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.
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.