Strange as it may sound, the Telecom Regulatory Authority of India (TRAI) does not know if telecom services-providers are enforcing tariffs for unsolicited data package along with voice service on subscribers.
Ravi Shankar Prasad, minister of communications, law & justice and electronics and information technology, while responding to a question in the Lok Sabha stated, "The TRAI is not in notice of the telecom service providers enforcing tariffs in respect of unsolicited data package along with voice services in the name of free service to be charged later from consumers."
Hans Raj Hans, member of Parliament (MP), asked the question about enforcing of tariffs by telcos. He had asked whether the issue of enforcing tariffs for unsolicited data package along with voice service in the name of free service only to be charged later from consumers has come to the notice of the TRAI.
He also asked whether the TRAI is aware that telcos are rampantly changing consumer’s tariff plan at the back end without their consent thereby charging high bills.
Responding on this, Mr Prasad, the minister stated, "The telecom tariff order (TTO) issued by TRAI mandates that a tariff plan once offered by a service provider shall be available to a subscriber for a minimum period of six months from the date of enrolment of the subscriber to that tariff plan. The Telecom Tariff Order further provides that the subscriber shall be free to choose any other tariff plan even during the said six months’ period."
Vodafone Idea announced that the 'on-net' voice calls would be billed at six paise per minute. The 'on-net' voice calls after the provided FUP limit will be charged 6 paise per minute, similar to Reliance Jio. It is also providing bundled 'on-net' minutes, whereas Jio will be charging customers for IUC 'top-up' vouchers.
Interestingly, just last month, TRAI had floated a "Consultation Paper On Transparency in Publishing of Tariff Offers". The paper aims to empower end consumers by making available all relevant information to them and to eliminate the instances of adverse choices made by consumers due to lack of information, misleading information or due to difficulty in assessment or comparison of information.
The paper says, "It has been observed that the service providers are offering various non-telecom services as a part of the bundled offering to the existing and prospective customers. Many complaints have been received regarding the charges being imposed on the customers after the free subscription period (if offered) of such service to customers is over. It has also been noted that there may be certain situations in which there may be conflict between the obligations of the service providers as regards tariffs and as regards bundled offerings."
This applies when a tariff plan from the telco offers a free subscription of certain service for a period exceeding six months and the service-provider proposes to change the tariff or discontinues the tariff plan after six months, the subscriber runs the risk of losing the remaining free subscription period if he does not agree to the revised tariff or exercise option to migrate to the plan offered.
On Monday, 2nd December, the market regulator, Securities and Exchange Board of India (SEBI) asked NSDL (National Stock Depository Ltd) to transfer investors’ shares that were pledged by Karvy Stock Brokers Limited (KSBL), back to their respective depository (demat) accounts. This is an excellent move at a time when there is hardly any good news for the average saver. KSBL, one of the largest market intermediary and brokerage firms, had helped itself to investors’ shares held in demat accounts opened with it and pledged them to borrow heavily. The loans were transferred to Karvy group entities, mainly to a realty company.
Karvy has borrowed money from a clutch of banks and finance companies—Bajaj Finance, HDFC Bank, Axis Bank, ICICI Bank, IndusInd Bank and Kotak Mahindra Bank, among others. Bajaj Finance rushed to the Securities Appellate Tribunal (SAT) against the directive today. SAT has ordered a stay on any further transfer of shares back to clients (this could affect over 7,000 of Karvy’s clients) and directed the regulator to hear the lenders’ concerns by tomorrow and pass orders by 10th December. KSBL owes Rs345 crore to Bajaj Finance and it has already issued a loan-recall notice to the firm.
All this is along expected lines. Corporate India, with their battery of expensive lawyers, is good at ensuring that the justice system works efficiently for them by getting stay orders or interim orders or simply delaying proceedings. It is rarely that the regulator shows the wisdom to go back to basics and act in line with its core responsibility. But its quick action on Monday evening ensured that the scale of equity, for once, was tilted in favour of retail investors, not forcing them to run from pillar to post to salvage their investments.
Under the preamble of the Securities & Exchange Board of India Act, SEBI is mandated with three principal objectives. Of these, the first is “To protect the interests of investors in securities”; the other two are to promote the development of the securities market and to regulate it.
At a time when the regulator has been rapped for closing investor complaints without even examining them, it is good to see SEBI put the interests of a large number of retail investors first by ensuring that shares, that were illegally pledged by Karvy, were returned to investors’ demat accounts.
The practice, so far, has been different. In a slow and unequal justice delivery system, the disaggregated retail savers (depositors or investors) are always the losers. The big players and their expensive lawyers not only dictate policy but, often, can steamroller courts as well. SEBI’s action, this time, has reversed the process and protected the small investor, even as multiple other issues are contested and thrashed out in court.
The money involved is enormous—over Rs2,013.77 crore—belonging to 82,559 investors. The remaining investors (of a total of approximately 90,000-95,000) would get their shares credited after paying what is due to KSBL. Simultaneously, SEBI escalated its action against KSBL by suspending its trading licence with immediate effect.
For the banks and corporates, who are crying foul, the money recoverable from Karvy is hopefully less than the value of shares pledged. Most of them would have multiple business relationships with C Parthasarathy, Karvy’s promoter-chairman, and his group entities; so their ability to enforce their rights and recover dues is significantly higher.
On 22nd November, SEBI cracked down on KSBL with a hard-hitting, ex-parte, interim order barring it from taking on new clients or using the Power of Attorney (PoA) provided by its clients. The order stunned the market, but answered the complaints of thousands of investors who weren’t getting their money back from the firm. The action was based on a fairly detailed investigation by the National Stock Exchange (NSE) which, prima facie, established that KSBL illegally pledged clients’ shares to raise funds.
It did this by hiding facts from the NSE and NSDL by failing to report certain DP (depository participant) accounts and crediting funds raised by pledging clients’ shares to its own bank accounts which were further transferred to a realty company.
Without going into details of how this was done in a digital environment, in a physical world it would mean that KSBL violated the trust of its clients and stole their shares.
According to the market scuttlebutt, it appears that some investors may not have been entirely unaware of what was going on; but we will come to that later. Karvy’s initial reaction was, interestingly, defiant; probably because it got away unscathed in the IPO scam of 2006 after a SEBI order was set aside by SAT.
When Greed Rules
Coming to investors, sources say that some investors themselves have created the possibility of being cheated by their broker-DPs by allowing their shares to be pledged and earn from them.
They were told how idle shares lying in a demat account could be turned into a source of income, by lending them, especially to make margin payments. They hence allowed their shares to remain in the broker's pool account, to be pledged as a pool. This opens the door to the possibility of brokers misusing the shares. A former SEBI official points out that “this works well when the broker pays interest regularly and the investors have no complaints. However, when the interest stops, many of these investors feign ignorance and play innocent victims.”
Unless they can show that Karvy fudged information and did not send them regular reports, such investors, driven by greed, may end up paying for their foolish and risky behaviour. SEBI also is aware of this practice and had tightened the rules in June, requiring a tri-partite agreement with investors. Those who were party to it would be a different category. The investigation would also show whether banks had done their due diligence and ensured that shares they had lent against were recorded with the depositories. And whether they had sought an undertaking from KSBL that the shares belonged to it and were unencumbered.
However, the bulk of investors may, indeed, be innocent victims; they now have their investment protected and the ability to move their business elsewhere. The episode, however, raises serious questions that need to be addressed quickly.
Are Broker DPs Safe?
A former executive director at SEBI points out that brokers were allowed to become DPs to provide a seamless system and a one-stop service to investors. In practice, though, it has been a constant battle for investors to protect themselves from being cheated by market intermediaries.
The first major battle was the misuse of the mandatory PoA that brokers insisted as a requirement for online trading. These used to give brokers sweeping rights to investors’ money and were, often, misused to decimate their investment. Moneylife was part of this long battle all through a decade ago, to clean up the system.
Over time, SEBI has come up with stringent rules to restrict misuse and ensure that investors receive information and alerts through multiple channels about transactions in their account as well as investments.
Brokers are also forced to transfer excess funds available with them back to the client account every quarter. In June, SEBI said that clients’ shares couldn’t be pledged to raise funds after the Allied Financial Services episode. According to Business Standard, another three-dozen brokers are under SEBI’s radar.
And, yet, KSBL with over 234,000 customers, could indulge in such brazen and criminal misappropriation of assets of a large number of investors. This shows that circulars and rules that cast an increasing burden on investors to be forever vigilant are not the answer.
After all, it is SEBI which is relentlessly forcing even long-term investors to dematerialise shares. It has also failed to provide appropriate infrastructure to those who wish to hold physical shares to be able to dematerialise/ rematerialise them as required.
So, the onus of ensuring that shares in DP accounts are safe has to be with the regulator; its inability to keep up with the ingenuity of fraudsters cannot be at investors’ cost. In this context, SEBI’s decision to move quickly and credit shares back to investors’ accounts is a heartening move in the right direction.
(This article has been updated on Wednesday 9.45 with a few additional details)
The Securities Appellate Tribunal (SAT) has reportedly asked Karvy Stock Broking Ltd or Karvy to approach National Stock Exchange (NSE)'s disciplinary committee on revoking the trading suspension. Separately, the Tribunal also asked the Securities and Exchange Board of India (SEBI) to hear Bajaj Finance Ltd, a client of Karvy, and pass an order by 10 December 2019. SAT also ordered suspension of any further transfer of securities that Karvy Stock Broking had pledged with the lenders. Karvy has approached the SAT after NSE, Bombay Stock Exchange (BSE) and Multi Commodity Exchange (MCX) on Monday suspended its trading licence across all segments of equity, cash, commodities and currency on regulatory concerns.
According to a report from the Mint, after hearing Karvy's representation, NSE's disciplinary committee will pass final order on whether the trading suspension stays or is revoked by 6th December. The petition by Karvy against SEBI would now be heard on 13 December 2019.
In a separate order, the SAT bench of Dr CKG Nair and justice MT Joshi, asked SEBI's whole-time member (WTM) to hear Bajaj Finance and pass an order by 10th December. Bajaj Finance has approached SAT contesting an order passed by SEBI on 22 November 2019 barring trading accounts of Karvy.
In its contention, Bajaj Finance, represented by senior counsel Janak Dwarkadas, says since Karvy violated certain clauses of their loan agreement and withdrew beyond the sanctioned amount, on 20 November 2019, it had issued a loan recall notice to the brokerage seeking refund of its full outstanding loan of about Rs345 crore, including interest and charges. Bajaj Finance was planning to invoke the pledge, however, on 22 November 2019, SEBI prohibited Karvy from transferring securities and the Bajaj group company could not invoke its pledge.
In its order passed on Tuesday, the SAT says, "...we find that the impugned order notes that Karvy had raised funds pledging securities from banks and non-banking finance companies (NBFCs) and therefore was aware that rights of those entities would be impacted by the said order. As such, even if they could not be heard while passing the impugned order at least on their representation they were entitled to be heard...we are of the considered view that the impugned order has prejudiced and adversely affected the rights of the appellant as a bonafide lender."
Last month, market regulator SEBI found that Karvy Broking had illegally diverted nearly Rs2,000 crore of more than 95,000 clients’ shares to its own accounts.
Based on a preliminary report from NSE, the WTM of SEBI had issued an ex-parte ad interim order on 22 November 2019 restraining Karvy from taking new clients in respect of its stock broking activities and also prevented the brokerage from using the power of attorney (PoA) given by its clients. Later, on 29th November, the SAT asked SEBI to consider request of Karvy and pass appropriate orders. However, on the same day, SEBI disposed all contentions made by Karvy and barred the brokerage from using PoA of its clients.
In an email to its clients on Monday, Karvy had said, "All of you must be aware of the fact that the NSE and the BSE have suspended trading by us on all stock exchanges. We have received this communication from the NSE only at 8.27am, in the morning, and were informed that we have been temporarily suspended under rule 13 A (a) of the NSEIL Rules, with effect from 2 December 2019, on account of regulatory concerns. We are yet to receive a show cause notice from them, and we propose to respond to the show cause notice appropriately. The BSE has also sent an intimation to us about the suspension of trading. We are approaching the SAT to intervene."
Reports suggest that Karvy is facing a liquidity crunch due to a number of bad client trades on castor seeds. The Hyderabad-based financial services group is facing liquidity problems as some clients have defaulted on payments after incurring huge losses on trades in castor seed contracts. The payments contagion now seems to have spread to other investors who are complaining that Karvy is not making the payments.