CONSUMER RIGHTS
Stock exchange liable for poor service
Pushpa Girimaji

Whether it is a case of inordinate delay on the part of a company in sending share certificates and refunds or unfair trade practices by stock-brokers, investors have successfully used the consumer protection law to secure justice. Now more recently, eight consumers sought the help of the court to claim compensation from the stock exchange for the losses suffered by them as a result of a member (stock-broker) being declared a defaulter. The order of the apex consumer court, holding the stock exchange to be a 'service provider' and, therefore, accountable for any deficient service provided to the investor, will go a long way in protecting the rights of consumers.

The grievance of the consumers in this case was that the Delhi Stock Exchange cancelled the membership card of the stock-broker they were dealing with, on the ground that he failed to honour his commitment. Subsequently, his ticket (membership card) as broker was also auctioned. However, the DSE did not ensure disbursement of the amount due to them as a consequence of their transactions with various companies done through the broker. Thus alleging deficiency on the part of the DSE, they sought recovery of their money—varying from Rs 1.36 lakh to Rs 4 lakh. The district forum, before which the case was first filed, held that the total liability of the DSE towards a defaulter member would be Rs 25 lakh, and its payment in respect of the eight complainants would be limited to Rs 1 lakh per person only.

In support of this decision, it quoted the rules governing the Investor Protection Fund operated by the DSE, and said under the rules, there was a ceiling of Rs 1 lakh per investor. While agreeing with this view, the state commission reiterated that the stock exchange was also liable but its liability was limited to Rs 1 lakh per investor. The stock-broker, on the other hand, had the liability in respect of the entire amount received from the consumers.

The DSE's main argument before the apex court was that since the consumer pays consideration in the form of brokerage to the broker, the consumer had hired the services of the broker only and not the DSE. So only the broker had to pay the amount due to the consumers and not the stock exchange. It also contended that the Consumer Protection Fund was a trust created to protect the interests of bona fide investors, particularly small investors from losses, and not customers who indulged in speculative transactions.

Dismissing this contention, the commission said: "In our view, not only does the broker renders service in the purchase and sale of listed securities but the stock exchange is also required to render service to the investors. The stock exchange controls and organises the mode, manner and performance of the contract between the investors and its member-brokers. It also charges fees on various counts. Further, a share broker cannot do any business in security transactions without becoming a member of the stock exchange, as provided in Section 19 of the Securities Contracts (Regulation) Act, 1956.

"The stock exchange is also required to maintain the Stock Exchange Customer Protection Fund. Every member of the stock exchange is required to be a member of the said fund and is required to make yearly contribution to the fund. Further, the stock exchange, which is an incorporated company, consists of its members and acts through its members. Hence, the stock exchange is also a service provider.’’

The apex court further pointed out that the complainants in this case would be consumers who are affected by the services provided by the share-broker, who was a member of the DSE. The DSE is required to provide various services as per the Memorandum of Association and the rules governing the sale and purchase of shares, including the constitution and operation of the fund for protection of investors in case of default by its member(s). From that fund they are required to pay the amount as prescribed. Hence, the complaint for recovery of such amount is maintainable.

Almost 12 years ago, the apex court had held that the services rendered by stock-brokers, too, came under the purview of the consumer courts and if a consumer suffered loss or harassment as a result of deficient or negligent service rendered by a stock-broker, he had the right to haul him up and seek compensation. Now the new order holding stock exchanges too liable for deficient service is a milestone in the area of investor protection.

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