Sunness Capital India Pvt Ltd (Sunness Capital) has become the 32nd defaulter broker since May 2019, to be expelled by the National Stock Exchange (NSE). According to NSE, the Bengaluru-based broker's trading rights have been withdrawn in equity, futures & options (F&O) and commodity segments from 18 April 2022.
The NSE notification says, "All members are hereby informed that the following trading member has been expelled from the membership of the Exchange under Rules 1 and 2 of Chapter IV of the NSEIL Rules and has been declared as a defaulter under byelaw 1(a) of Chapter XII of NSEIL Bye-laws with immediate effect."
In the same release, the bourse says, "Members' attention is also drawn to the sub-rule 4(A) & 5 under Rule 8 of Securities Contract (Regulations) Rule, 1957 (SCRR), which provides for disqualification of persons from holding the office of a director/partner in a company/firm if such persons had previously held the office of the directors/partners in any company/firm which had been a member of the Exchange and has been declared defaulter or expelled by the stock exchange."
Padmajyothi Sreesha and Sasitota Prabhakara Shreesha are the directors of Sunness Capital.
This, however, is not the first time that Sunness Capital has faced regulatory action. In February 2020, market regulator Securities and Exchange Board of India (SEBI) imposed a Rs3 lakh penalty on the broker for failing to follow regulatory norms.
"...it is noted that Sunness Capital (the Noticee) has failed to furnish any valid reason for not settling the funds and securities to the clients during the period of inspection except that these were technical/ procedural lapses on its part. Though the noticee had claimed that all the client accounts have been settled as of now, it is noted that these accounts were not settled at the relevant time as required under the SEBI circular MIRSD/SE/Cir-19/2009 dated 3 December 2009. However, it is noted that an attempt appears to have been made to rectify the deficiencies post inspection carried out by SEBI," the order issued by SEBI's adjudicating officer (AO) G Ramar says
Moneylife has been writing about the sudden increase in broker defaults in the past three years, leading to thousands of investors losing big chunks of their savings. Our 'well-regulated capital market', which boasts multiple safeguards such as investor protection funds and settlement guarantee funds, has turned out to be a mirage.
This is the 32nd time NSE has taken action against its member-broker. Since May 2019, there have been a series of 32 broker defaults (including Modex International Securities, Anugrah Stock and Broking Pvt Ltd, Karvy Stock Broking, BMA Wealth Creators, Fairwealth Securities) on NSE.
Since January 2020, the beginning of the COVID pandemic, the number of broker defaults, most of which are found to be misusing client funds or securities, has reached 26. NSE expelled four brokers in 2019, 14 in 2020, 10 in 2021 and two in the first two months of 2022, that had taken the total number of brokers defaulted and expelled by NSE to 30.
Most broker defaults have inflicted crippling losses on investors, although the settlement guarantee ensures no impact on the market itself. In many cases, brokers used investors' shares to obtain leverage and take speculative positions on the derivatives market leading to losses.
Sometimes, they passed back a little interest for the pledged shares; but, in many cases, investors were unaware of their shares being pledged.
For instance, in 2019, Karvy Stock Broking was banned by the SEBI for defaulting clients for around Rs2,000 crore, making it one of the biggest such cases in India.
This list does not include the two firms which abruptly closed their capital market business of their own accord (voluntarily). One is IndiaNivesh, whose voluntary closure has led to litigation between HDFC Bank and Edelweiss Custodial Services and exposed the shady practice of 'funded fixed deposits' being accepted by the clearing corporation as collateral. In this case, the dispute is over a Rs100 crore funded FD, which HDFC Bank refused to honour. The other was Action Financial, which initially claimed to have done a voluntary closure but was later expelled by the exchange since it had failed to refund investors’ money. (Read: IndiaNivesh, Edelweiss & HDFC Bank: The Curious Case of Rs100 Crore Fixed Deposit Receipts
In June last year, SEBI issued a framework to minimise the risk of misuse of investor funds by stockbrokers. The new measures are part of the market regulator's effort to prevent misappropriation and misuse of client funds by brokers and also to protect the clients in the event of a default by the brokers. (Read: SEBI Develops System to Detect Misuse of Client Securities by Brokers
This follows several instances of brokers misusing clients' securities for trades that were not authorised by them and submitting false information to stock exchanges.