Bourse to pay if broker defaults

source: Times Of India by Jehangir B Gai

The next time a stock broker defaults, you can make the stock exchange he operates in, pay. That is the summary of a landmark ruling of the National Consumer Disputes Redressal Commission. Investors can get up to a lakh of rupees from the stock exchange to which the defaulting broker is attached.
The ruling will provide additional security to investors over and above what is already offered by the stock exchanges. It will also make the stock exchanges more vigilant in examining the records of brokers.
Since stock brokers charge a brokerage for services rendered by them, they are immediately liable to their customers (investors). However, it was not clear whether the stock exchange was also liable for the conduct of brokers. The judgment delivered by Justice M B Shah on behalf of a bench comprising himself, Rajyalakshmi Rao and Anupam Dasgupta conclusively settled the issue last December.
Several consumers had filed complaints before the Delhi consumer forum against a broker as well as the Delhi Stock Exchange, for default with respect to the sale and purchase of shares. In all these matters, DSE tried to defend itself by claiming that it was merely a non-profit making organisation which regulated the business of sale and purchase of shares and debentures and that it was governed by the guidelines issued by Sebi. It also claimed that none of the complainants had hired the services of the stock exchange, as the investor merely pays a consideration in the form of brokerage to the broker and not to DSE. So, it was not rendering any service to investors and a claim against DSE would not be maintainable.
But could the stock exchange be held jointly responsible along with the broker? The district forum held that, indeed, DSE was jointly liable, and so did the state commission in appeal.

Investors can get up to Rs 1L relief

In a landmark ruling, the National Consumer Disputes Redressal Commission has ordered that investors can get up to a lakh of rupees from the stock exchange to which the defaulting broker is attached.
Several consumers had filed complaints before the Delhi consumer forum against a broker as well as the Delhi Stock Exchange, for default with respect to the sale and purchase of shares. The matter then went in revision before the national commission, which was of the same opinion. It held that not only does the broker render ‘service’ in the purchase and sale of listed securities but the stock exchange is also required to render service to the investors. Hence, the stock exchange is also a service provider and liable under the Consumer Protection Act.
The next issue was the extent to which an investor would be entitled to protection. The rules governing the customer protection fund provide that compensation on an investor’s claim shall not exceed Rs 1 lakh subject to a maximum of Rs 25 lakh per defaulter. The national commission made a number of observations: it said DSE is a profit-making body since it issues tickets (membership cards) as well as bonus tickets for trading rights to its member brokers. The member broker, in turn, charges brokerage from investors on a scale prescribed by DSE, which controls and organises the mode, manner and performance of the contract between the investors and its member brokers. A share broker cannot do business in security transactions without becoming a member of the stock exchange.
The stock exchange is also required to maintain the Stock Exchange Customer Protection Fund. Members are required to be a member of this fund and make a yearly contribution. Consumers can now hold the stock exchange liable if a broker defaults. But claims should be restricted to the actual loss involved in the transaction or Rs 1 lakh, whichever is lower. However, when several investors are duped by a broker and the total sum exceeds Rs 25 lakh, then the claim of each investor would have to be worked out proportionately on a pro rata basis.

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