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Investing Last Updated: Jan 6th, 2005 - 16:06:12


Ombudsman With Reference to Capital Markets in India
By M.Aparna
Dec 27, 2004, 06:43

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OMBUDSMAN (OM’ .BUDS .MAN)

WITH REFERENCE TO CAPITAL MARKETS IN INDIA

Approximately forty years ago word of the Ombudsman began to spread around the world. Today, it is so popular that everyone knows that an Ombudsman has long proven to be a most effective means of bringing back the people’s faith in democratic government.

Ombudsman is “ahm’ bedz’ man which means a public official appointed to investigate citizens’ complaints government agencies or officials that may be infringing on the rights of individuals.

The concept of Ombudsman traces its root to the branch of Administrative Law. It is a measure of imposing checks and balances on the functioning of (public) authorities. In terms of Oxford Dictionary, Ombudsman means, ‘Official appointed to investigate individuals complaints against public authorities’. In other words Ombudsman means ‘an attorney or representative who investigates a complaint against the administration’. Thus, the role of an Ombudsman can be understood as a watchdog on the administration

OMBUDSMAN IN U.K. - AN IDEAL OMBUDSMAN IN THE WORLD

 

  • In United Kingdom, the Financial Services and Markets Act (“FSMA”) which received Royal Assent on 14th June, 2000, establishes a new, single regime for the statutory regulation of financial services in the United Kingdom and establishes the Financial Services Authority (“the FSA”) as the statutory regulator.

 

  • According to the Act, an FSA to establish a new, single ombudsman scheme to resolve disputes between consumers and financial services firms quickly and with a minimum of formality. This new scheme will be known as the Financial Ombudsman Service (“the FOS”).

 

  • This new ombudsman scheme will replace eight existing dispute resolution schemes currently operating in the financial services sector including the Investment Ombudsman schemes set up by the Investment Management Regulatory Organisation (“the IMRO scheme”) and the Securities and Futures Authority Complaints Bureau and Arbitration Service (“the SFA scheme”).

 

·         The primary objective of the aforesaid scheme is to ensure that consumers and firms alike are able to benefit as soon as possible from the replacement of these former schemes with a single service operating across the financial services sector, it is proposed that these existing schemes shall cease to operate from the date on which the new arrangements under FSMA come into effect.

 

  • It does not deal with the complaints schemes operated by bodies which are Recognised Professional Bodies (“RPBs”) under the Financial Services Act 1986, which will be considered in the context of arrangements relating to the RPBs more generally. 

 

  • To conclude, unlike in India, there exists only one ombudsman scheme to settle the disputes between the consumers and financial services firms quickly with minimum formality.  

SEBI OMBUDSMAN IN INDIA

With a view to realize its twin objectives of regulating the capital markets and safeguarding the interests of the investors, the Securities and Exchange Board of India (SEBI) has recently set up a new institution called the ‘Ombudsman’ for regulating the capital markets.

Need of SEBI Ombudsman

The SEBI received /receiving complaints from the investors against listed companies for non-receipt of refund orders, non-receipt of share certificates, unit certificates, non-receipt of dividend and many more matters. They are even claiming damages or compensation or interest etc. from such listed companies. Towards investor protection, SEBI has taken two courses of action, i.e., advising the companies or the intermediaries to redress the same and/or prosecution or imposition of monetary penalty on the erring companies. However, the available action against intermediaries is the suspension and cancellation of registration or imposition of monetary penalty. The above does not redress the grievance of investors to give any compensation to the investors.

Considering the above injustice to the investors, SEBI issued an alternative redressal mechanism which is cheap, fast, informal and efficient which has been engaging the attention of SEBI. SEBI is exploring the avenue such as scheme of Ombudsman. Further, the Joint Parliamentary Committee on Stock Market Scam and matters relating thereto in its report recommended that the concept of Ombudsman, which is already being used in the Banking and Insurance Sectors, should also be extended to the capital market.

Framework of SEBI (Ombudsman) Regulations, 2003

The proposal of Ombudsman for Securities Market was discussed in the meetings of the legal Advisory Committee constituted by the SEBI, which is headed by Mr.Justice M.N.Venkatachaliah, Former Chief Justice of India. The Committee has suggested the framing of the SEBI (Ombudsman) Regulations by SEBI pursuant to its functions under section 11 of the SEBI Act, 1992. Accordingly, the draft of the SEBI (Ombudsman) Regulations, 2003 has been prepared. The SEBI vide Notification No.SO 953(E); Dated:21.08.2003 notified that the SEBI (Ombudsman) Regulations, 2003 is for the establishment of the office of Ombudsman to redress the grievance of the investors in securities and for matters connected therewith or incidental thereto.

However, SEBI brought out certain amendments  to the said Ombudsman Regulations and named it as The SEBI (Ombudsman) (Amendment) Regulations, 2003 vide Notification No. F.N. SEBI/LAD/DOP/22090/2003, dated:5/12/2003. It gets into operation soon after it receives the consent of the Parliament.

Meaning of SEBI Ombudsman

The Ombudsman under SEBI means an Office (person) appointed to redress investors complaints against a listed company and/or a capital market intermediary as defined in the SEBI Act. Regulation 2(1) defines an Ombudsman as “any person appointed under Regulation 3 of these regulations, and unless the context otherwise requires, includes ‘Stipendary Ombudsman’”. 

Stipendary Ombudsman under regulation 2(n) means ‘a person appointed under regulation 9 for the purpose of acting as an ombudsman in respect of a specific matter or matters in a specific territorial jurisdiction and for which he may be paid such expenses, honorarium or sitting fees as may be determined by the Board from time to time’. Regulation 9 states that notwithstanding the appointment of the Ombudsman under regulation 3, SEBI may appoint a person as a stipendiary ombudsman out of the panel prepared under sub-regulation 4 of regulation 3, for the purpose of acting as an ombudsman in respect of a specific matter or matters in a specific territorial jurisdiction as may be specified in the order of appointment. Infact, the stipendiary ombudsman will, save as otherwise provided, exercise all such powers and functions as are vested in an ombudsman under these regulations.

·         Office of SEBI  Ombudsman

The SEBI has framed a set of regulations to pave the way for appointment of Ombudsman to redress the grievances of investors in the securities market. The regulation 3 provides that a three-member Selection Committee, possessing prescribed qualifications and nominated by SEBI chairman, would be appointed to recommend the prospective candidates to the SEBI Board, which may appoint one or more Ombudsman for such territorial jurisdiction as may be specified. Further, the SEBI regulations also provides for the appointment of Stipendiary Ombudsman from a panel of persons prepared by the Selection Committee. Each such panel shall be in force for a maximum period of two years and shall be reconstituted from time to time.

The office of the Ombudsman would be located at the Head Office of the SEBI-Mumbai, However, the regulations also permit an Ombudsman or Stipendiary Ombudsman to hold sittings at the places within his area of jurisdiction basing on the necessity. Infact, the Board  may provide the premises and other infrastructures including staff or secretarial assistance for the office of Ombudsman or Stipendiary Ombudsman, as the case may be.

A person appointed as an Ombudsman shall necessarily be an Indian Citizen and of high moral integrity who is not below the age of 45 years. He shall either be a retired district judge or qualified to be appointed as a district judge or have at least ten years experience of service in any regulatory body or have special knowledge and experience in law, finance, corporate matters, economics, management or administration for a period not less than ten years or an office bearer of an investors association having experience in dealing with matters relating to investor protection for a period not less than 10 years. The term of appointment of an ombudsman has been fixed for three years being eligible for re-appointment for another period of two years provided such person not attained the age of sixty-five years. However, before the expiry of period of said five years, the Board, at any time, may terminate the office of Ombudsman by giving him not less than three months notice in writing or salary and allowances eligible for such period, and similarly the Ombudsman, at any time, before the expiry of such period, can relinquish his office of Ombudsman by giving not less than three months notice in writing.

The salary, allowances, honorarium or fee payable to, and other terms and conditions of service of an Ombudsman including Stipendiary Ombudsman shall be determined by the Board from time to time.

A person to hold the office of Ombudsman shall not be

ü      an undischarged insolvent;

ü      convicted of an offence involving moral turpitude;

ü      an unsound mind;

ü      charge sheeted for any offences;

ü      a whole time director in the office of an intermediary or a listed company and a period of atleast 3 years has not elapsed.

The regulations have also stipulated that a person shall be eligible to be appointed as a ‘Stipendary Ombudsman” only if he/she has held a judicial post or an executive office under Central or State Government for at least 10 years or is having experience of at least 10 years in matters relating to consumer or investor protection or has been a legal practitioner in corporate matters for at least 10 years or has served a minimum period of ten years in any public financial institution or in a regulatory body.

·         Authority of SEBI Ombudsman

The ombudsman is empowered to:

ü      facilitate amicable resolution of the complaint(s) received against any listed company or a market intermediary; or

ü      adjudicate such complaints in the event of failure of a friendly or amicable settlement;

ü      avoid the denial on the ground that there are some grey areas which are of concern , while the benevolent investor-protection spirit behind the regulations need appreciation.

In addition to above, the Ombudsman shall

ü      draw up an annual budget for his office of Ombudsman after consultation with the Board and shall incur expenditure within and in accordance with the provisions of the approved budget;

ü      submit an annual report to the Board within three months of the close of each financial year containing general review of activities of his office of Ombudsman;

ü      furnish from time to time such information to the Board as may be required by the Board.

 

It may be noted that every financial year of the Ombudsman shall end on 31st March of each year and the annual report shall be given in such form and manner as may be specified by the Board.

 

  • Complaint of Investor Grievances to SEBI Ombudsman

 

The SEBI regulations specified the grounds on which an investor may make a complaint to an Ombudsman.

 

The grounds may include

 

ü      non-receipt of dividend,

ü      non-receipt of allotment letters, share certificates, unit certificates, debenture certificates,

ü      non-receipt of refund orders,

ü      rights and bonus entitlements,

ü      non-receipt of interest, redemption amount,

ü      non-receipt of annual reports or statements pertaining to portfolios,

ü      non-transfer of securities within the stipulated time,

ü      any of the matters covered under section 55A of the Companies Act, 1956

ü      any grievances against an intermediary or a listed company, etc.

 

Any person who has grievance against a listed company or an intermediate relating to any of the specified matters can approach an Ombudsman only

 

ü      after a written representation to the listed company or the intermediary named in the complaint which is rejected; or

ü      when the complainant does not receive any response from the listed company or the intermediary within a period of a month after the listed company or the intermediary concerned received the representation; or

ü      when the complainant is not satisfied with the reply given to him by the listed company or an intermediary.

 

Towards Proceedings before Ombudsman

 

ü      Strict rules of evidence under the Evidence Act, 1872 shall not apply;

ü      Ombudsman may determine his own procedure consistent with the principles of natural justice;

ü      No legal practitioner is permitted to represent the defendants or respondents at the proceedings except with the permission of the Ombudsman to represent only the complainants.

 

On conclusion of Proceedings

 

ü      The Ombudsman or the Board, as the case may be, shall be entitled to award reasonable compensation along with the interest including future interest till date of satisfaction of the award at a rate which may not exceed one percent per mensem.

ü      The Ombudsman or the Board, as the case may be, may determine the cost of proceedings in the award and include the same in the award or as the case may be, in the order.

ü      The Ombudsman or the Board, as the case may be, may impose cost on the complainant for filing complaint or a petition for review, which is frivolous.

 

 

Generally if an award is based on mutual agreement between the parties, it is final and binding. In the event of failure between the parties to arrive at an friendly or amicable settlement then there is a provision for adjudication. In case of adjudication, the Ombudsman is required to give his award within three months from the date of filing of the complaint. Under clause 20 of the said regulation, any party aggrieved by the award on adjudication may, within one month from the date of receipt of the award, file a petition before the SEBI board setting out the grounds for review of the award. 

 

Thus, it is a quasi-judicial body because it decides the disputes among parties and has the power to pass an award that is binding. This award is inclusive of compensation with interest and the costs of the proceedings.

 

 

  • Display of the particulars of the SEBI Ombudsman

 

 

Owing to the importance of Ombudsman in the capital market, SEBI through its regulations made it mandatory that every listed company and every intermediary shall display the name and address of the ombudsman in its office premises in such manner and of such place as specified by SEBI, to bring the same to the knowledge of shareholders or investors or unit holders visiting the office premises of the listed company or the intermediary and whenever necessary they can make use of it. Further, disclosure shall also be made in the offer documents or other agreements with clients.

 

 

  • Modification to the SEBI (Ombudsman) Regulations, 2003

 

If any difficulty arises in giving effect to the provisions of these regulations, the Board may issue such directions or clarifications as it may think necessary or expedient for removing the difficulty.

 

  • Flaws in the SEBI (Ombudsman) Regulations, 2003

 

Some of them are explained below:

 

Ø      The objective of the Ombudsman mechanism of SEBI is the speedy redressal of investor grievances on various matters, as more specifically mentioned in clause 13 of the said regulation. However, the proposed mechanism is bound to delay the dispensation of justice, thereby defeating the very objective.

 

Ø      The confusion results on reading of clause 2(1)(g), clause 13 and clause 14(2), because clause 2(1)(g) defines “complainant” as “any investor who lodges complaint with the Ombudsman and includes a recognized investors association’, clause 13 permits any person to lodge a complaint, whether he is an investor or not, and clause 14(2) contemplates that the complaint shall be in writing duly signed by the complainant or his authorized representative (not being a legal practitioner) in the prescribed form.

 

Ø      The reading of clause 6 and clause 9 will only results into contradiction and jeopardize the investors cause. Because, as per the regulations, the Ombudsman shall not suffer from any disqualification under clause 6, but under clause 9 a stipendary ombudsman need not possess the same qualifications, though he can under clause 9 act as an ombudsman in respect of any specific matter or matters in a specific territorial and exercise all the powers and functions vested in an Ombudsman.

 

Ø      The Ombudsman shall be nominated by the SEBI chairman on the basis of the recommendation made by a selection committee. But SEBI, the appointing authority, is headed by a person who has no judicial background. Further, the said regulation shall not mandate that the recommendation of the selection committee shall be final and binding. This is sham of justice.

 

Ø      Legal representation is expressly disallowed unless it is permitted by the Ombudsman and that too it is restricted only to complainants. This sounds laudable but is unjustified because if there are any issues of law or even facts then legal representation is must and further it should not be forgotten that the Ombudsman may not always be a lawyer or a person having any knowledge of law.

 

INSURANCE OMBUDSMAN AND SEBI OMBUDSMAN – DISTINCTION

The recommendation of a trial with the institution of Ombudsman has been made by the Malhotra Committee as a measure for reducing litigation. The Insurance Ombudsman Redressal of Public Grievances Rules, 1998 (Insurance Rules) was framed five years back by the Central Government in exercise of its power under sub-section (1) of section 114 of the Insurance Act, 1938 for appointment of an Ombudsman in the Insurance Sector.

 

Insurance Ombudsman

SEBI Ombudsman

It is regulated by the Insurance Ombudsman Redressal of Public Grievances Rules, 1998 w.e.f.

It is regulated by the SEBI (Ombudsman) Regulations, 2003 w.e.f. August 21, 2003.

He is the person appointed by the governing body of Insurance Council to redress the grievances of the insured customers and mitigate their problems involved in redressal of those grievances.

He is the person appointed by SEBI to redress the grievances of investors in the securities market.

He is a person whose style of working is unlikely to be inhibited under the Advisory Committee constituted under rule 19.

He is not more than an agent or a delegate of that regulating authority, i.e.,SEBI.

Under the proviso to Rule 2 of the Insurance Rules, the Central Government may exempt an insurance company from having an Insurance Ombudsman, if it is satisfied that an insurance company has already a grievance redressal machinery which fulfils the work of the Rules.

There is no such proviso under the SEBI regulations.

An award given by an Insurance Ombudsman is not binding on the complainant as per the insurance rules. If the complainant does not intimate the acceptance of the award within the prescribed period, it may not be implemented by the insurance company (Rule 17).

An award given by the Ombudsman is final and binding on the parties and persons claiming under them subject to review by SEBI itself if there is substantial miscarriage of justice or there is an error  apparent on the face of the record (Regulation 20).

The task before the insurance ombudsman-safeguarding the interests of the insured – is much less tough than that of the Ombudsman for investors. Because insurers are very few and have so far been government-owned, directly or indirectly, and even after effect is given to the country’s privatization policy there can no conceivable hurdle in the way of ombudsman functioning.

The task before the SEBI Ombudsman safeguarding the interests of the investors is tougher than that of the Insurance Ombudsman because he was the person charged with the duty of removing the grievances of the investors against listed company(s) or intermediary(s) in the capital market.

He will have to tackle a few number of insurance companies.

He will have to remove the grievances of investors against those who control and manage innumerable companies is a different kettle of fish.

Insurance ombudsman shall be paid salary equal to that of a judge of the High Court (with allowances to be specified by the Central Government).

SEBI Ombudsman shall be paid salary, allowances and so on, of an Ombudsman appointed under it to be determined by SEBI from time to time.

 

BANKING  OMBUDSMAN AND SEBI OMBUDSMAN - DISTINCTION

 

The Reserve Bank of India had, on June 14, 1995, introduced the Banking Ombudsman Scheme. The Scheme intends expeditious and satisfactory disposal of customer complaints in a time bound manner. The scheme is applicable to all commercial banks having business in India (except Regional Rural banks) and scheduled primary cooperative banks.  

 

Banking Ombudsman

SEBI Ombudsman

It is regulated originally by the Banking Ombudsman Scheme, 1995 w.e.f. June 14, 1995 and revised Banking Ombudsman Scheme, 2002 w.e.f. June 14, 2002.

It is regulated by the SEBI (Ombudsman) Regulations, 2003 w.e.f.August, 21, 2003.

He is the person appointed by Reserve Bank of India (RBI) to redress the grievances against deficiency in banking services, concerning loans and advances and other specified matters.

He is the person appointed by SEBI to redress the grievances of investors in the securities market.

He acts as an overseer, and a regulatory body, who is competent and has complete knowledge of working of banks and the banking system in India.

He is not more than an agent or a delegate of the regulating authority, i.e.,SEBI.

An award given by the Ombudsman is not final and binding until the complainant furnishes. within a period of 1 month from the date of award, a letter of acceptance of the award in full and final settlement of the complaint.

 

An award given by the Ombudsman is final and binding on the parties and persons claiming under them subject to review by SEBI itself if there is substantial miscarriage of justice or there is an error  apparent on the face of the record (Regulation 20).

The remuneration and other perquisites payable to Banking Ombudsman is determined by RBI from time to time and shall be borne by the banks in such proportion and in such manner as may be determined from time to time.

SEBI Ombudsman shall be paid salary, allowances and so on, of an Ombudsman appointed under it to be determined by SEBI from time to time.

 

 

CONCLUSION

 

The institution of the Ombudsman shall be examined carefully, in its own light, as guardian of the people’s right to hold the government accountable. Close attention shall be placed on the distinction that the Ombudsman is not a watchdog of the administration but of the people. When our legislators learn the difference, they will be well on their way to constructing Ombudsman Avenue-a free, easy access to effective petitioning for redress against seemingly improper administrative action or omission. If this is achieved, one may see yet another new chapter in the history of capital markets in India.

 

Comments are welcome at devulapalli@sulekha.com


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