Bombay High Court: Investors Plead for Multi-Agency Special Investigation Team Probe into Rs1,300 Crore Anugraha Scam
In a petition before the Bombay High Court, hundreds of investors of Anugrah Stock & Broking Ltd have come together to demand the setting up of a multi-agency special investigation team so that the assets are consolidated and auctioned efficiently. The petition has made the National Stock Exchange (NSE), the NSE Clearing Corporation and Edelweiss Custodial Services as respondents. 
 
The petitions (CRI WPST/2876/2020 and CRI WPST/2878/2020) were listed before Justice SS Shinde and Justice MS Karnik on 13 October 2020. The high-profile case had advocate Yusuf Iqbal Yusuf representing several hundred investors who have come together to try and recover their money. The amount involved and believed to be lost exceeds Rs1,300 crore. Moneylife has covered the details of this case extensively. Our articles can be read here:  https://www.moneylife.in/tags/anugrah.html
 
Following a detailed hearing, the Bombay High Court, while hearing the Anugrah Stock & Broking Pvt Ltd fraud case, has asked the public prosecutor to submit status report on investigation being carried out by economic offences wing (EOW) of Mumbai police and the enforcement directorate (ED).
 
During the hearing, senior counsel Amit Desai, representing NSE, contended that there was no need to implead NSE in this matter. However Adv Yusuf submitted that NSE had the investor protection fund (IPF) which cover losses for investors up to Rs25 lakh per investor and urged the Exchange to be asked to release this amount immediately so that relief can be provided to the small investors. 
 
Appearing for Edelweiss Custodial Services Ltd, counsel Sameer Pandit claimed that Edelweiss Custodial Services was not a party to the fraud, had no contractual relations with investors of Anugrah and, therefore, investors should opt for arbitration. 
 
Similar objection was raised by senior counsel Venkatesh Dhond, representing NSE Clearing Ltd. 
 
However, advocate Yusuf pointed to a circular, issued by SEBI (Securities and Exchange Board of India), which explains the role of the depository and clearing member in ensuring that individual securities are not sold for meeting other obligations.
 
After the hearing, the bench posted the matter for 19th October, while asking the PP (public prosecutor) to submit status report of EOW and ED investigations.
 
The bulk of investors in Anugrah have 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. 
 
On 4th September, the National Stock Exchange (NSE) had withdrawn all trading rights of crisis-hit Anugrah Stock and Broking Pvt Ltd. Earlier on 1st September, the stock exchange had withdrawn Anugrah's trading rights in future & options (F&O), currency derivatives and commodity derivatives segment.
 
In a circular, NSE says, "On account of the regulatory concerns observed, the relevant authority of Exchange has decided to withdraw the trading rights of the member in all segments of the Exchange with immediate effect. Accordingly, in addition to the aforementioned segments, Anugrah Stock & Broking Pvt Ltd shall also be disabled in all other segments of the Exchange from 4 September 2020 before market hours."
 
Anugrah Stock and Broking, which won a reprieve from Securities Appellate Tribunal (SAT) on 17th August, was unable to deposit Rs165 crore with the NSE by 1st September. The Exchange then had withdrawn its trading rights and also seized its computers and books, the brokerage firm has told investors thronging to its office. 
 
Last month, the EOW of Mumbai police has registered a case of cheating against the troubled stock-broking house, Anugrah Stock & Broking Pvt Ltd, for duping an investor of Rs8 crore. As Moneylife has reported in the past, the extent of investor losses in Anugrah could be as high as Rs1,000 crore and investigators have confirmed that more complaints having been subsequently coming to the EOW.
 
The case was registered by Ashutosh Shah at Juhu police station against the firm’s director Paresh Kariya, and Kalap Shah and Anil Gandhi of Teji Mandi Analytics and others, under criminal breach of trust and criminal conspiracy. However, no arrests have been made yet.

 

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    COMMENTS

    mr.singhvi

    2 weeks ago

    let us form an investors association cheated by karvy, and file a case against them in High court, otherwise they will siphon off the Assets, and investors will be left with nothing.

    SEBI Restricts Retail Investors from Investing in Fresh AT1 Bond Issues of Banks
    The Securities and Exchange Board of India (SEBI) has now tightened rules for fresh issues of AT1 (additional tier-1) bonds issued by banks, to restrict retail investors from investing in them. The new rules for issuance, listing and trading of these perpetual non-cumulative preference shares (PNCPS) and innovative perpetual debt instruments (IPDIs)/ perpetual debt instruments (PDIs) (commonly referred to as AT1 bonds/instruments) will come into effect from 12 October 2020. This will protect retail investors from investing in these highly risky instruments. Last week Moneylife reported how blatant mis-selling of these AT1 bonds continues at the distributor and agent level. 
     
    AT1 bonds have come under a long shadow in the wake of the Yes Bank event where the entire value of the Bank’s AT1 bonds (Rs8,415 crore) was written-off when the rescue package led by ( the State Bank of India (SBI) was announced; investors in these bonds lost all their money. SBI’s AT1 bonds, which yield more than SBI’s fixed deposits, are being hawked in a similar manner. Several distributors and agents are wrongly advertising these bonds with claims that AT1 bonds are better than fixed deposits. Hundreds of retail investors have complained about the mis-selling of these instruments. The new changes in rules seem to be an effort to address this mis-selling to the average non-savvy retail investors, as exposed by Moneylife.
     
    SEBI has also made it mandatory for banks to issue AT1 bonds on the electronic book provider (EBP) platform irrespective of issue size. "The issuance of AT1 instruments shall be done mandatorily on the EBP platform irrespective of the issue size," it said.
     
    In the latest circular issued on 6th October, SEBI has announced the following rules: 
     
    "1. The issuance of AT1 instruments shall be done mandatorily on the electronic book provider (EBP) platform irrespective of the issue size. 
     
    2. Issuers and stock exchanges will ensure that only qualified institutional buyers (QIBs) are allowed to participate in the issuance of AT1 instruments. 
     
    3. The minimum allotment of AT1 instruments shall be Rs one crore.
     
    4. The minimum trading lot for AT1 instruments shall be Rs one crore."
     
    The market regulator has also specified in the circular that issuers will need to comply with enhanced disclosure requirements. This includes details of the conditions under which the call option included in these bonds may be exercised. The issuer also needs to clearly state the inherent features of AT-1 bonds in the risk factors.
     
    In addition, the ‘point of non viability clause’, which gives the Reserve Bank of India (RBI) absolute right to direct a bank to write down the entire value of its outstanding AT1 instruments/bonds, if it thinks the bank has passed the point of non viability (PONV), or requires a public sector capital infusion to remain a going concern.
     
    AT1 bonds have certain unique features which grant the issuer (i.e., banks, in consultation with RBI) a discretion in terms of writing down the principal / interest, to skip interest payments, to make an early recall, etc, without commensurate right for investors to legal recourse. 
     
    The regulator seems to acknowledge the backlash after the Yes Bank episode and admitted that the “the nature and contingency impact of these AT1 instruments and the fact that full import of the discretion available to an issuer, may not be understood in the truest form by retail individual investors." The matter was discussed in SEBI’s advisory committee on the development of corporate bond market in India, viz., corporate bonds and securitisation advisory committee (CoBoSAC) and based on the recommendations of the CoBoSAC, the new framework was designed. 
     
    The changed rules effectively restrict AT1 bond buying by non-QIBs (qualified institutional buyers) only to secondary markets and someone buying more than Rs1 crore worth of these bonds would be implicitly assumed to be an informed buyer. This, however, means that large corporates would be deprived of the opportunity and will not be able to buy these bonds in the primary market since they are not QIBs. 
     
    The other possible mid-term to long-term effect is that when the call option in the already issued AT1 bonds is triggered over the next few years, a lack of market appetite for fresh issues of these bonds might lead to a problem and could upset the banking sector.
     
    However, a lot of retail investors might continue to have an exposure to AT1 bonds through mutual fund fixed-income schemes, which are allowed to invest in them. Public sector banks, like SBI and Bank of Baroda, have issued large volumes of AT1 bonds in the past few weeks. 
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    COMMENTS

    Ramesh Popat

    3 weeks ago

    Many Trusts have invested in the bonds lured by banks and
    intermediaries for higher interest and Trusts have fallen in
    trap. They might have lost the capital.

    m.prabhu.shankar

    3 weeks ago

    Excellent Money Life. Great Work.

    Rupesh Chatterjee

    3 weeks ago

    "The new changes in rules seem to be an effort to address this mis-selling to the average non-savvy retail investors, as exposed by Moneylife."

    Articles on MoneyLife helps bring the attention of financial policy makers to matters of importance. This effort by the team in organising all the information and presenting their case needs to be appreciated.

    Blatant Mis-Selling of Bank AT1 Bonds Continues
    In a supreme irony, the State Bank of India (SBI) AT1 bonds, which yield more than SBI’s fixed deposits, are being hawked in a manner similar to the way those of Yes Bank were mis-sold. India’s largest State-owned bank SBI which is on a massive fund raising spree, is currently on a roll, issuing large volumes of Basel-compliant additional tier 1 (AT1) bonds at record-low coupon rates. 
     
    Several distributors and agents are wrongly advertising these bonds with claims that SBI AT1 bonds are better than fixed deposits. One of them, Ahmedabad-based Tipsons (which runs the portal  https://www.thefixedincome.com  and claims to be registered with Securities and Exchange Board of India—SEBI—as a category I merchant banker), is even going to the extent of saying “FD like features with higher attractive yield, stability of principal, generate a regular flow of income, better option that debt MF.”
     
     
    This amounts to mis-selling because while fixed deposit (FD) is guaranteed to the extent of Rs5 lakh, AT1 bonds are not. Also, while in FD, the principal is protected, in AT1 bonds, it is not. There is also no mention of the associated risks. Nobody is saying that these AT1 bonds are unsafe. But if the interest rates rise, your FD value will not go down, but AT1 bond value will. The issue is not whether AT1 bonds are safe or not safe but they are not similar to FDs, which is what many distributors are wrongly claiming. Both the SEBI and the Reserve Bank of India (RBI) are turning a blind eye to this menace of blatant mis-selling. Ironically, it is this same SBI management, which is running Yes Bank, which had wiped out the Yes Bank AT1 bonds (earlier this year in March 2020) without a second thought. Surely the Bank is big enough to come down heavily on such mischief.
     
    AT1 bonds are issued by banks to shore up their core capital base to meet the Basel III norms. These bonds are unsecured, perpetual in nature and so pay a higher coupon rate. But they are high risk and can be written down if the bank’s capital dips below threshold limits. RBI can also ask a bank that is dangerously on the edge to cancel its outstanding AT1 bonds without consulting its investors, which is what happened in the case of the AT1 bonds Yes Bank was holding when SBI bought a 48% stake in the Bank to save it.
     
    A large number of these high-risk products were sold to Yes Bank customers by its own relationship managers with the promise of high returns and FD-like safety of capital. In many cases, this was done without explaining the risks or conducting risk profiling and suitability checks with the customers.
     
    Many retail investors were goaded by their relationship managers to pick up these bonds from the secondary market (these bonds are not meant for retail investors and, hence, primary issuance is not available for them). When a product is being sold by highlighting or exaggerating the positive aspects and the suitability of the product for the customer while suppressing the limitations or risk factors, it can be construed as mis-selling. This culture of mis-selling financial products is pervasive, even as the regulators are increasingly tightening the regulations on all market intermediaries.
     
    When Yes Bank collapsed in early March this year and the RBI wrote off the entire value (Rs8,415 crore) of the AT1 bonds as a part of the hurriedly-put-together rescue package for the cash strapped lender, all investors lost their money. Many of these investors were retired individuals who had parked a sizeable chunk of their life savings in these bonds at the behest of their relationship managers. 
     
    Many investors have dragged the lender to court demanding that they be compensated. RBI has said that risks to these bonds were well known to the investors and that the rules allow writing off the bonds if capital falls below the regulatory minimum. Several direct and indirect retail bondholders through mutual funds, insurance firms, and provident funds have filed a case in Bombay High Court against the mis-selling of these bonds but unfortunately it seems to be a long haul for them. The write-down was done as per the globally accepted Basel-III norms that mandate writing down of such bonds in the wake of an emergency.
     
    In the recent past, several news reports came out detailing how Yes Bank executives had sold Yes Bank AT1 bonds with 5-year tenors at an interest rate of 9.5%pa (per annum) claiming that the “instrument is as safe as bank fixed deposit having no linkage to the riskier equity market.” Bank executives sold these instruments to investors pitching these perpetual bonds as ‘super FDs’ offering safety and relatively high return compared with regular fixed deposits. While prevailing RBI regulations do not bar banks from selling perpetual bonds to retailers, the rules clearly say that these instruments should not be pitched with fixed deposits as a benchmark. As per rules, the risks involved in these instruments must be clearly explained to investors.
     
    Several retail investors invested money in the AT1 bonds because they were led to believe that their investment is earning a guaranteed 9.5% interest every year and their principal would be returned at the end of five years.
     
    Thousands of gullible investors invested in the now defunct AT1 bonds of Yes Bank. It was soon discovered that e-mail trails clearly show that nowhere there was a mention about the risks involved with AT1 bonds that are more in the nature of an equity product with in-built risk factors. 
     
    The same modus operandi seems to be at play even now, luring gullible retail investors by comparing AT1 bonds with fixed deposits, debt funds while there is no mention of the risks involved in buying these. Retail investors need to be informed that AT1 bonds, issued by banks bearing a fixed rate of interest payable at regular periods, are not risk-free and the banks also have the ability to permanently write down such bonds with no obligation to repay the principal amount. 
     
    Many retail investors do not understand the problems lurking in the fine print of a financial product since the product they are buying is intangible. They see the product through the words and material shared by the seller. The buyer understands the features of a financial product based on how the seller describes its features, which is called an ‘agency problem’. The regulators have absolved themselves by insisting on disclosures. However, most average retail investors are simply not geared with adequate knowledge of finance to understand what really the disclosure means in layman terms, while high-net worth individuals (HNIs) have their own financial advisors.
     
    No Redress
     
    One would think that the banking ombudsman is the right authority to complain to against a relationship manager if one has been mis-sold a product. However, the ombudsman already has a track record of rejecting a high number of 'mis-selling' complaints. In the case of Yes Bank’s AT1 bond-holders, whose value was written down during the crisis at the bank, the ombudsman rebuffed complaints saying the matter is sub-judice. 
     
    In fact, in one complaint, the ombudsman even rejected the complaint as not falling under any of the grounds of complaints under the ombudsman scheme. However, mis-selling is indeed one of the grounds for complaints under Section 8(1)(w)(i) of the Banking Ombudsman Scheme, 2006, which lists “improper, unsuitable sale of third party financial products." Complaints to SEBI were also returned on the ground that the matter is sub-judice. 
     
    The complainants had made it clear that their grievances were against mis-selling and not for legal rights and seniority of creditors (bond-holders against shareholders), which is being examined by the Bombay High Court. Mis-selling of financial products is widely prevalent in India. With RBI and SEBI unwilling to help, the consumer courts seem like the last remaining alternative for these individuals.
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    COMMENTS

    Ramesh Popat

    4 weeks ago

    OMG! great ML!

    Newme

    4 weeks ago

    I hate even going to Bank branches just to avoid sales pitch by Bank managers.

    REPLY

    Nasreen Rustomfram

    In Reply to Newme 4 weeks ago

    True. When RMs want to sell, they find time to call you. But when some issue is to be resolved, it has to be done through 'proper channels' and takes its own time.

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