[The following guest post is contributed by Shreyangshi Gupta, who is a third year B.A., LL.B. student at the West Bengal National University of Juridical Sciences (WBNUJS).
This post aims at identifying the nature of rights relating to securities law, i.e. if they are of such nature that they can be resolved by a private arbitral tribunal, or whether they are exclusively reserved for adjudication in public fora (courts). By analysing the interplay between court decisions on arbitrability and the securities regime in India, the post highlights the undefined position of law on arbitrability of securities issues.]
A contemporary debate in arbitration deals with the question whether certain ‘public law’ issues involving ‘public interest’ can be settled through ‘alternative, private decision-making processes.’ Such questions are resolved by looking at the ‘arbitrability’ of a dispute i.e. the ability of a dispute to constitute the subject matter of arbitration.
This concept of arbitrability encapsulates three aspects:
- whether the disputes, by virtue of their nature, could be resolved by a private arbitral forum or whether they are exclusively reserved for public fora;
- whether the disputes are covered by the arbitration agreement between parties; and
- whether the parties have referred the disputes to arbitration
Under section 81(1)(a) of the English Arbitration Act, 1996, there exists no clarification if certain disputes are arbitrable or not. Instead, the courts determine arbitrability depending on the facts and circumstances of each case. As held in Fulham Football Club (1987) Ltd v. Richards, a case is not arbitrable if the dispute in question engages ‘third party rights’ or matters of public interest which are incapable of being determined within confines of private contractual processes.
In a nutshell, commercial disputes, both contractual and non-contractual, are capable of arbitration. This includes disputes relating to fraud, intellectual property rights, employment law, consumer rights, as well as certain competition law issues. Insolvency proceedings, by virtue of being subject to a statutory regime, are incapable of arbitration. Similarly, criminal matters and family law issues are also not arbitrable.
With regard to India, the Arbitration & Conciliation (Amendment) Act, 2015 lacks enumeration regarding the categorization of non-arbitrable disputes. Instead, under section 7, it implicitly suggests that all disputes, owing to the presence of any form of legal relationship, are arbitrable regardless of their nature.
However, under section 34(2)(b) of the Arbitration and Conciliation Act, 1996, Indian courts are empowered to set aside arbitral awards or refuse enforcement in case “the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force.”
This ambiguous statutory restriction on arbitrability throws the ball in the court of the judiciary. By means of seminal judgments, certain limitations have been placed on parties’ freedom to arbitrate, resulting in conceptual crystallization of arbitrability to a certain extent.
In the landmark Booz Allen and Hamilton Inc. v. SBI Home Finance Limited & Others, the Supreme Court, while dealing with the issue of arbitrability of disputes, held that arbitral tribunals are ‘private fori’ chosen by the parties, in place of courts or tribunals, the ‘public fori’ as per the laws of the country. All disputes relating to ‘right in-personam’ are arbitrable whereas, all disputes relating to ‘right in-rem’ are unsuited for private arbitration and are to be adjudicated by courts as well as public tribunals.
The Booz Allen case closely reflected norms under English law and addressed pertinent issues relating to arbitrability; however, securities law being a valid subject-matter of arbitration continues to remain relatively unexplored. Thus, for understanding if securities law are arbitrable or not, it is imperative to study certain judgments that expound on the reasoning laid down in Booz Allen.
In Kingfisher Airlines Limited v. Prithvi Malhotra Instructor, the Bombay High Court placed additional restrictions on arbitrability. It held that a dispute regarding any subject-matter would be considered inarbitrable if a particular legislative enactment creates or governs special rights, obligations, as well as accords special powers (including jurisdiction) to subject-matter oriented tribunals. Civil courts are necessarily excluded from the jurisdictions of such specialised tribunals.
Elucidating on this, in HDFC Bank v. Satpal Singh Bakshi, the Delhi High Court analysed the legislative intent behind the formulation of various specialised tribunals as well as the nature of rights and duties vested in them. It was held that the Rent Control Act as well as the Industrial Disputes Act create special rights and give special powers to the industrial adjudicators or tribunals. These powers are not available to civil courts; hence, disputes within the ambit of these statutes cannot be decided by means of arbitral tribunals which are essentially substitutes of civil courts.
In Aircel Digilink India Ltd. v. Union of India, the Telecom Disputes Settlement and Appellate Tribunal (‘TDSAT’) held that the Telecom Regulatory Authority of India Act, 1997 was a special legislation aiming to protect the interests of the service providers and the consumers of the telecom sector. Proper functioning of various stakeholders in this sector, as well as speedy adjudication by a specialised tribunal having requisite knowledge and expertise of the sector, such as the TDSAT, was vital for its development. Emphasizing on this, exclusive jurisdiction was accorded to the TDSAT; civil courts and arbitrators had no authority to interfere with this jurisdiction.
For the purpose of this post, parallels can be drawn between the aforementioned statutes, the functions of the specialised tribunals they create, and the Securities and Exchange Board of India Act, 1992 (“the SEBI Act”).
The Preamble of the latter provides for the establishment of the Securities and Exchange Board of India (‘SEBI’), to protect the interests of investors in securities and promote their development, in addition to regulating business in stock exchanges as well as the securities market. By maintaining oversight, performing functions of auditing, and regulating substantial acquisition of shares or take-over of companies, SEBI is mandated, under Chapter IV of the SEBI Act, to unearth fraudulent and unfair trade practices, such as insider trading. The investigation and exposé of such malpractices ensure investor confidence within the public, which is collectively beneficial for markets and economic progress.
It is evident from the SEBI Act that SEBI performs necessary public functions. SEBI deals with specialised technical matters of securities dealings that have bearing upon a larger section of the public and economic development.
In addition to this, section 15U of the SEBI Act exclusively gives extensive, special powers to the Securities Appellate Tribunal (‘SAT’). The SAT has the same powers as vested with civil courts (including but not limited to appellate powers), but, as per section 15Y of the SEBI Act, the latter has no jurisdiction to entertain any suit or proceeding in respect of any matter. As per HDFC Bank, arbitral tribunals are essentially replacements of civil courts; hence, neither special rights are created in their favour, nor they do they have exclusive jurisdiction.
Unquestionably, the SEBI Act is a special legislation which creates and governs special rights, obligations which are exceptions to the norm of rights in-personam. Thus, keeping in mind the aforementioned decisions (most importantly Kingfisher Airlines), there is an implied bar on arbitration of securities law matters because special powers are granted or governed by specialized tribunals such as the SAT, and the same are lacking with civil courts.
Arbitration and Securities Disputes: The Analysis
However, the solution to the question of arbitrability of securities law disputes is not as straightforward. The matter becomes contentious when there is a dispute between parties bound by a pre-existing, private contractual relationship. The relationship could be in the form of a shareholders’ agreement, or a joint venture or joint cooperation agreement between shareholders or securities owners of any company. In case the agreement contains a clause to refer all disputes arising out of or in connection with that dispute to arbitration, then it may become difficult to adjudge the arbitral tribunal’s scope or jurisdiction in resolving such a subject-matter.
In addition to these agreements, there exist substantive norms permitting arbitration, formulated by the SEBI. A 2013 SEBI press circular lays down guidelines and exhaustive procedures on arbitration mechanism for investor grievance redressal. From the circular, it is palpable that arbitration is the ideal channel for streamlining the investor grievance redressal mechanisms at stock exchanges and increasing overall efficacy in granting investor protection.
Further, the SEBI bye-laws in Chapter VII provide for arbitration as a method to resolve claims, complaints, or disputes etc arising out of trading or settlement, between trading members. The National Stock Exchange (‘NSE’) bye-laws also have similar provisions.
Undoubtedly, the circulars and the bye-laws permit investor-broker arbitration, as well as arbitration between trading members in a stock exchange. These norms implicitly set the trend that at the outset securities issue can be arbitrated upon for effective redressal and investor protection. This goes contrary to the understanding previously derived from an analysis of case laws on arbitrability.
However, it is to be noted that in the aforementioned regimes, the securities matters are classified as arbitrable simply because they are rights in-personam, or rights of such nature that they have an effect only upon private parties, i.e. particular investors, brokers or trading members in stock exchanges. As opposed to this, a perusal of the aforementioned case laws indicates that the rights dealt with in relation to securities are exceptions to the rights in-personam.
In support of this contention, in cases of oppression and mismanagement, it has been held that any matter relating to the rights of or benefits to the shareholders in their capacity as members of the company is not required to be referred to arbitration, even if the parties have an agreement to submit all disputes to such forums. A petition under sections 241-244 of the Companies Act, 2013 is a proceeding in-rem. It is an action by shareholders for the larger benefit of the company. Similarly, a securities matter will not be arbitrable if the dispute potentially affects public interest or the economy on the whole.
In conclusion, it is indisputable that there exists a dichotomy with respect to the nature of rights that are governed by securities law. There is no clear demarcation as to what exactly constitutes a right in-rem and a right in-personam with regard to securities issues. Thus, it is crucial to have laws establishing a firm position on this, and ultimately answering the question of arbitrability of securities issues, once and for all.
- Shreyangshi Gupta