Disclaimers may hit claims for compensation against glitches

Mahesh Chauhan (name changed on request) was betting that the markets would fall after the Union Budget 2021-22. He built his positions accordingly. All he could do was watch when the S&P BSE Sensex would rise over 2,000 points. There was a technical glitch at his discount brokerage. He had no way to cut his losses. And he’s been fighting for compensation since.

Chauhan realised during the process that the two clauses on a form he signed absolve the broker and the stock exchange of any liability in the event of a technical hiccup. This may also affect any investor who seeks compensation for a subsequent outage at the National Stock Exchange (NSE) on February 24. It may also absolve HDFC Securities and Zerodha Broking, which reportedly faced technical hitches on March 1. Upstox (RKSV Securities) users had faced issues on February 1.

Lawyers say compensation may be an uphill task for investors in the absence of judicial precedent and broader institutional difficulties, given snags have become increasingly common.

Investor compensation can be a tough ask, in terms of financial liability for stock exchanges and brokerages, as the value of securities changing hands often runs into trillions, suggested Sandeep Parekh, managing partner of Finsec Law Advisors and former executive director at the Securities and Exchange Board of India (Sebi).

“The system will collapse,” said Parekh. This may be the reason why Sebi’s master circular for stockbrokers excludes claims against brokers and exchanges for outages, he noted.

“The client is aware that trading over the internet involves many uncertain factors. The stockbroker and the exchange do not make any representation or warranty that the service will be available to the client at all times without any interruption,” says Clause 9 in Sebi’s circular on trading using internet and wireless technology.

“The client shall not have any claim against the exchange or the stockbroker on account of any suspension, interruption, non-availability or malfunctioning of the stockbroker’s service or the exchange’s service,” says Clause 10 on Page 195 of the same document.

Both clauses are included on the form that Chauhan signed.

Sumit Agrawal, founder, Regstreet Law Advisors and ex-sebi official, said the liability of stock exchanges and brokers for system failures, such as the one at the NSE, is that of an evolving tortious strict liability.

“Strict liability is a standard of liability where a person is legally responsible for the consequences flowing from an act or omission, even in the absence of intentional fault. While the contract with investors by brokers has disclaimer clauses, compensation of investor’s losses is more focused on equity rather than the codified law. However, there are no judicial precedents in India in such cases,” said Agrawal.

The US’ Securities and Exchange Commission fined the New York Stock Exchange and two affiliated exchanges $14 million over a trading halt in 2015.

It had also previously penalised the Nasdaq stock exchange over system glitches during the Facebook initial public offering.

India’s stock markets regulator, too, has asked the NSE to explain reasons for not migrating to the disaster recovery site, observed Agrawal.

“In the current episode, Sebi is seized of the matter and only time will tell how the markets regulator deals with it and nudges stock exchanges to tighten the shortcomings of market infrastructure,” he said.

Emails sent to the stock exchanges, Zerodha Broking, Upstox (RKSV Securities), and HDFC Securities went unanswered till the time of going to press.

Lawyers say compensation may be an uphill task for investors in the absence of judicial precedent and broader institutional difficulties, given snags have become increasingly common