Stock exchange will have to pay if broker defaults

Holding that stock exchanges are service providers coming within the ambit of Consumer Protection Act, the National Consumer Commission has ruled that bourses would have to compensate investors in case its broker defaults.

"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 Commission presided over by Justice M B Shah said in a recent order.

The Commission passed the order on a petition filed by Delhi Stock Exchange challenging the State Commission's order which had directed it to compensate eight investors after a brokerage firm, P K Wadhwa & Co, defaulted.

The Commission dismissed the plea of DSE which contended that an investor was a consumer with respect to a broker and not to the exchange because brokerage fee was paid to a broker.

"Without becoming a member of the stock exchange, share brokers are not permitted to have any transaction in purchase and sale of shares. Therefore, the stock exchange is apparently a service provider," the Commission said in its order which is helpful in providing security to the investors.

Upholding State Commission's order, it noted that the bourse had a liability to pay as it controlled and organised the mode, manner and performance of the contract between the investors and its member brokers.

The Commission also rejected the DSEs contention that it was a non-profit making body only regulating such transactions.

"The DSE is profit-making body since it issues tickets as well as bonus tickets for trading rights to the brokers who have to pay an initial admission fee and a regular subscription fee and the brokers in turn charge brokerage from the investors on scale prescribed by it," it said.

Referring to the DSE Customer Protection Fund, set up on the guidelines of the Securities and Exchange Board of India, to safeguard the interests of the investors, the Commission said the trustee of the fund was required to step into the shoes of a defaulting broker and perform all the obligations on his behalf.

"In the present case, there is no dispute that M/s P K Wadhwa & Co, a member of the DSE, committed default in making payment or delivering shares for which amount was paid by the complainants. In that set of circumstances, the DSE has to pay compensation up to Rs 1 lakh (Rs 100,000) to each of the investors," it held.

The Commission also refused to increase the amount of compensation from Rs 1 lakh as pleaded by the investors.