The Securities and Exchange Board of India (SEBI) has sought feedback on complaint handling by market intermediaries (MIs) and market infrastructure institutions (MIIs). The Investor Education and Protection Fund Authority (IEPFA), which impounds unclaimed funds, wants feedback on plans to ease its much-criticised claims process. The good news is that both are asking for feedback and will, hopefully, give it serious consideration. Does this signal a new sensitivity towards investor issues and a genuine attempt to ease friction-ridden processes? If it does, it ought to have been more comprehensive, since the hardship investors face is not fully encapsulated in the questions posed by the discussion papers.
Does SEBI SCORE?
SEBI is looking to strengthen the investor grievance redress through online dispute resolution mechanisms. The process, at present, is that investors first file their complaint with the respective company, MIs (includes brokers, depository participants, registrars, etc) or MIIs (usually stock exchanges and depositories). If it remains unresolved, you can file an online complaint with SEBI’s complaints redress system called SCORES. SCORES connects with MI and, if the issue remains unresolved, it goes into a three-step process which involves mediation/ conciliation, arbitration and, sometimes, appellate arbitration. Unfortunately, SEBI is only seeking feedback on the redress process followed by MIs without first attempting to find out if SCORES is working as it should.
The questions framed by SEBI’s consultation paper can be answered very quickly from the investor perspective. An online grievance redress system is welcome but it cannot remain one-sided and prejudiced against the investor, as we have said often enough in Moneylife and through Moneylife Foundation.
The process today pits an investor with limited knowledge and resources (about capital market rules, regulations and how they can be systematically side-stepped) against intermediaries with deep pockets and specialised teams including lawyers, to contest investor complaints. In most cases, the brokers’ representatives are on very friendly terms with MII officials, since their daily work keeps them constantly in touch. Investors are intimidated by their show of camaraderie and further bulldozed by their lawyers.
SEBI officials have to first understand and acknowledge that this is an unfair system. Then, if it intends to make the system fairer, it needs to handle investor complaints in house, instead of fobbing off the responsibility on to intermediaries. It also needs to expand the scope of the discussion and start with whether SCORES itself needs serious revamping. When I posed a question on Twitter about the efficacy of SCORES, the response was mostly negative.
In the early-1990s, GV Ramakrishna, SEBI’s most effective chairman yet, came up with a strategy of compiling and issuing regular press releases, naming and shaming companies with the highest pending investor complaints. Apart from a drastic reduction in complaints, it also served as a warning to investors. The situation is diametrically different today. The SCORES website seems designed to keep out investors, restrict access to information and protect more powerful stakeholders.
As a cautious investor, if you want to check the track-record of a market intermediary, SCORES has a mandatory registration requirement that demands astonishing details such as Aadhaar, PAN, eKYC, bank account and bank IFSC code, in addition to email and mobile number. This is a great example of citizens’ need to be protected from unnecessary data collection by government, without first establishing how well the data is protected. Why should a SCORES registration process require Aadhaar, PAN and bank details? It can be collected only if it is germane to a specific complaint. Were this data to be hacked, it is adequate to clean out the bank accounts of investors.
Moreover, why is the regulator guarding information about complaints against market intermediaries behind such an impenetrable wall, instead of making it freely available? While specific details of complaints and complainants may be protected, all regulators need to publish information about number of investor complaints as part of their fiduciary obligation. There should also be an escalating matrix of penalty and action against those with repeated complaints against them. Instead, SEBI’s consultation paper asks whether “intermediaries also be required to publish data/information” regarding arbitration matters. Why talk of intermediaries? SEBI ought to publish data on complaints and grievance redress and make it openly available on its website.
SEBI’s discussion paper also asks whether the appellate arbitration should be done away with and the extent of interim compensation provided to investors who win arbitration in case the intermediary files an appeal. How are investors supposed to weigh-in on these issues without data? Unless SEBI collates market-wide data and puts it in the public domain, the only relevant feedback it will receive would come from intermediaries and their support system, including lawyers and consultants, making the entire exercise rather biased.
Arnaud Descamps, an investor, says that a link to download documents in the SCORES system continues to be dysfunctional since September 2020, with no action to rectify it. He complains of information asymmetry even while dealing with complaints against companies. In his complaint, he alleges that the company that he complained against had access to far more information than he did and got away by misleading the regulator.
Like all others, Mr Descamps complains that SCORES is essentially a post-office. It either closes complaints after hearing from the intermediary, without giving the investor a chance to respond. Officials handling SCORES are eager to transfer responsibility to intermediaries, especially the stock exchanges, rather than understand grievances and make a serious attempt to resolve them. Clearly, the unequal battle for investors begins at SEBI itself, although the preamble to its statute puts investor protection ahead of market regulation.
IEPFA’s Simplification
The IEPF Authority pooled unclaimed shares, bonds as well as the dividends, interest, bonus and other benefits offered by listed companies into a fund which is managed by IEPFA, if these remain unclaimed for seven years. It has an online recovery mechanism that is so cumbersome and full of friction that most investors require the help of specialised agencies such as IEPF Claim, Share Samadhan or Recoversy or other agents in order to claim what is legitimately theirs. The fees charged for such intermediation range from 20% to 50% of the value of money locked up in IEPFA.
Until recently IEPFA, which is run by bureaucrats of the ministry of corporate affairs (MCA), stubbornly insisted that it offered an easy recovery mechanism and even warned claimants not to use the help of ‘agents’. The good news is that IEPFA’s consultation paper has recognised the need to simplify and expedite the refund process. According to the paper, IEPFA intends to provide online interface between investors and companies to hasten the process with strictly enforceable timeline. The proposed process looks to introduce faster processing for claims below a threshold value (Rs5 lakh) and to reduce documentation required above the threshold.
According to the discussion paper, delayed responses from companies to verification requests slow the process. It hopes to address this with strict timelines and online engagement with investors. On the positive side, the IEPF paper is extremely detailed (read here: https://www.iepf.gov.in/ bin/dms/getdocument?mds=rQszgsd4KKfW64JAanoocg%253D%253D&type=open) and specific in its analysis and seems sincere about easing the claims process. Investors wanting to file claims would do well to read it because it clearly lists all the major reasons for delays, discrepancies and rejection of claims. Taking care of these issues, especially with regard to nominees, succession certificates, joint accounts and corporate actions with regard to unclaimed shares, will help investors avoid mistakes while filing applications.
Another positive aspect is that it has transparently put out data on funds held by IEPF—Rs5,685.25 crore and about 1.17bn (billion) unclaimed shares at the end of November 2022—as well as complaint handling in simple graphics.
Strangely enough, the excellent report ends by posing three questions which appear to be an attempt by IEPFA to shirk its core responsibility through a consultation process, while enjoying interest on investors’ funds!
a.Should the approval process of claims filed remain with Authority, or delegated to the company up to a certain threshold for certain types of claims, or delegated completely?
Our response: Since IEPF has blamed companies for delays, transferring responsibility back to them, while IEPFA enjoys the interest on investors’ money, is grossly unfair. Pushing the issue back to companies, when they no longer have full-fledged share transfer departments, is a shocking attempt to transfer its duties after having impounded unclaimed funds and corporate benefits.
b.Should the shares and amount be transferred by the Authority directly to the claimant or to the company which will further transfer it to the claimant?
Our response: Since the shares, bonds, dividends, interest and other benefits have been forcibly impounded in IEPF if unclaimed for seven years, the Authority should surely take the responsibility of making payments rather than pushing investors and their heirs back to companies.
c.Should any threshold of limitation be brought by which claims can be settled only as a value of shares or time-barred?
Our response: Most shares being claimed by investors or their heirs are likely to be of blue-chip companies which will continue to pay dividend, interest and issue bonus shares. It is unlikely that any investor would claim or chase defunct companies, since there is already a huge problem of orphaned shares blocking demat accounts. So any attempt to sell the shares after 10 years only deprives investors of legitimate dues and should be avoided. Having changed the law to impound shares and with vast resources available with IEPFA, in terms of interest, it needs to work for investors instead of wasting time and money on pointless investor education seminars and advertising campaigns.
Regulators need to clean their house first, before they can clean the houses of the Regulated.
This is evident from the fact that the link to download documents from SCORES system is dysfunctional since Sept. 2020. What a shame!
I give another case of the most famed NSDL - their website informs the email ID for complaints as [email protected]. Try sending a message on this email ID and up pops the message "address could'nt be found or is unable to receive mail". What can one do other than bang one's head?
In short everyone wants an "Investor grievance Free" Life.
My (includes my husband) experience is that the system of RTAs is the worst villain this scheme of things. They do not bother about shareholders; after all it is the company which pays them.
The easiest way of rejecting any letter/ document is "Signature varies" forgetting that they have the document of the IPO, which would be decades old. Earlier one could write to the company secretary, or call at the Regd. Office and get things done; but not now. The term 'unclaimed dividend' is a misnomer; it should be UNPAID DIVIDEND, as many a time they do not discharge their responsibility, citing excuses., and sit on shareholders money and then transfer them to IEPF. They also lose documents given to them, and keep blaming the shareholder. This is my experience with even the biggest RTA of all - Karvy. Many a time my husband had gone to their local office with docs, but their Hyderabad office would not act. Result is money due to me is going into the Investor protection and education fund, and claiming it is an ordeal. (Getting to lodge as complaint is SCORE is not easy, as the computer link often fails)
Whats new? Nothing has changed. Unless the regulator and the government are delinked or government functions are outsourced, its like the Leonard Cohen song, 'everydbody knows, that's how it goes.'
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SEBI is looking to strengthen the investor grievance redress through online dispute resolution mechanisms. The process, at present, is that investors first file their complaint with the respective company, MIs (includes brokers, depository participants, registrars, etc) or MIIs (usually stock exchanges and depositories). If it remains unresolved, you can file an online complaint with SEBI’s complaints redress system called SCORES. SCORES connects with MI and, if the issue remains unresolved, it goes into a three-step process which involves mediation/ conciliation, arbitration and, sometimes, appellate arbitration. Unfortunately, SEBI is only seeking feedback on the redress process followed by MIs without first attempting to find out if SCORES is working as it should. 
SEBI’s discussion paper also asks whether the appellate arbitration should be done away with and the extent of interim compensation provided to investors who win arbitration in case the intermediary files an appeal. How are investors supposed to weigh-in on these issues without data? Unless SEBI collates market-wide data and puts it in the public domain, the only relevant feedback it will receive would come from intermediaries and their support system, including lawyers and consultants, making the entire exercise rather biased.
This is evident from the fact that the link to download documents from SCORES system is dysfunctional since Sept. 2020. What a shame!
I give another case of the most famed NSDL - their website informs the email ID for complaints as [email protected]. Try sending a message on this email ID and up pops the message "address could'nt be found or is unable to receive mail". What can one do other than bang one's head?
In short everyone wants an "Investor grievance Free" Life.
The easiest way of rejecting any letter/ document is "Signature varies" forgetting that they have the document of the IPO, which would be decades old. Earlier one could write to the company secretary, or call at the Regd. Office and get things done; but not now. The term 'unclaimed dividend' is a misnomer; it should be UNPAID DIVIDEND, as many a time they do not discharge their responsibility, citing excuses., and sit on shareholders money and then transfer them to IEPF. They also lose documents given to them, and keep blaming the shareholder. This is my experience with even the biggest RTA of all - Karvy. Many a time my husband had gone to their local office with docs, but their Hyderabad office would not act. Result is money due to me is going into the Investor protection and education fund, and claiming it is an ordeal. (Getting to lodge as complaint is SCORE is not easy, as the computer link often fails)