Broker Siphons off Rs366 Crore of Odisha Cement MF Units and Other Client Assets: Exposes Basic Systemic Flaw that Could Cause Huge Losses to Investors
In a startling development, the National Stock Exchange (NSE) has discovered that a second depository participant (DP), which is also a brokerage firm, has helped itself to the shares and funds kept in safe custody. This time, the amount is a whopping Rs366 crore and includes the shares of a large listed entity like Odisha Cement.
 
The broker in question is Allied Financial Services Pvt Ltd. An interim order from market regulator Securities and Exchange Board of India (SEBI) in the matter, which has been issued without a proper warming to all investors to check their account, is so obtuse that it hides the gravity of NSE’s findings. 
 
We learn from the interim order issued by SEBI on 27 February 2019 that NSE has ordered a forensic audit.
 
Odisha Cement has separately informed stock exchanges about the loss of shares, which in its case alone amounts to Rs344 crore and it has also filed a criminal complaint. However, it is not clear how the money will be recovered if the broker has already made huge losses in the market.
 
SEBI also received a complaint from Novjoy Emporium Pvt Ltd alleging unauthorised transfer of its mutual fund units worth Rs21.70 crore by Allied Financial Services.
 
Last month, a Kolkata brokerage called Guiness Securities Ltd (GSL) similarly collapsed after having fraudulently helped itself to client funds. As per a report from Business Standard, SEBI banned GSL and 35 entities from securities market 'till further directions' in a case related to non-settlement of client funds and misappropriation of securities. These 35 entities also include GSL's present and former directors. 
 
On receipt of the NSE report, which prima facie indicated misuse of client securities worth Rs212.17 crore across 1,139 scrips by Guiness Securities, SEBI carried out a preliminary analysis. 
 
It is not clear how many more brokerage firms will be found to have illegally used shares or money kept in their safe custody in DP accounts. 
 
Ironically, SEBI has forced all investors to dematerialise shares and is working at ending physical paper, while offering no protection from broker-fraud or DP fraud — it is important for all investors to note that these are not covered by investor protection funds or any trade guarantee or insurance. 
 
Everyone who suffers a loss, for no fault of theirs, will have to fight it out individually. SEBI's orders also have little significance if the regulator does not do anything to help recover funds. In any case, there are no solutions if the broker has lost money in the market and there is nothing to recover.
 
This is the first time that investors are being exposed to a implications and dangers of this fraud after stock exchanges and trading systems were automated and modernised, over two decades ago. 
 
In SEBI’s order in the Allied Financial Services case, it has listed few sets of players involved. This includes clients of Allied Financial Services, unregistered or third-party entities or client of its clients, and entities related with its directors. 
 
As per NSE's forensic report, three clients, Money Mishra Financial Services, Awanish Kumar Mishra and Money Mishra Overseas Pvt Ltd, collectively hold 89% of holdings give the full form of ROS in brackets allegedly includes mutual funds, which has been transferred in an unauthorised manner from third party and clients. Awanish Kumar Mishra along with Jitender Kumar Tiwari are directors of Money Mishra Financial, Money Mishra Overseas as well as Allied Financial Services. 
 
The report also outlined several frauds committed by the broker, including misuse of client funds. Allied Financial Services transferred funds of about Rs13.61 crore from client's bank to own bank account, which then were used for investment in property through own bank account. It also made a donation of Rs50 lakh from these funds. 
 
The NSE report says, "The member has transferred the Mutual Funds Units belonging to unregistered entities or client to its client beneficiary account through its three associated concerns viz. Money Mishra Financial Services, Awanish Kumar Mishra and Money Mishra Overseas Pvt. Ltd. It is further observed that these transferred mutual fund units have been used as collateral for futures & options (F&O) margin with its clearing member IL&FS Securities Services Ltd (ISSL) towards trade obligations of these three associated concerns."
The report also find out non-availability of funds payable to clients in the bank accounts of Allied Financial Services. As on 31 January 2019, the broker was supposed to pay Rs138.78 crore to clients. However, total funds available with it, including deposits of Rs42.42 crore with ISSL, amount of Rs1.1 crore with exchanges, and bank balance of Rs84 lakh, were only Rs44.36 crore. There was a shortfall of Rs94.42 crore.
 
Allied Financial Services also failed to settle accounts of its inactive members. After verifying trial balance and register of securities, NSE found that, as on 30 November 2018, the broker had not settled funds and securities worth Rs37.48 crore of 102 inactive clients, who have not traded in preceding three months. 
 
NSE also found 44 instances where Allied Financial Services was found transferring funds from client's bank account to own account and vice versa. It says, “An amount of Rs19.72 crore has been transferred from client to own bank account and Rs3.89 lakh has been transferred from own to client bank account resulting in net transfer of Rs19.68 crore from client to own bank account.”
 
Allied Financial Services was also found using client funds to meet its proprietary (PRO)
obligation. “On verification of PRO mark-to-market (MTM) of the member, it has been observed that on all five sample dates client funds were used to meet the PRO obligation amounting to Rs88.29 crore,” the report says.
 
The broker paid Rs26.42 crore in excess to the balances of its clients. In addition, five out of its top 10 clients were unregistered entities and were found to have indulged in the practice of receiving and returning securities or mutual funds from other clients into their DP accounts. 
 
  
Besides Allied Financial Services, SEBI had banned Rajeev Kumar Asopa, Lalit Agarwal, Rajendra Prasad Basia, Awanish Kumar Mishra, Jitendra Kumar Tiwari, Money Mishra Financial Services, Money Mishra Overseas Pvt Ltd, Pankaj Garg and Jitender Malhotra from accessing the securities market.
 

 

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COMMENTS

K S Ashokan

3 months ago

Solution may be to include one more step of authentication by the client/investor in the link to be CREATED between "CDSL/NSDL" and "the Broker", for each and every order of sale, so that the broker has access to the shares which are released from CDSL/NSDL only. This can easily be done at the time of placing the SELL order with the broker through a link to CDSL/NSDL which can be created in the online platform of the broker.

Mayank Kumar

3 months ago

Moneylife, you should provide solution and best practice as well to your readers. thanks

Arun Adalja

3 months ago

always open demat account with bank if possible psu and never give power of attorney to dp and always check your holding every week.

MT

3 months ago

Best defence is to open demat account with bank and not give PoA to broker handling your trading account

RAMESH GOBINDRAM MEHTA

3 months ago

Best defence is not to use small broker and go with the big broker like HDFC, ICICI etc.

REPLY

Suketu Shah

In Reply to RAMESH GOBINDRAM MEHTA 3 months ago

and donot use their advisory services,make yr own decisions via being knowledgable yrself.tell the stock broker of these banks never to call you as they force (or rather attempt to force) toxic stocks by reducing their self confidence.

Suketu Shah

3 months ago

There shd be a discloasure with a hiugh font when one appoints a stock broker like in cigar packets "dealing with stock brokers is injurious to clients wealth,health and happiness."

Inspite of blacklisting my own broker permanently alongsisde all others in the county 9 months ago,he stil unsolicitedly has stated sending me his daily mailers to influence me to buy nonsense stocks(it wl never happen in this lifetime but jail for him on grounds of harassment could happen).Stock Brokers have no bottom and they are all like Shakun Kothari in Bazaar movie produced by Viacom.

Odisha Cement’s MF Units worth Rs344 crore illegally transferred by depository participant
Odisha Cement Ltd has said a depository participant (DP) has illegally and unauthorisedly transferred mutual fund units worth Rs344 crore from the demat accounts of its erstwhile units  OCL India Ltd (OCL) and Dalmia Cement East Ltd (DCEL).
 
In a regulatory filing, the company says, it has already reported the matter to National Securities Depository Ltd (NSDL) National Stock Exchange (NSE) and other appropriate authorities including market regulator SEBI. 
 
"The investigation has already been initiated by SEBI and we understand that appropriate actions are being taken including keeping the transfer or redemption of the said units on hold. We have also filed a criminal complaint with the Economic Offences Wing, New Delhi," it added.
 
Odisha Cement is formed after amalgamation of Dalmia Bharat Ltd, Dalmia Cement (Bharat) Ltd And Odisha Cement.
 
More details soon...
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COMMENTS

Amit Kumar

3 months ago

Very dangerous. Very outrageous. How is stealing shares/MF units even possible?! So bad for business. Somebody should guide retail investors about how to protect themselves from such things, e.g., by using multiple DPs.

REPLY

KIRAN SAINI

In Reply to Amit Kumar 2 months ago

if u dont know the truth so please shut your mouth.

Sreepathid

3 months ago

How they can open their DP account with a broker instead of SHCIL and other Banks ?
SEBI should bring a rule where in Brokers can't have DP and vice versa.

Hot and Cold Stocks of Mutual Funds in January 2019

In January 2019, Axis Bank and HDFC Bank were the most preferred stocks of Indian mutual funds. The net purchases of Axis Bank were Rs1,476 crore, of which Reliance Mutual Fund made net purchases worth Rs431 crore. Mahindra & Mahindra and Tata Steel were the most sold stocks. The net sales of Mahindra & Mahindra was Rs297 crore and net sales of Tata Steel was Rs263 crore.

 

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