Anugrah Scam: How Collective Action Focused Attention on Role of Regulators and Intermediaries
In a breakthrough for retail investors, concerted action by hundreds of victims of a failed brokerage firm is holding regulators accountable and focusing sharper attention on the lapses of clearing members and intermediaries. They are getting far better results than individual complaints with the market regulator that have to wait endlessly for action. 
 
In a major development, on 20th October, NSE Clearing Ltd (NCL) issued a 60-page order for ‘restitution’ of clients’ shares worth Rs460.32 crore that were wrongly sold by Edelweiss Custodial Services Ltd, (Edelweiss) the clearing member of Anugrah Stock & Broking Pvt Ltd (Anugrah). An NCL committee has held Edelweiss responsible for failure to comply with various circulars of the Securities and Exchange Board of India (SEBI) and the National Stock Exchange (NSE) and also imposed a fine of Rs1 lakh which has to be deposited within 15 days. 
 
Moneylife was the first to report about Anugrah, the latest in a long list of brokerage firms that duped investors by illegally using their securities for higher leverage in derivatives trading which finally went bust. Anugrah had collected over Rs1,300 crore by promising high, risk-free, monthly returns in derivatives trades, but was essentially a ponzi scheme.
 
Things took an interesting turn when Anugrah charged Edelweiss Custodial Services, its clearing member, with unauthorised sales of clients’ shares (without first invoking a bank guarantee provided) to meet settlement obligations. Although Edelweiss has aggressively denied wrongdoing, NCL has issued a unique order that calls for ‘restitution’ after holding it squarely responsible for several lapses. Moneylife has reviewed a copy of the order which was issued after a show-cause notice to Edelweiss.
 
Operative Part of the Order 
The order, by NCL’s member and core settlement guarantee fund, says that Edelweiss’s “improper action of disposal of clients’ securities done in gross disregard of the SEBI circulars/guidance” warrants remedial action. After a detailed discussion on whether it has the powers to order such an action, it has ordered Edelweiss “to reinstate the securities wrongfully disposed of.”
 
The term ‘reinstate’ means that Edelweiss “shall buy the same quantity of the same securities from the market,” it says. The reinstated securities will be credited to a “new identifiable beneficiary demat account” and will be “dealt with appropriately for restitution to the clients” as per directions of NSE. Further, no encumbrance, direct or indirect, will be created on this demat account.
 
Point 26 of the order says, it is “clearly established that there is misuse of client securities, the exact quantum of securities to be restituted is dependent on the outcome of the scrutiny being carried out by the NSE.” Further, that “the actual quantum of securities to be reinstated by the noticee (Edelweiss) will follow the receipt of instructions from NSE/NCL in this regard, post detailed scrutiny of NSE.”
 
While the order is very clear, Edelweiss, in a written response to Moneylife, seemed to suggest that no obligation has been cast on it, at the moment: “We are given to understand that as of date, neither NSE or NCL are in possession of the full details of the exact balances of the complainant clients’ in the books of Anugrah.” But NCL unambiguously told us on 22nd October that, “ECSL (Edelweiss) is required to reinstate the securities disposed of belonging to clients of Anugrah. The reinstatement shall be required to be done within a period of fifteen (15) calendar days from the date of receipt of instructions by ECSL from NSE / NCL.” Our sources at the Exchange also assure us that the shares to be purchased for restitution will be quantified in two or three days and will not be a long-drawn affair, because the forensic audit of Anugrah is already complete. The final tally has to be adjusted for cases where clients owed margin or payment to Anugrah when it shut operations.
 
Not only will Edelweiss have to complete the restitution process in 15 days but, on failing to do so, “an amount equivalent to the value of the securities as on the 16th day (end of day/closing price on NSE, on BSE if NSE prices are not available) plus a mark-up value of 5% shall be blocked from the available collateral,” it is pointed out.
 
Why Edelweiss Is Accountable
Edelweiss, in response to the show-cause notice, had argued that its actions were bona fide and the NCL committee has no ‘omnibus power’ to order reinstatement of securities (although it admittedly has powers to expel, suspend, fine, penalise under censure and or withdraw all or any membership rights of the clearing member).  
 
The order notes that Edelweiss, “sold off clients’ securities worth about Rs460.32 crore in utter disregard of the SEBI circular and NCL regulations and without any proper due diligence to ensure that it only sold securities of defaulting debit balance clients, to the extent of their respective defaulted obligations…”
 
While deciding that this is a fit case to levy a penalty of Rs1 lakh on Edelweiss, the committee notes that there was “no penalty matrix available” at present and “a uniform penalty structure across all the clearing corporations is being formulated.”
 
Break-up of Wrongly Sold Shares
A break-up of the Rs460.32 crore worth of securities sold by Edelweiss, provided in the order, is as follows: 
a) Rs252.09 crore worth of clients’ securities were sold without any instruction from Anugrah and, therefore, without due diligence.
b) Rs37.90 crore worth of clients’ securities was sold off on instructions from Anugrah. While this indicates that they belonged to clients with debit balances, Edelweiss did not do adequate due diligence by asking for client-wise debit balances and relied on unsubstantiated statement of Anugrah. 
c) Rs149.26 crore worth of clients’ securities were sold off on instructions of Anugrah without ascertaining if they belonged clients with debit balances.
d) Rs21.07 crore worth of clients’ securities were sold off on the basis of instructions from Anugrah to meet mark-to-market obligations, without any record or data to check if these belonged to clients who had failed to meet payment obligations. 
 
It notes that Edelweiss was also unable to provide client codes and information on whether clients whose shares were sold had debit balances, establishing inadequate due diligence. 
 
Multi-pronged Action
Edelweiss will undoubtedly contest the NCL order before the securities appellate tribunal (SAT), but it already faces multiple legal challenges of a similar nature. 
 
A petition (Bombay High Court: Investors Plead for Multi-Agency Special Investigation Team Probe into Rs1,300 Crore Anugraha Scam), filed by a few hundred investors through advocate Yusuf Iqbal Yusuf, has asked for a multi-agency special investigation team probe into the case. There is a third set of investors that has filed arbitration petitions before the Bombay High Court, which gave investors their first breakthrough, with the Court appointing a liquidator and ensuring that Anugrah’s promoters do not alienate assets. 
 
Another petition, filed by Nimesh C Shah and other investors, has made market regulator SEBI as the first respondent followed by NSE, NCL, CDSL (Central Depository Services Ltd) and Edelweiss and Anugrah. The petition, filed through advocate Ravi Hegde of Parinam Law Associates, accuses SEBI and the other intermediaries of ‘failing to protect investors’ by ensuring compliance with the many circulars issued by NSE and SEBI from time to time, which are documented by the petition. It charges the regulator with failing to “devise an appropriate mechanism to detect diversion of clients’ funds and securities” as well as wrong reporting of client funds and securities. It wants eligible investors to be compensated through the investor protection fund of the Exchange. 
 
In response to complaints, the economic offences wing (EOW) of the Mumbai police is conducting a separate investigation which has placed a lien on Rs460 crore with a clearing account at ‘City Bank’. The Metropolitan Magistrate’s court provided interim relief by vacating the lien on 1st October on condition that of Edelweiss “submitting bank guarantee or security of assets worth Rs460 crore till disposal of the main application.” 
 
 
A big differentiator in Anugrah’s case is the network effect. Nearly 500 victims of the failed brokerage came together quickly in a social media group (created by Moneylife Foundation) that could tap into high-quality advice (both professional and pro bono) and guidance from legal and market experts to file complaints and support them in a decision to hold regulators accountable and get results. It is collective actions like these that will pave the way for viable class action cases in future.
 

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    COMMENTS

    dereykmartin

    3 days ago

    Being a senior citizen, I have been
    cheated by lakhs of rupees, could
    You please tell me what are the
    chances of getting back my hard
    earned money.

    dilipmehta51

    1 month ago

    Keep me posted for latest developments in Anugrah scam case.

    Balaraman Sriram

    1 month ago

    what is going on with India Nivesh? They shut down operations in march 2020 just before Lockdown.?

    dilipmehta51

    1 month ago

    Excellent work by ml.
    Continue to save hard earned money of small investors.

    ajaychandele

    1 month ago

    Commendable action by MoneyLife! Request MoneyLife to assist MODEX investors who are similarly impacted.

    shankar_1979

    1 month ago

    Excellent work ML team! Such actions are highly commendable. Keep up the great work.

    SEBI Chairman Ajay Tyagi Admits Investor Protection Fund Woefully Inadequate
    The market regulator today admitted that investor protection fund (IPF) with stock exchanges is 'woefully insufficient'. Mr Ajay Tyagi, chairman of the  Securities and Exchange Board of India (SEBI) said this in response to a media query at a event organised by the Confederation of Indian Industries (CII). Although the SEBI chairman made a general remark, Moneylife has been pointing out that the National Stock Exchange (NSE) which accounts for over 90% of trading turnover has a significantly smaller IPF of Rs594.12 crore compared to that of the Bombay Stock Exchange’s (BSE) Rs784.24 Crores as on 31 March 2020. 
     
    Interestingly, the number of broker defaults and demands on BSE’s funds have also been significantly lower, compared to payments made by NSE every year, as seen in this table on its website. 
     
     
    Responding to a question, the SEBI chairman said, "I agree that investor protection fund is woefully insufficient. We have examined this and will soon take action in consultation with stock exchanges to increase the IPF. We will not allow that to be criteria to delay payment in case of broker default.” He further said that SEBI plans to take multiple steps to mitigate investor concerns about the safety of their investments. These steps include increasing the IPF. 
     
    The IPF (maintained by the bourses) is used to refund investors who have lost money after default by brokers. Under this, upto Rs25 lakh can be paid to each investor on the NSE. 
     
    The regulator is also known to be working on the proposed T+1 settlement from the current T+2 settlement (T is trading day). Mr Tyagi said “early settlement is in everyone’s interest and we are aware about the issues around early settlement.” The regulator has begun talks with all stakeholders: exchanges, clearing corporations, custodians and participants. A fortnight back, SEBI met all stakeholders on T+1 settlement. All have agreed to the proposal, except foreign portfolio investors (FPIs). According to FPIs (which account for more than 30% volumes in the cash market), this measure would curtail trading volumes in the cash segment as they would require a longer timeline for settlement. 
     
    In the candid question-answer session, Mr Tyagi dubbed independent directors as a ‘puzzle’ and prevailed on such directors resigning from boards of companies to flag corporate governance concerns if they have any. 
     
    He admitted that in the past two-three years, SEBI has seen an increase in the number of resignations of independent directors. Independent directors have an important role to perform as they are a voice of the minority shareholders. 
     
    India Inc has been fraught with many frauds over the past few years and regulators have been making efforts to strengthen the corporate governance standards. Mr Tyagi said “… the whole thing that they (independent directors) are the voice of the minority shareholders, to what extent should they be accountable and responsible, how they fit in into the board structure, which type of people should be taken” are among the issues SEBI is struggling with. 
     
    Mr Tyagi was speaking today at the Financial Market Summit organised by CII, the industry lobbying body. He said “If any such resignation is on account of governance concern, considering the role of, and expectations from, independent directors, I urge the resigning independent directors to come forward and state the same clearly to the public at large.” The event was attended by many industry stalwarts and had a stellar line-up of speakers who shared their point of view. 
     
    He pointed out that the directors are mandated to give reasons for their resignations within seven days and go beyond 'cryptic' writing to detail out an exact reason for quitting. Mr Tyagi acknowledged that the independent directors are a 'puzzle' which the SEBI is trying to deal with as it tries to strengthen the overall systems.
     
    Mr Tyagi said there are primary market issuances of over Rs6 lakh crore a year and the same have grown significantly in the past three-four years, but accepted that liquidity in the secondary market is an issue. 
     
    He stated that there is an urgent need for diversification in the country's financial sector in terms of fundraising, through a shift to capital markets. He said "The financial sector in India is currently dominated by bank lending. This needs urgent diversification by facilitating fundraising through capital markets, especially considering the well-known problems with the banking sector.” 
     
    Speaking about capital markets, he said “…capital markets work on the principle of disintermediation that is by directly bringing together the issuers and investors. Clearly this can work only if all the closures are readily made available by the borrowers to the investors so that they could take decision after realising the risk and return of the investment. Trust of fairplay and faith in the regulatory system is of utmost importance in the capital markets to thrive and sustain.”
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    Edelweiss Asked To Credit Rs460 Crore Bank Guarantee of Anugrah Stock & Broking to Escrow by NSE Clearing
    In a 60-page order issued on 20th October, the NSE Clearing Ltd/ National Stock Exchange (NSE) has asked Edelweiss Custodial Services Ltd to credit Rs460 crore that was provided as a bank guarantee by Anugrah Stock & Broking Pvt Ltd (Anugrah) to an escrow account. Following an investigation, a committee constituted by the NSE is understood to have rejected all the contentions of Edelweiss and asked it to reinstate the money/securities in an escrow account within 15 days or face a penalty that runs into several lakh rupees. The Anugrah issue was first reported by Moneylife
     
    While NSE would not confirm the order, reliable sources, privy to details, tell us that NSE has sent this order to the Securities & Exchange Board of India (SEBI). An email sent to Edelweiss for its comments had not been responded to at the time of publishing. Any reply from them will be added to the report.
     
    Update 8.31pm: Edelweiss denies it has been asked to reinstate securities in a designated account; we, however, understand the order differently. According to Edelweiss: "The order states that NSE will do a detailed inspection of Anugrah’s books and the balances of its clients’ and only in the event that they find that shares of clients having credit balance were liquidated, will they direct us to reinstate these shares in a separate account.  We are given to understand that as of date, neither NSE or NCL are in possession of the full details of the exact balances of the complainant clients’ in the books of Anugrah." 

     

    It is important to note that this is in addition to an order of the additional chief metropolitan magistrate on 1 October 2020, where Edelweiss Custodial Services agreed to submit a bank guarantee/security of unencumbered assets worth Rs460 crore until the main application is disposed. This was also in connection with the Anugraha scam, following action taken by the Economic Offences Wing (EOW) of the Mumbai police.
     
    Update: Edelweiss claims this action of the EOW has been stayed by the courts; however, Moneylife has a copy of the order of the esplanade court, Mumbai. The facts are that Edelweiss Custodial Services moved court seeking to set aside the lien exercised by EOW on  a particular 'City Bank' account, instead it undertook to secure 'unencumbered assets worth Rs460 crore'. The court agreed to vacate the lien on Edelweiss Custodial Services submitting a bank guarantee/security of unencumbered assets worth Rs460 crore until the main application is disposed.  This order was passed on 1st October 2020.
     
     
    It may be recalled that Anugrah faces litigation by over 500 investors who have moved the Bombay High Court through multiple cases. Several of these have made SEBI, NSE, NSE Clearing Corporation and Edelweiss Custodial Services party to the litigation. Investors have pleaded for a multi-agency probe into what happened with Anugraha. Read out report here: https://moneylife.in/article/bombay-high-court-investors-plead-for-multi-agency-special-investigation-team-probe-into-rs1300-crore-anugraha-scam/61824.html
     
    The primary allegation is that Edelweiss Custodial Services invoked the bank guarantees of Anugrah Stock & Broking and partly sold off the securities after it discovered that the securities pledged to it belonged to the broker’s individual clients. Read more here: https://moneylife.in/article/anugrah-scam-many-unanswered-questions-for-sebi-nse-and-edelweiss/61540.html
     
    According to sources, Edelweiss Custodial Services will move the Securities Appellate Tribunal (SAT) against the NSE order. However, it is important to note that Edelweiss Custodial Services faces similar allegations in two other matters, already before SAT. In the case of banned sub-broker VRise, NSE had directed Edelweiss to return securities belonging to after investors complained that their shares were fraudulently submitted as collateral. Advocate Ravi Hegde of Parinam Law Associates has filed an intervention petition on behalf of investors in that case. 
     
    Also interesting to note is a SAT order of 3 July 2020 in a case filed by Axis Bank as clearing member for Modex International Securities, a failed brokerage, where NSE had issued orders on 28th May and 8th June to release certain securities of the broker (which represented clients who had zero credit/debit to their account). Axis Bank’s claim that NSE’s action was arbitrary and illegal was rejected. This means that any approach to SAT is not guaranteed to go in favour of Edelweiss. 
     
    By way of background, on 4th September, the NSE had withdrawn all trading rights of crisis-hit Anugrah Stock and Broking Pvt Ltd for being unable to meet settlement obligations. Earlier on 1st September, the stock exchange had withdrawn Anugrah's trading rights in future & options (F&O), currency derivatives and commodity derivatives segment. Anugrah and its associates had raised Rs1,300 crores in what appeared to be a Ponzi scheme, claiming high returns from derivatives trades.
     
    In addition to the actions mentioned above, another petition has been filed by Parinam Law Associates, which has again made the regulator, stock exchange, clearing corporation and others as respondents in the Anugrah case. Hundreds of investors have lost large sums of money, with one south Mumbai-based family alone having invested over Rs150 crore. So, the number of litigants is likely to swell, unless other investors seek other options.
     
    Update: Edelweiss says, "We will take recourse to remedies available to us and in keeping with the stated regulations. We continue to maintain that we have followed all existing regulations governing Clearing members and strict diligence, as is expected and allowed to clearing members, has been undertaken throughout our dealings with Anugraha." 
     
    The bulk of investors in Anugrah has come through an associate firm called Teji Mandi Analytics, which was apparently running a derivatives portfolio of over Rs1,000 crore like a Ponzi scheme with assured monthly returns. 
     
    (Yogesh Sapkale contributed to this article).
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    COMMENTS

    Sigmadadixit

    1 month ago

    Edelweiss has to pay cost for their mistakes.

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