Off-market trades get the thumbs down on bourses

Having burnt their fingers in the past, the stock exchanges are not taking any chance with margin trading now. The wish is to ensure that they are not saddled with disputes between brokers and their clients arising out of off-market transactions, as has been the case in the past.

As the exchanges circumscribe the limits of what is eligible and ineligible for exchange cover, investors find themselves entirely at the mercy of the brokers.

The National Stock Exchange (NSE) has informed its members that the arbitration mechanism shall not be available for settlement of any dispute between the client and trading members, arising out of funds placed with trading member for the margin trading facility, and the amount lying in the exchange's Investor Protection Fund and Settlement Guarantee Fund shall not be available for settling any loss suffered by any client in connection with the margin trading.

That crux of the NSE's argument is that while a registered transaction is protected, unregistered transactions do not fall under its purview. But the problem is that investors do not know before investing whether the proposed transaction is legitimate or not.

As an investor Ashok L Narang says, "In the scenario where the exchanges are not taking any responsibility upon themselves, there is no protection for investors in case there is a problem with the broker."

He adds that he suffered losses in 2001 under the erstwhile automatic lending and borrowing mechanism (ALBM) because he was issued bogus contract notes and bills by the broker for the money he had invested.

"We were not compensated by the exchange and hence we filed a writ against the NSE in the Mumbai High Court, which has recently been admitted," he said.

Deena Mehta, managing director, Asit C Mehta, said, "The exchanges should be responsible and provide arbitration in case of disputes between investors and brokers as the former do not have the necessary expertise to handle such cases. In fact, the high court has sent back some such cases to the securities appellate tribunal (SAT) because of their relevant expertise."

The NSE has, however, said that all transactions done on the exchange, whether normal or through margin trading facility, shall be covered under the arbitration mechanism of the exchange, adding that Investor Protection Fund and Trade/ Settlement Guarantee Fund will continue to be available for all transactions done on the exchange, whether normal or through margin trading facility.