‘Technical issues are a gray area; traders have to factor in this risk, regulator’s call final': Sandeep Parekh

If an exchange shuts downs for an hour, then an exchange cannot be sued, said FinSec Law Advisors' Sandeep Parekh.

In a case that could set an important precedent, a trader won a compensation claim filed against Zerodha for sustaining losses due to a technical issue. The BSE’s Grievance Redressal Committee (GRC) ordered the platform to compensate for the losses sustained due to this problem.

Moneycontrol spoke to Sandeep Parekh, Founder of FinSec Law Advisors and former executive director of Sebi, on the legal implications of technical problems in cases between brokers and traders.

Also read: In a far-reaching case, a trader wins compensation claim against Zerodha

What is a broker’s liability if a trader makes a loss due to a technical problem?

This is a complex subject. In normal contracts, when you make a mistake, there's no meeting of mind and therefore it can be reversed. This is more difficult in an anonymous market. So, many people are on the other side of the trade, so you need to take a call. And when I say call, it means, you know, whether you reverse it or you don't, somebody's made a mistake, they should pay some amount. So the regulator kind of takes a call. There is now a SEBI policy on this. But it is not always black and white.

What is the legal validity of the agreement that a broker makes a trader/investor sign during onboarding, which says the broker will not be responsible for the technical issue/operational problems?

Yes, they are valid. But technical issues are kind of as I mentioned a bit of a gray area. So that is going to be a regulator's call. If a platform is down for an hour, then the broker can’t pay for the full amount lost. The regulator will impose some kind of penalty. These are systems, they are not going to work all the time, they are machines after all.

So, just a penalty amount and not a like-to-like compensation?

Yes, just a penalty. If they start paying the full amount, the entire system will collapse.

Also read: Don’t backtrack, keep escalating, says trader on winning compensation from Zerodha

So in this way isn’t a trader at complete risk when trading on a digital platform? Isn’t this more skewed towards the brokers?

If every time, there was a technical issue and the broker had to pay they would be sued out of existence. It is the same even for exchanges. If an exchange shuts down for an hour can the exchange be sued? No. So the risk is there for the trader.