BCI rules do not permit advertisement or solicitation by advocates or their firms. This website is for information only. See Disclaimer

The missing limb of justice: Karvy saga shows why Sebi SCORES only on paper in complaint redressal

Featured in

It’s been more than 70 days since Khubaib Alam filed a complaint with India’s stock-market regulator, the Securities and Exchange Board of India (Sebi). The Delhi-based banker, one among the many victims of the Karvy Stock Broking scam, had filed a complaint with the Sebi Complaint Redress System (SCORES) platform on November 23, 2019, the very next day after the regulator barred Karvy from adding new clients.

And Alam, like numerous Karvy clients, is still awaiting a response.

Before Sebi came out with the circular banning Karvy, Alam claims he had placed a payout request of about INR5 lakh on November 6, 2019. “The fund-transfer hasn’t been done yet. Also, I haven’t received any reply from Karvy, or from Sebi on the SCORES complaint,” Alam says.

To be sure, the complaints filed by investors on the SCORES platform have been forwarded by Sebi to the National Stock Exchange (NSE), which in turn has sought a response from Karvy within a week.

“But Karvy hasn’t replied, and, therefore, the matter is not moving further,” says Deepesh Kumar, a Mumbai-based Karvy client who has more than INR5.2 lakh stuck with the broker.

According to Kumar, his complaint was filed on SCORES on November 23, 2019. “Sebi forwarded it to the NSE on November 25, 2019. The NSE asked Karvy to reply by December 5, 2019. Karvy has not replied till date. Now, neither Sebi nor NSE is concerned about Karvy’s conduct,” he says.

Alam and Kumar are now part of a WhatsApp group called Karvy Victims, wherein 131 clients are trying to find ways to recover their money and stocks. Most group members have filed complaints on SCORES and have the same story to tell. They are yet to hear from Karvy, and the market regulator, too, has offered them no clarity.

The Karvy scam and the continuing hardship of its clients raise a big question over the efficacy of Sebi’s complaints-handling platform — SCORES. Conceived as a system for timely resolution of investor grievances, SCORES has seemingly turned into their burial ground.

As a result, it has drawn sharp criticism from several quarters in the recent past for failing to resolve investor grievances. In many cases, no hearing is offered to the aggrieved party, as complaints are disposed of with computer-generated replies, according to legal experts and investors.

Who SCORES the regulator?

Since 1992, the year it became an autonomous body, Sebi had been resolving grievances through the ‘securities customer complaint’ system, which was automated and renamed as SCORES in 2011.

SCORES is an online platform designed to help investors lodge complaints against listed companies and Sebi-registered intermediaries. All complaints received by Sebi against listed companies are dealt through SCORES.

Since the launch of SCORES, the number of pending grievances with Sebi has dropped miraculously. As far as efficiency is concerned, SCORES has recorded a redressal rate of 95% in recent years, the highest among regulators globally.

But despite its splendid on-paper performance, the platform continues to receive a lot of flak.

“It is systematically flawed,” a securities lawyer tells ET Prime requesting anonymity. According to him, SCORES works like a post office because it merely sends the complaint to the accused company or broker seeking response. Upon receiving the same, the complaint gets closed.

This raises serious concerns over the accountability of Sebi’s Investor Complaints Cell.

“While SCORES is a step ahead in grievance redressal, it needs to be taken to the next level,” says Sumit Agrawal, partner, RegStreet Law Advisors.

“The disposal of an investor complaint by obtaining an answer from the listed company may not mean redressal. Other than quantitative assessment of numbers, I don’t think there exists any qualitative assessment by external reviewers. Perhaps, feedback from complainants and a review by external committee or the board of Sebi is the need of the hour,” adds Agrawal, who is also a former Sebi official.

A fading ray of hope

The apex tribunal has been unsparing in its criticism of the SCORES platform and Sebi’s “hands-off” approach in dealing with investor complaints. For instance,in a recent case that Agrawal was arguing for the appellants, the Securities Appellate Tribunal (SAT) made the following observation:

“Despite providing detailed evidence relating to the fact that Schneider was not making any effort in getting listed in the nationwide stock exchanges and the valuation of its shares got done by Schneider was without taking all factors into account, instead of carrying out at least an examination, Sebi has treated these representations as just ordinary SCORES complaints like individual investors’ complaint such as non-receipt of shares, dividend etc.”

In the above case, investors had directly approached Sebi chairman Ajay Tyagi in March 2017 and handed over a detailed letter highlighting their concerns against Schneider Electric.

“SAT deplored the hands-off approach of Sebi in treating shareholders of companies on regional exchanges and held that [matters regarding] continued listing, exit, and valuation of shares of companies cannot be treated as individual investor complaints (by disposing them of routinely through SCORES), and it asked the regulator to pass a reasoned order in three months,” Agrawal says. “While companies are interested parties, investors expect Sebi to act independently. It gives them hope.”

Agrawal has an important point.

Investors trust Sebi as the guardian of their interests because, after all that is the founding philosophy behind the market regulator whose preamble states that its basic function is to “…protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected there with or incidental there to”. Hence, the regulator’s inability to pass reasoned orders, or speaking orders — regarded as the third limb of natural justice — is a worrying sign.

An observation made by SAT in the above case underlines the magnitude of lapses in the regulator’s grievance-resolution mechanism. “Given the mandate of investor protection, such an approach adopted by Sebi as regulator is completely untenable,” it said.

In another case, Sanjay Thakur, a surgeon who was with a company-run hospital before falling out with its senior management, says he filed a whistleblower complaint over e-mail to top Sebi officials against Reliance Industries, raising corporate-governance issues.

His e-mail was forwarded to the company and the response he got was that since the issue was related to the use of corporate social responsibility fund, it came under the purview of the Ministry of Corporate Affairs (MCA).

The complaint, which was registered on the SCORES portal in February 2018, was closed in early March with a remark, “we have already replied”, without any further probe or explanation.

The ordeal kept repeating, at least for eight times, until last December. Each time, Thakur says, the regulator disposed of the complaint summarily not bothering to go into documentary evidences and without a proper hearing. It did not even check whether the reply given by the company addressed the issues raised, he claims.

At last, the ninth time, Thakur was fortunate to get a response from SCORES asking him to provide documentary evidences. “You are advised to provide documentary evidences supporting the allegations of whistle-blower victimisation (your employment details with the company, any relevant e-mail correspondences with company officials, correspondences with the audit committee, etc.), if any. For all other issues mentioned in your complaint, you are advised to approach the MCA,” he says

Thakur says that he had then sent a strongly worded e-mail requesting the finance ministry to “sack the entire Sebi board” as it was “scuttling the probe”. He believes the e-mail was sent back to Sebi by the ministry and that’s why the probe has now started. Thakur is hopeful of getting a fair hearing this time.

These are not one-off incidents. Agrawal of RegStreet explains that in many cases, Sebi in a routine manner converts investor complaints of securities fraud, non-disclosures, siphoning off, valuation, insider trading, manipulation of securities, and accounts etc. to SCORES complaints.

“This is undesirable,” he says. “If Sebi will not apply its mind or dig the alerts provided by such complaints, investors may not have recourse in law (The Sebi Act bars jurisdiction of civil courts) and hence it must be appealable at SAT.”

In jest, the lawyer quoted earlier on condition of anonymity says, “Today, if Ramalinga Raju [of the Satyam scam] sends his confession letter to Sebi, it would be treated as a SCORES complaint”.

In a recent case, where Sebi moved the Supreme Court against SAT, the regulator in its appeal puts forth the challenges it faces in dealing with complaints on SCORES and explains the manner in which it goes about handling them.

“Many of the thousands of complaints received by Sebi on the SCORES platform are of a nature which brings out non-compliance or contravention of securities laws by listed company or other market participants and therefore would require detailed analysis and investigation, which in itself is a time consuming process and hence, such complaints cannot be disposed of in a time-bound manner,” Sebi says in its appeal, a copy of which ET Prime has seen.

Citing an earlier judgment, the market regulator points out that “there is no provision therein entitling any third party to send any complaints to Sebi, and Sebi is not bound to entertain complaints. The judgment also held that it would be physically and practically impossible for Sebi to give a hearing to each and every complainant.”

On its handling of complaints on the platform, Sebi says that SCORES “has disposed of a number of complaints of a general nature which has benefited various investors and if the disposal of such complaints on SCORES platform cannot be treated as disposal and requires reasoned orders in the case of each and every complaint, the same would open a Pandora’s box and make the SCORES platform impracticable and non-functional.”

Missing the woods for the trees

Coming back to Karvy, NSE had in its first report to Sebi mentioned that securities worth INR2,300 crore of more than 95,000 clients were transferred by the broker to one of its own demat accounts by misusing the power of attorney (PoA) given by clients.

To its credit, Sebi did move swiftly to transfer these pledged shares back to the clients’ accounts, but that was only a part of the solution.

Karvy is one of the largest brokers in India and when the scam came to light, it had around 1.2 million clients, of which 300,000 were active ones. There is still no clarity over the real proportion of the Karvy mess. ET Prime had earlier reported that Karvy had not been prompt in honouring payout requests even much before the fiasco.

While Karvy hasn’t replied to Kumar and Alam’s SCORES complaints, it has sent them and many others in the WhatsApp group e-mails putting the blame squarely on the Sebi circular for the non-payment of dues.

“When Sebi banned Karvy, money kept with the broker for trading purpose got stuck with them. The traders who were having open futures and options positions, were forced to square off after the ban and again the fund got stuck with the broker. Traders, who were waiting for the opportune moment to buy shares had kept cash with Karvy, also have their money stuck,” Kumar says.

“So, this cash deposited with the broker has nothing to do with the Sebi order and Karvy is sitting over it on pretense of the Sebi ban,” he adds.

Investors suspect that Sebi is not even aware of the amount of payouts/funds on which Karvy has been sitting for more than two months. They want the regulator to reveal the real quantum of failed payout requests and share Karvy’s official statement to Sebi as to when it would pay back its clients.

Half measures

Companies are required to file an ‘action-taken’ report within 30 days of receiving a SCORES complaint, failing which Sebi can initiate action.

According to Akash Karmakar, partner at Law Offices of Panag and Babu, in Karvy’s case while Sebi is empowered to order the impounding of proceeds of transactions being investigated or freezing proceeds of, or dealings in securities which were under investigation, it has been reluctant to exercise these powers.

Meanwhile Karvy, in its response to ET Prime’s queries, says it has been informing investors about the present status, and in some cases even resolving complaints. Karvy added that it is looking to raise funds at the group level and hopes to see results before mid-February. “We hope to ensure that we complete the entire backlog from clients by the end of this month. We hope to settle all payouts, and complete all share transfers by the February 15,” it says.

On compensating clients for the delay in payouts, the broking firm says it will be considered on a case- to-case basis.

The bottom line

In the past, similar incidents have shown that once a financial fraud is committed, it becomes a daunting and seemingly endless fight for its victims to get back what is rightfully theirs. And the Karvy saga has been no different, with investors slowly losing hope each passing day. They have little faith in the broker’s assurance since many promises made since November 2019 are already well past their due dates, and adding to their desperation the market regulator has been dragging its feet.

As for many members of the Karvy Victims’ WhatsApp group, like 69-year old Pune resident Ashok Ghose, the radio silence on the matter from the regulator, exchanges, and Karvy has been nerve- racking. For the retired Tata Motors employee, a majority of his holdings, worth around INR16 lakh, have been pledged by Karvy without his consent and a separate payout request for funds worth INR5 lakh has not been honoured since November 23, 2019 — a complaint for which was filed with SCORES on December 8, 2019.

“I am a senior citizen, you can imagine the kind of anxiety I am going through, being made to run in circles by the authorities,” Ghose says.

A detailed questionnaire sent to Sebi did not elicit any response0