensures disputes receive appropriate attention based on their complexity and parties’ satisfaction levels.

The framework balances multiple objectives: providing accessible justice for investors, reducing burden on courts, maintaining market integrity through regulatory oversight, and encouraging amicable settlements preserving business relationships. By leveraging technology and establishing clear procedural timelines, SEBI addresses traditional litigation’s key drawbacks of excessive cost, delay, and complexity. The mandatory nature of ADR clauses ensures all investors benefit from standardized dispute resolution procedures regardless of which intermediary they deal with.

Going forward, the mechanism’s success depends on effective implementation, continuous quality improvement of empaneled professionals, adequate technological infrastructure, investor awareness, and balanced judicial oversight. SEBI must monitor the system’s performance through regular reviews and remain responsive to emerging challenges and stakeholder feedback. If implemented effectively with attention to these considerations, SEBI’s ADR mechanism could become a model for other regulatory domains seeking to enhance dispute resolution efficiency while maintaining investor protection standards.

Published and Authorized by Rutvik Desai