After hearing the grievances of investors and clients of Anugrah Stock & Broking Pvt Ltd (Anugrah) the Bombay High Court says there exists a prima facie case and the statutory authorities have, indeed, failed in performing their duties under the law. Especially the bench observed that market regulator Securities and Exchange Board of India (SEBI), which has wide powers, ought to have passed necessary orders in the interest of clients or constituents of Anugrah. "Action, if any, taken by the authorities, including SEBI, were at a belated state," the HC noted.
The bench of justice SS Shinde and justice MS Karnik was hearing petitions filed by investor-clients of the crisis-hit Anugrah Stock & Brokers. Dr Birendra Saraf of Parinam Law Associates represented the investors during the hearing.
The observations of the HC came after Dr Saraf, in his submission, pointed out how clients and constituents of Anugrah have suffered due to the lapses of SEBI, National Stock Exchange (NSE), NSE Clearing Ltd (NCL) and Central Depository Services Ltd (CDSL). "The Court ought to pass necessary directions for conducting detailed investigation into their roles, irregularities and negligence committed by these authorities," Dr Saraf contended.
Senior counsel Venkatesh Dhond, representing NCL, intervened and informed the bench that the clearing house had performed its duties. He submitted that NCL had passed an order against Edelweiss Custodial Services, directed to reinstate securities worth about Rs460 crore, which were wrongfully and illegally sold off. However, Dr Saraf pointed out that NCL acted only in October 2020, subsequent to a show-cause notice issued in September 2020 for mis-utilisation and mis-appropriation of securities by Edelweiss since January 2020.
Further, he mentioned that Edelweiss has challenged the order passed by NCL before the Securities Appellate Tribunal (SAT), which is pending adjudication as on date. In its order on 5 November 2020, SAT had directed Edelweiss to give an undertaking before NCL stating that they will deposit Rs212 crore (basis on the list of securities furnished by NCL on 3 October 2020) or such amount as may be directed by the Tribunal within two weeks.
Dr Saraf, in his written submission, also contended that NSE, NCL, and CDSL acted as silent spectators until SEBI intervened in April 2020, after which, inspections into the affairs of Anugrah were initiated. He says, "...NSE was aware of the active misuse of client funds and securities by Anugrah. On one occasion, Anugrah had also advanced loans worth over Rs300 crore to certain entities, the fate of recovery of which is unknown to the petitioners and which will go a long way in securing the recovery of the outstanding dues of the petitioners and other clients and constituents of Anugrah. It appears that NSE has not taken any steps to recover the same from these entities."
"NSE was aware that Anugrah was giving incorrect ledgers and not reporting the correct holding positions to the clients," the senior counsel says, adding, "NSE was aware that Anugrah was incorrectly and wrongfully reporting the margins to NSE which is a serious offence and that is the same misconduct, which resulted in Anugrah trading in huge volumes without informing its clients."
"Though nominal penalties were levied, no action was taken to suspend the broker and clearing member or inform the investors about such violations, which would have put the investors to notice about the same. These instances of violation, inaction of the NSE to take appropriate measures and having measures on paper without implementation clearly shows the way the purported investor protection is done by the largest stock exchange in the world," Dr Saraf added.
Explaining facts and the specific role played by each authority, the senior counsel stated that action against Anugrah and Edelweiss was taken by these authorities at a belated stage. He says, "None of the timelines for the protection of clients' funds and securities were followed under SEBI circulars of 17 December 2018 and 1 July 2020, on prevention of mis-use and mis-appropriation of clients' funds and securities."
"Despite initiating investigation in May 2020, the assets of Anugrah were only attached on 13 November 2020 by SEBI and subsequently it was declared defaulter by NSE on 26 November last year. NSE is issuing recovery notices, based on fraudulent statements provide by Anugrah and have refused to provide trade details, forming its basis. Certain petitioners, who were claiming credit balances from Anugrah have been served with recovery notices from claims of alleged debit balances in their trading accounts, running into crores of rupees," Dr Saraf contended.
On 4 September 2020, NSE had withdrawn all trading rights of the crisis-hit Anugrah Stock and Broking. Earlier on 1st September, the stock exchange had withdrawn Anugrah's trading rights in future & options (F&O), currency derivatives and commodity derivatives segments.
According to Dr Saraf, who is representing investor clients of Anugrah, when the other violations came to light, NSE did not freeze the assets or market operations of Anugrah, its directors, Teji Mandi or its directors, or Edelweiss. "The petitioners discovered that in the meantime, Anugrah carried out several transactions and withdrawals from its bank accounts, transferring amounts to its sister concerns and directors, which the petitioners brought to the notice of this Court in the arbitration petitions," he says.
Raising questions on SEBI's inaction, Dr Saraf contended that the market regulator had refused to exercise its powers on the pretext that they premature, despite noticing the defaults committed by Anugrah in its order and having the benefit of reading the contentions of NSE, NCL and CDSL which depict the blatant contravention and lax attitude of these authorities.
Further, the exercise of powers by the economic offences wing (EOW) does not stop SEBI from exercising its powers under the SEBI Act 1992.
Dr Saraf also mentioned how SEBI used its powers against NSE in the co-location matter and issued directions against the Exchange and its employees. This was based on an anonymous complaint filed with SEBI against NSE, claiming that NSE had been giving preferential treatment to certain stockbrokers and that there is an inequality in the ecosystem.
SEBI had directed NSE to disgorge about Rs1,000 crore, the amount earned as profit during the relevant financial years of committing violations. Besides this, even a direction of disgorging a portion of salaries from the senior employees of the Exchange was passed by SEBI, Dr Saraf mentioned.
Moreover, he says, the petitioners understand that SEBI has initiated proceedings against NSE in the matter of defaults committed by Karvy Stock Broking Ltd, one of the 13 aforesaid defaulted entities. "SEBI therefore is possessed of sufficient powers to direct an investigation in this matter against NSE, NCL and CDSL. However, no such actions have been initiated in the present matter," Dr Saraf contended.
Due to the paucity of time, the Bombay HC has directed to list the matter on 8 March 2021 at 4pm, where Dr Saraf will continue his arguments. The HC also mentioned that before hearing Dr Saraf's arguments, it would like to hear explanations and submission by senior counsel Rafique Dada, representing SEBI and senior counsel Amit Desai, who is representing NSE in the matter.