Three Brokers Identified in Deloitte’s Audit as Having Allegedly Misused NSE’s Co-location Facility
The Securities and Exchange Board of India (SEBI) has issued show cause notices to National Stock Exchange (NSE) officials and brokers who allegedly misused the co-location (colo) facility. Deloitte Touche Tohmatsu India LLP conducted forensic investigations into three brokers including OPG Securities, SMC Global and Barclays Securities, according to a report in Moneycontrol.com, which claims to have seen the Deloitte report. SEBI is said to have issued a show cause notice to the three brokers.
 
In 2015, an anonymous whistleblower had written to SEBI and to Sucheta Dalal of managing editor of Moneylife alleging that some trading members on the NSE who had subscribed to the exchange’s co-location server facility were getting an unfair advantage by way of faster access to the exchange’s. The whistleblower also alleged the collusion of NSE officials.
 
It may be recalled that Moneylife was the first to expose this scam in mid-2015, for which NSE had filed a defamation case against us.  A single-judge had penalised NSE for Rs50 lakhs for having filed a case against us. After filing an appeal against the order, NSE paid up the penalty. Meanwhile, in the wake of the scam, the top brass of NSE had to resign and a new management team took charge.
 
According to Deloitte report, tn the Futures and Options segment, OPG appeared to be the first to connect to the tick-by-tick server on a significant number of trading days between 2012 (233 days) and 2013 (248 days). OPG had connected to the secondary server even after receiving multiple communications from the exchange to disconnect from it, says the report, as reported in Moneycontrol.
 
In its submission on May 28, 2018, OPG in turn apparently said that it was facing various issues while connecting with the server. The Delhi-based company claimed that there were around 35,000 disconnections to the primary server over 365 days between 2012 and May 2014 (approximately 98 disconnections per day). They connected to the secondary server as a contingency measure to minimize the risks faced due to unforeseen disruptions in the Tick by Tick (TBT).
 
OPG appears to have used the algorithm provided by “Omnesys” and “Greeksoft” to perform trading through their NSE co-location. 
 
In its forensic audit Deloitte found that SMC global had connected to the secondary server even after several reminders from the exchange to avoid doing so. As per the NSE circular, secondary server was to be used only when a primary server is not available. In the audit, Deloitte found that between 2010 and 2015, SMC had connected to the secondary server on 389 days in the Future and Options segment.
 
The report said, “Out of the above 389 days that SMC connected to the secondary server, we observed that it had made complaints to COLO support on 210 days. However, for the remaining 179 days, on which SMC was connected to the secondary server we did not observe any complaint made to the COLO support or the exchange. For 210 days that SMC had connected to the secondary server, it made complaints only on 64 days to COLO support about connectivity or network issues.”
 
On September 8, 2017, SEBI had ordered a forensic audit of the brokers that used the co-location facility.
 
In the Colo issue, there are two detailed reports. One by SEBI’s Technical Advisory Committee (TAC) and a forensic audit report from Deloitte. The detailed investigation by TAC and forensic audit by Deloitte pointed out how brokers could get advantage in connecting to the NSE’s servers because the Exchange had no ‘load balancers’ and ‘randomisers’ in its systems architecture. Both report also said, Delhi-based OPG Securities was consistently able to connect to NSE’s trading system ahead of other trading members, as alleged by the whistleblower’s letter. The TAC also found that the architecture of NSE with respect to dissemination of Tick-by-Tick (TBT) through TCP/IP was prone to manipulation/abuse. (Read: TAC Report Proves Systemic Lapses at the NSE)
 
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    Will SEBI Succeed in Trying to Create a Much-needed Vibrant Bond Market ?
    On the Budget day, India sought to expand its bond market beyond the traditional ambit of sovereign debt. Pursuant to this objective, market regulator Securities and Exchange Board of India (SEBI) initiated diversification of borrowings of Indian corporates by mandating to raise at least a quarter of their incremental funds from the bond market. The regulator came out with a consultation paper in order to address the liquidity problem persisting in the bond market, with an intention to create a robust secondary market for the debt securities in India.
     
    SEBI’s proposal and corresponding inferences
     
    The regulator proposed that listed companies with outstanding long-term borrowings of Rs100 crore and a credit rating of AA and above will have to compulsorily raise 25% of their debt from the bond market from the next financial year. Lower rated corporates have been exempted from the framework for the time being due to the limited demand for such securities.
     
    It is believed that if the 25% norm is followed religiously, it would tantamount to increased bond floatation as more companies would be able to access the debt market. Ideally, the move should provide insurance companies, provident funds and pension funds an opportunity to invest in high yielding instruments and open up a new funding avenue for lower-rated companies. Besides, the government might limit corporates' dependence on banks and the risk associated with it. However, there is a need for an expansion in the investor base for implementation of these rules.
     
    Rationale 
     
    There is no secondary market for corporate bonds in India to speak of. The sorry state of affair could be because of illiquid debt market, bad press in case of default, risk-averse attitude as well as lack of awareness among investors.
     
    On the brighter side, bonds are the ideal way to raise funds for a certain kind of long-gestation infrastructure project, which, typically, are capital-intensive.  It takes years to roll out toll-roads, build flyovers and set up massive power generating plants. The project developer has no cash flow to service debt until the project is running and banks may not be considered a viable source as bank funding is short tenure, which would result in asset-liability mismatch. 
     
    A sound corporate bond market would take a lot of pressure off banks, which are reeling under bad debts. Retail investors will also get a chance to invest in such projects via debt funds. In short, large exposure to risk would be substantiated with huge rewards.
     
    The issuer-issuance conundrum
     
     
    The above chart demonstrates the issuance by different types of entities. It is palpable that almost 60-70% of the total issues are done by financial sector entities while the private sector non-financial entities constitute only around 20% of the total issuances.
     
    Debenture Redemption Reserve (DRR)
     
    Financial sector companies, including NBFCs doing private placement, have been exempted from the maintenance of debenture redemption reserve (DRR), while all issuances by non-financial entities and entities doing public issue are required to set aside a part of their profits (equivalent to 25 % of the value of outstanding debentures) as DRR. Besides, such companies have to invest at least an amount equivalent to 15% of the debentures maturing during the year in bank deposits, government securities, etc. Such an earmarking of funds imposes an opportunity cost on the issuer.
     
    Hence, it can be inferred that if the requirement of DRR is dispensed with, it will naturally facilitate more corporates to access the bond market for their financing needs. Further, in order to safeguard the investors from the default risk of the issuer, execution of Insolvency and Bankruptcy Code 2016 would prove to be a panacea.
     
    DRR maintenance imposes a significant cost on public issue of bonds and on bonds issued on the basis of private placement by non-financial corporates. Given that the issue of protection of bond investors, in cases of default, has been significantly addressed by the enactment and operationalisation of the Insolvency and Bankruptcy Code (IBC), it is felt that if the requirement of DRR is dispensed with, it will naturally facilitate more corporates to access the bond market for their financing needs.
     
    Investment Grade
     
    The need to invest in bonds with lower ratings and deviating from ‘AA’ to ‘A’ grade ratings, would impact pension and provident funds more because they have largely invested in AAA-rated securities. As of today, even the provision to invest in up to AA-rated instruments is hardly explored by most of the larger investors. Corporate bonds rated 'BBB' or equivalent are investment grade. In India, most regulators permit bonds with the 'AA' rating only as eligible for investment. However, this case may not hold true after SEBI’s proposal. 
     
     
    As per SEBI, in 2016-17, 51% of total borrowings came from bonds compared to 37% in 2012-13, a good indication for the deepening of bond market. However, borrowings are still heavily skewed towards high rated borrowers, with 90% of the issuances concentrated in the AA and AAA rated categories. In light of the extant depth of the bond markets, it is hoped that the proposed rules should not be onerous for corporates.
     
    SEBI proposed a “comply or explain” framework for the new rules. This means that companies would need to disclose non-compliance as part of “continuous disclosure requirements,” the regulator said. Further, from the third year of implementation i.e. F.Y. 2021-22, the requirement of bond borrowings shall be tested for a contiguous block of two years i.e. F.Y. 2021-22 and 2022-23 will be treated as one block and the requirement of 25% borrowing through bond market shall need to be complied with for the sum of incremental borrowings made across the period of the block. Further, at the end of the block if there is any deficiency in the requisite bond borrowing, a monetary penalty in the range of 0.2% to 0.3% of the shortfall shall be levied.
     
    Impact on Financier’s Interest
     
    The entry barrier for lower rated corporate bonds would be demolished because the proposal might escalate the pool of investment grade issuers. So far, the loan route was considered the Holy Grail for small borrowers. The bond avenue would serve as an alternative for them to raise funds at a reasonable price keeping in mind investor’s perpetual keenness to diversify their investments as diversification results in risk reduction. It may be useful to classify BBB-rated corporate bonds as investment grade and thus allow pension funds and insurance companies to enter that space.
     
    Whether SEBI’s attempt would prove to be a boon or a bane, will only be seen as the days unfold.
     
    (Rajeev Jhawar is an Executive at Vinod Kothari Consultants P Ltd)
     
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    SEBI orders fresh auction of Pancard Clubs’ properties
    As part of its ongoing exercise to recover Rs7035 crore to pay off over 51.55 lakh investors duped by the Pancard Clubs Limited (PCL), the Securities and Exchange Board of India (SEBI) has announced an e-auction of PCL’s properties located all over India, including Mumbai and Thane.
     
    SEBI, which by now has auctioned nearly 57 properties and sealed 27 properties, has issued a fresh notification on 17 July, for the sale of immovable properties and vehicles. The immovable properties offered for sale, located in and around Mumbai include: a basement, ground floor and first floor at Khatau House, Mahim West (3788,1480, 8108.52 sqft respectively), 14 galas located at Kalyandas Bhawan, Dadar ( 6836 sqft), Hotel United- 21, Thane (3264.21 sqm), flat No 103, Gorai Shri Ashish Cooperative Housing Society, Borivali West (750 sqft), ground plus mezzanine floor, Vardhman Industrial Complex, Thane West (248.04 sqm) and three offices situated near Nerul railway station, Navi Mumbai (4129 sqft).
     
    The properties in other parts of Maharashtra include: Hotel United-21, Lonawala, near Pune (10.114 sqm), 12 Bungalows at Lonawala, near Pune (4950 sqm Hotel United 21, Haveli, Pune (49,500 sqm), Resorts at Mahabaleshwar, Satara (8720 sqm) and Tiger Camp resort, Chandrapur (8.79 acres).
     
    The properties elsewhere in the country include: land at Varca, Salcete, Goa (500 sqm), Hotel United-21, Somnath, Gujarath (12,800 sqm), Lake City Resort, Udaipur, Rajasthan (3245.2 sqm), Tiger Habitat, Kanha, Madhya Pradesh (3.28 acres), Jungle resort and Seoni, MP (3.53 acres).
     
    The properties in the south include: land at Kodagu, Coorg, Karnatak (32.49 acres), Resort at Mysore, Karnataka ( 1384.23 sqm), land parcels at Kottayam, Kerala ( 14.14 acres), Resort, Dindigul, Tamil Nadu( 2acre) and Hotel United 21, Nilgriris, Tamil Nadu (5 acres).
     
    Other parties include: Resort at Durgapur, Burdwan, West Bengal (11719 sqm), Hotel United 21, Mandarmoni, Beach View, West Bengal (7769.97 sqm), Resort at Paraganas, Sundarban, West Bengal (2.30 acres), Hotel United, Gurgaon, Haryana (2763.40 sqm ) and Hotel United 21, Bhimtal, Nanital, Uttarakhand (7870 sqm).
     
    In addition the e-auction will also be held for sale of vehicles between 10.30 AM to 11.30 AM on 2 August. The vehicles for sale include: Mercedez Benz (MH 46 AK 5555) (reserve price-Rs 71,25,000) (EMD Rs712500/-), Mercedez Benz GL (MH 01 AU 5555) (reserve price-Rs17,25,000) (EMD Rs172500/-), Hyundai Verna (MH 21 BF 5534) (reserve price-Rs4,35,000) (EMD Rs43,500/-), Toyota Innova (MH 01, BG 9959) (reserve price-Rs791250) (EMD Rs79,100/-) and Maruti Alto (MH 01 BF 2841) (reserve price-Rs117750) (EMD Rs11,800/-).
    PCL started in 1990 andmobilized money under its holiday scheme. It offered one and half time returns on money invested for three years, double returns after 6 years, two and half times returns after 9 years and two and three times returns after 10 years. PCL is alleged to have duped investors between 2002 and 2014 through its various holiday and collective investment schemes. 
     
    Till 2010-2011 the activities of PCL were normal. In 2010, SEBI scrutinized the documents relating to the business carried on by PCL and objected to its activities saying that its share capital stood at a meagre Rs50 lakh, while the money mobilized under its holiday scheme was over Rs7,000 crore. Besides, investment to the tune of over Rs1,000 crore was made towards acquiring hotels and resorts, thereby expanding inventory of properties on offer in the holiday scheme by utilising the proceeds of its money doubling  scheme.
     
    SEBI noted that Pancard Clubs mobilised Rs7,035 crore from 51,55,516 investors from 2002-03 to 2013-14 through its various holiday schemes. On 31 July 2014, it asked the company and its directors --"not to collect any fresh money from investors under its existing scheme” and "not to launch any new schemes or plans or float any new companies to raise fresh money.” 
     
    In November 2015, the the Securities Appellate Tribunal (SAT) asked PCL to immediately repay investors who had filed the intervention application. On 29 February 2016, SEBI ordered PCL, to provide full inventory of all the assets and details of properties held by its directors.
     
    The company had failed to comply with SEBI’s directions issued in February 2016, to refund to investors their money. CMD late Sudhir Morawekar, Shobha Barde, Usha Tari, Manish Gandhi, Chandrasen Bhise and Ramchandran Ramkrishnan were the “directors” of PCL.
     
    “The corpus of money accumulated by PCL by way of contributions to the holiday scheme was well above the limit of Rs100 crore set under the proviso of clause 1 of subsection 2 of Section 11AA of the SEBI Act, crossing which, a scheme is deemed to be a CIS," the Bench of Justice JP Devadhar, Jog Singh and Dr. CKG Nair Of Securities Appellate Tribunal (SAT) had said in its order. 
     
    The Bench had stated, that “the PCL transferred these investments to other schemes but gave a false affidavit that investors have voluntarily switched over to the non-refundable schemes. This was an attempt to deprive the investors of benefits which were originally promised by the company under its earlier schemes.”
    On 12 May 2017, SAT upheld SEBI’s order that PCL is a CIS and needs to be wound up. SAT directed PCL to refund investors’ money within three months. However the investors are yet to get refund of their money. PCL was closed down by SEBI since May 2017.
     
    Now the investors do not know to whom they should return their matured policy certificates. Some of the PCL’s hotels and restaurants are still functioning. As such SEBI should inform investors how much revenue PCL is collecting and to ensure that the investors’ money is refunded, Rashtrashakti Investors Co-ordination Committee (RICC) President Dnyaneshwar Darwatkar said.
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    COMMENTS

    27rahulwagh

    1 week ago

    I have invested my large amount of savings in pancards, for future security as to marry my 2 daughter's and my only Son who is also dignosed with Ulcerative Colitis is unable to do anything cause of it in hope I will do my all father duties I invested in their and my wife's name now SEBI is just saying and Auctioning the Pancards Clubs properties but are the Money give. To those who invested we are in the Ship with Hole, with no shore aside... Now it feels like SEBI is doing this otherwise before it none invester complained about there money being stolen by Pancards club... But SEBI is ....if not then why is SEBI taking 2016 to now 24 May, 2020, But no Money is refunded to any of its investers .... even SEBI looks like a Shark to fulp the largest Chunk without anyone knowing it...
    If not then when will SEBI refund our money.....

    prv8055

    3 weeks ago

    Hard earned money , seems to be vanishing. Suggest what to do.

    Ekta Singh

    4 months ago

    I had invested some money but when our money return back. How will get.

    Swapnil Shirawale

    8 months ago

    I had Invested some money but don't know when our money is return back, when this proceeds is complete.

    Aishwarya Jadhav

    8 months ago

    Pancard club money

    MrCmtamboli

    1 year ago

    It is learnt Sebi has auctioned some properties. But no pqyment to Members of Pancard club ltd. Why?

    Shambhavi Shetty

    1 year ago

    Refund process

    Manjunath Balgi

    2 years ago

    Sir, we have invested more than three lacs in Pan Card Clubs different scheme and all are matured and how and where we have to submit our matured certificates please guide all invester

    REPLY

    Mrinal

    In Reply to Manjunath Balgi 2 years ago

    Hiii i have also invested a lot in this . Want to ask you some informations. Can you give me your contact or ping me in whatsapp 9883553834

    Hanumant Phadtare

    In Reply to Mrinal 2 years ago

    You can join this group for information about PCL.
    https://chat.whatsapp.com/GAfAJW235VmBtr40jXDrfo

    Snehal Pawar Gharat

    In Reply to Hanumant Phadtare 1 year ago

    Give whats app link

    Manjunath Balgi

    2 years ago

    What about our investment made in the name of self n wife and children, to whom to approach for our claim of maturity refund please guide all investor to get their hard earned money , even we don't mind to get our initial investment money not double or triple

    Ashok Senniappan

    2 years ago

    Since 1990 the PCL mobilized money under its holiday scheme and SEBI discovered in 2010 that it had only 50 lakh as capital while it had collected 7035 crore to pay off over 51.55 lakh investors and only in in 2010 it came to know that it has crossed the limit fixed for CIS schemes! SEBI great job done awaking from deep sleep after PCL committing irregularities.Why not action initiated its officials for delection of their duty while drawing fat salaries? Is SEBI not helped the company in committing ireggularities.? All the officials should be subjected to questioning like Senator Elezebeth Warren did to Wells forgo executives.

    sanjay modak

    2 years ago

    My wife had invested some money out of her household savings. Don't know if any refund out of the sale of property will be automatic on pro-rata basis or she has to lodge a claim (with whom?).

    arun k Dasgupta

    2 years ago

    SEBI has ordered amalgamation of various Mutual fund schemes sold by the Mutual Fund houses contrary to the options exercised by the buyers and as a result every single investors have lost very sizeable amounts of their portfolio and the loss making ones have been able tocut down their losses to some extent, the profotable ones have lost their profits to subsidize worst performing schemes before amalgamation. While Mutual fund houses have increased their share of profit by diversion of funds , the investors are losing inspite of Sensex being at all time high. This has happened with many funds but one I would like to quote is HDFC Prudence Fund to HDFC Balance Advantage Fund. Has SEBI done any analysis about the relative gain or loss had the participants continued in old scheme and if they have lost because of decision by SEBI on unfounded assumptions, the loss should be borne by them and not by the consumers. To the best of my knowledge neither SEBI nor any Mutual Fund has done any such analysis. What the Regulator is doing is entirely unacceptable.

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