What Investors Don’t Know, That They Don’t Know
The past two years have seen tens of thousands of people losing their hard-earned savings to fraud in entities that appear to operate in a legitimate and highly regulated environment. Nearly a dozen brokerage firms have collapsed. People who lose money are justifiably angry, aggressive in their demand for justice and certainly don't deserve to be cheated.
 
I sympathise with people who lose money to unscrupulous fraudsters who come in the guise of stockbrokers, insurance agents, financial advisers, fund managers or bank relationship managers. These are people you should be able to trust. But what is worrying and perplexing is that far too many of people blunder into investments without any due diligence. And, even after losing money, refuse to accept any responsibility for their decisions. 
 
Several investors who contributed to the Rs1,000+ crore kitty managed by Anugrah Stock & Broking and its associates, seem astonished that they could have made an effort to evaluate the promise of high returns, check the legitimacy of operations and find out more about the product and the entity they are entrusting their savings to. These investors include highly qualified professionals—even many chartered accountants.
 
Anugrah is not the only entity running dodgy schemes offering high returns; scores of others continue to fly below the regulators’ radars. Although we are quick to blame regulatory failures and poor supervision, here’s a look at what investors fail to check.
 
John Rothschild put it best in A Fool and His Money: “People who spend a week choosing a furniture refinisher will sign up with the first [financial planner] who calls. People who circle junkyards for matching hubcaps will buy mutual funds without reading the prospectus. People who check the expiration date on cottage cheese would not think of investigating the background of their broker...”
 
Here are a few things that should have acted as red flags.
 
Assured Returns:  Such returns have been under a cloud for over 25 years, after one determined activist, Viren Jain of Midas Touch Investors’ Association, successfully dragged Canbank Mutual Fund’s Canstar Scheme to court when it reneged on its commitment to pay up the returns ‘assured’ to investors in its offer documents. Canbank Mutual Fund’s parent, Canara Bank had to deliver on the promise as did many other public sector banks and insurance companies whose mutual fund subsidiaries had floated ‘assured return’ schemes. Soon after that, the Securities and Exchange Board of India (SEBI) tightened the rules on assured returns. It even has a strict code of advertisement that is available on stock exchange websites saying very clearly that advertisements by brokers and intermediaries shall not contain: “Any promise or guarantee of assured return to the general investors." 
 
Yet, dubious ‘assured returns’ schemes continue to proliferate. Many are caught only when they begin to default. Moneylife reported on VPS Advisory that offered a 20% return. Three years ago, SEBI barred Kassa Finvest and cancelled its broking licence for running a scheme that was very similar to Anugrah’s. This was widely reported in the media, but investors clearly did not pay attention. 
 
So when Anugrah sent out slide-decks ‘assuring’ a 12% return (and 100% capital protection), while also showing off payments of up to 40%pa (per annum), it should have raised questions about its methods and legitimacy. Instead, many investors are only now waking up to the fact that Anugrah’s name and logo were not on the slides and they were not sent from the broker’s official email. 
 
 
Who said the DAS (Derivatives Advisory Service) is illegal? 
“Tell me how it is illegal,” says one investor, bristling with irritation when we said the DAS was illegal. Well, SEBI rules permit a person or entity to manage money in the following categories: mutual fund, venture capital, portfolio management service (PMS) or alternative investment fund. An investment adviser or distributor cannot collect money. A stockbroker is permitted to execute your trades and do this on the basis of a power of attorney (POA), but needs a PMS licence to collect money. 
 
Anugrah’s derivatives advisory service (DAS) as well as that of its associate Teji Mandi Analytics (TMA) did not fit into any of these categories and was, therefore, illegal. Anugrah as a registered stockbroker legitimately asked clients to open accounts and provide POAs (which involves a lot of signatures), but that is for trading accounts and is not to be misused to collect money promising assured returns in pseudo PMS. TMA did not even have a brokerage licence, so everything was routed through Anugrah and, yet, nobody thought about checking what  SEBI licence it operated under.  
 
SEBI has extremely onerous rules, capital requirements and specifications about qualifications and reporting for each of these categories. Anugrah imitated some of them and made fake claims like not pooling investors’ money, etc, but nothing was reported to the regulator. 
 
The Turkey Problem 
Nassim Nicholas Taleb, author of the best-selling The Black Swan, writes: “Consider a turkey that is fed every day. Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race... This goes on for months, and the turkey feels better every day. Then, the day before Thanksgiving, the farmer wrings the turkey’s neck. Things can deteriorate, and can deteriorate quickly.” 
 
 
This is exactly what happened to Anugrah’s investors. Those who invested in 2014-15 even got 40% returns. Anugrah and TMA offered slides showing off the good times and people threw caution to the winds. Some even gave unsecured loans to Anugrah based on a promise of high monthly returns, without even the pretence of a broker agreement because he said it would be ‘less of a hassle’. 
 
 
We Paid Taxes
One aggrieved victim says, “For every transaction on NSE (National Stock Exchange) each one of us has paid service tax, securities transaction tax (STT), stamp duty and SEBI fees. The government collect huge taxes from us through Anugrah and TMA, so how can this be illegal?” All victims would have also paid income-tax on the earnings. 
 
The doctrine applicable to taxation is clear: Any illegality tainted with the earning has no bearing on its taxability. Income-tax authorities are especially not concerned if the income was earned illegally or by resorting to unlawful means. You still pay taxes. As for the rest—stamp duty, STT and service tax—these were legitimately paid by Anugrah on transactions on behalf of investors in its capacity as stockbroker. The know-your-customer (KYC) documents, POA and depository accounts were all opened through this legitimate entity. The rest was not.
 
Extra Income on Core Investments
In Anugrah’s case, it not only collected cash from investors (offering a higher return), but also ensnared them into parting with core investment in mutual funds and long-term holding of blue-chips (with a haircut in value). These stocks were to be held in their names in depository accounts. Most investors are struggling to salvage at least that portion of their savings and with some help from the Central Share Depository Ltd (CDSL) a few may get their money back. 
 
Many brokers have offered such arrangements with the lure of ‘earning interest’ on shares simply lying in depository accounts. This is sheer greed and basic cross-checking with a sensible investment adviser would have dissuaded people from such deals. The fact is that many investors had been warned by honest investment advisers and CAs to stay away from Anugrah-like offers and pledging their shares. Some listened and are safe. Many didn’t. 
 
 
Are expectations of trust and integrity too much to ask for?
Unfortunately, yes. And we are not singling out Anugrah in this regard, although it ran a completely illegitimate DAS. Moneylife’s sister entity, Moneylife Foundation, which is engaged in financial literacy, is categorical about who not to trust. This list includes the ‘relationship manager’ assigned to you by the most blue-chip names in Indian and international banking. We have handled and reported innumerable cases of banks decimating wealth, instead of managing it by churning portfolios to earn exit and entry charges, or recommending insurance schemes, complex derivative products, mutual funds and art or realty investments that allow the bank to earn higher fees. The perfectly ‘legal’ mis-selling of insurance products by bankers is one of the biggest rackets that our government and financial regulators refuse to stop under pressure from powerful bank lobbies. 
 
So ‘Caveat Emptor’ or buyer beware remains the guiding principle for investment and that is not going to change. Facts and due diligence will be far safer than blind trust and expectation of integrity. 
 
  • Like this story? Get our top stories by email.

    User 

    COMMENTS

    rajubarkade

    1 week ago

    Good article!!!

    still more to do & act in financial awareness

    godavari_joshi

    1 week ago

    Some reasons which I have noticed (other than greed or naive belief) when people get into such schemes:
    1- Most people feel very overwhelmed with the subject of Money /Wealth management. They would rather leave it to others than try to deal with the stress which they experience on trying to manage their money.
    2- The sellers in the Financial market products use jargons which scares people and also gives them an impression that these sellers in Financial Market must be smarter beings backed by professionals, Softwares, Brand names of the sellers etc
    3- Sometimes people get very carried away with the Books/Articles they read or the so called tutorials you see on the social media.
    4- Anything which looks a bit complicated or confusing to understand - People defer the decisions to others.
    5- and offcourse, lastly the lure to earn additional income is too difficult an urge to resist.

    Earning Money is probably easier than Managing It :)

    REPLY

    iamviveksri

    In Reply to godavari_joshi 1 week ago

    Well said

    shrine221

    2 weeks ago

    And it shows how everyone is hungry for High return and guarantee

    shrine221

    2 weeks ago

    Well written great everyone should take care of hard money

    aksharma.pnb

    2 weeks ago

    The shortage of regular staff and outsourcing of staff/services at SEBI level are responsible for scams.The SEBI must scrutinize the share prices,schemes of companies and their operations. Speculations must be avoided at all costs. Sources of funds must be enquired in detail to confirm that only legitimate money is used. Banks must verify end use of loan/credit facilities and they should be held responsible for any lapse.

    suketu

    2 weeks ago

    Another major point.Donot allow CA or even entertain talks by them on equities etc.Go to well known specialist mlife or do on yr own,.Donot go to anyone else.Also donot allow CA to guide you on investment even unsolicitedly .Would you allow yr cook to become yr driver?

    If they are so intelligent why are CA after yr portfolio.Let them invest their own portfolio and make 500% /yr.Why are they after yr money in equities?

    mywopy

    2 weeks ago

    Cost of living has gone up.

    Even with a decent job, most people will not get close to living a comfortable lifestyle the previous working generation was enjoying.

    If someone offers an opportunity for exorbitant returns to improve their living standards , most people will bet their entire life savings over it.

    It's either everything or nothing. There is no logical reasoning for human greed. This is how it has always been.

    iamviveksri

    2 weeks ago

    but what is the regulator doing ? why are we not able to ask those who are supposed to make investing safe in India to come clean on this- how come it is always Caveat Emptor only. then dont have these institutions. or are we to believe that the entire thing was unknown to the monitoring agencies? if we are paying tax on all the deals will not a picture emerge to anyone who is monitoring those taxes?

    kpushkar

    2 weeks ago

    Similar to goat farming .. Samruddha jeevan type frauds. Limosine etc
    Teak wood type schemes.. investor has to blame himself or herself for greed..

    We are more careful while buying vegetables 🙂

    kvrao42004

    2 weeks ago

    Public memory is proverbially short. People forget even their losses. Or new set of people join in and lose money. Regulators can't do anything. We are very careful in penny issues. It's quite astonishing that how the so called intelligent mind ignores risks
    When banks are offering 5/7% on fixed deposits, 40% return is mouth watering but an immediate sign of great risk. The mind is restless, seeks quick happiness, dislikes hard work and waiting. Result: self destruction.

    suketu

    2 weeks ago

    Lack of awareness/knowledge is so so damaging in money matter or anything.Secondly after having access to correct knowledge of being cheated etc still if you fall for scamsters you have yrself to blame.

    Atleast 2 CA's in MUmbai is using stock market to extort ie forcibly get their clients to their broker and then that broker doesnot pay while selling.Beware.

    How great the advise from moneylife on and on are to be cautious,educated,aware and not gullible.Cheers.

    drbheda

    2 weeks ago

    You have been doing a thankless job of educating people but greed is such an overpowering sentiment that caution is thrown to the wind, time & again.

    s5rwav

    2 weeks ago

    Blind Trust in Matter of Investment Helped Crooks to Mint Money and, in Corrupted Justicial System, Justice during One's Lifetime seem Out of Question. Commoners be Careful. I am Babubhai Vaghela from Ahmedabad. Thanks.

    RBI Accepts Kamath-led Panel's Suggestions on Resolving COVID-linked Stress
    The Reserve Bank of India (RBI) has broadly accepted the recommendations of the KV Kamath-led expert committee on resolution framework for COVID-19-related stress.
     
    The expert committee has recommended financial parameters including aspects related to leverage, liquidity and debt serviceability. It has suggested financial ratios for 26 sectors, which can be factored by lenders while finalising a resolution plan for a certain borrower.
     
    The sectors identified by the panel include auto-components, auto-manufacturing, aviation, cement, construction, pharma manufacturing, power, real estate, consumer durables, hotels, restaurants and tourism, among others.
     
    According to L Viswanathan, partner at Cyril Amarchand Mangaldas, the resolution framework is expected to bring in the required level of uniformity (and where relevant sector-specific calibration) and rigour in assessing impact of COVID-19 on companies and preparing resolution plans.
     
    He says, "Such parameters will provide flexibility to the borrower as well as cater to the need to have a sustainable business in the near future where the lending institutions are also free to stipulate other parameters in addition to the mandatory ones. Further these baseline ceiling or floor for the mandatory parameters can also be strengthened based on cash flow projections. Such flexibility also factors in the varying impact of the pandemic on various sectors/ entities, and the RBI has permitted lending institutions to, at their discretion, adopt a graded approach depending on the severity of the impact on the borrowers (which approach could entail classification of the impact on the borrowers into mild, moderate and severe), while preparing or implementing the resolution plan."
     
    "Finally monitoring has been stipulated for these parameters on an ongoing basis. The RBI has sought to strengthen the ICA mechanism by clarifying that ICA is mandatory and compliance of the signing of ICA shall be assessed as part of its supervisory review. This should encourage signing of the ICA and preparation of resolution plans. The requirement for maintenance of escrow accounts will also aid monitoring and control," said Mr Viswanathan from Cyril Amarchand Mangaldas.
     
    The committee selected five parameters based on their relevance while considering the resolution plan. These include ratios such as "total outside liability/ adjusted tangible net worth (TOL/Adjusted TNW), total debt/ebidta, current ratio, debt service coverage ratio (DSCR) and average debt service coverage ratio (ADSCR)."
     
    The lenders can also consider other financial parameters in addition to five mandatory parameters and may, at their discretion, adopt a graded approach depending on the severity of the impact on the borrowers, as per the report.
     
    In respect of sectors where ratios have not been specified, lenders can make their own assessment towards the resolution plan.
     
    The panel has recommended that the resolution framework should be invoked by 31 December 2020.
     
    As per the recommendations, the resolution process should be treated as invoked once lenders representing 75% by value and 60% of lenders agree to do so.
     
    The residual tenor of the loan may be extended by maximum two years, with or without payment moratorium. The moratorium period, if granted, shall come into force immediately on implementation of the resolution plan.
     
    The asset classification may be maintained as standard or upgraded to standard subject to the resolution panel being implemented as per the framework, said the report of the panel.
     
    Kamath Committee Resolution Framework
     
    Here Are Key Highlights of Resolution Framework Submitted by KV Kamath Committee...
     
    Eligibility:
    • Resolution under this Framework extended only to borrowers having stress on account of COVID-19.
    • Only those borrowers which were classified as standard and with arrears less than 30 days as at 1 March 2020 are eligible under the framework.
     
    Invocation Date and implementation
    • Resolution framework may be invoked not later than 31 December 2020.
    • RP needs to be implemented within 180 days from the date of invocation.
     
    Signing of ICA and provision requirements
    • Resolution process shall be treated as invoked once lenders representing 75% by value and 60% by number (Majority Lenders) agree to invoke the same.
    • ICA to be signed by all lenders within 30 days of invocation.
    • Lenders who have signed ICA, to make provision, higher of 10% or IRAC norms.
    • Lenders who have not signed ICA, to make a provision higher of 20% or as per IRAC norms, upon expiry of 30 days from invocation.
     
    General Guidelines:
    • The residual tenor of the loan may be extended by maximum two years with or without payment moratorium. The moratorium period, if granted, shall come into force immediately upon implementation of the RP.
    • The asset classification may be maintained as standard or upgraded to standard subject to the RP being implemented as per the Framework.
    • For aggregate exposures greater than Rs100 crore, an independent credit evaluation (ICE) to be obtained from any one credit rating agency authorised by RBI.
     
    Conversion of Loans into Securities and Valuation:
    • RP to include restructuring / regularization / change in ownership, if any, sanction of additional facilities.
    • RP may provide for conversion of debt into equity or other marketable non-convertible debt securities provided amortization and coupon are similar to terms of debt.
    • Equity to be valued as per lower of breakup value or DCF value (for unlisted companies) and market price (for listed companies).
    • Any other instrument to be valued at Re1.
     
    Post Implementation Performance:
    • In respect of exposures, any default by the borrower with any of the signatories to the ICA during the monitoring period shall trigger a Review Period of 30 days.
    • If the borrower is in default with any of the signatories to the ICA at the end of the Review Period, the asset classification of the borrower with all lending institutions, including those who did not sign the ICA, shall be downgraded to NPA from the date of implementation of the RP or the date from which the borrower had been classified as NPA before implementation of the plan, whichever is earlier.
    • In all cases, further upgradation shall be subject to implementation of a fresh restructuring under the Prudential Framework, or the relevant instructions as applicable to specific category of lending institutions where the Prudential Framework is not applicable.
  • Like this story? Get our top stories by email.

    User 

    COMMENTS

    mahesh.bhatt

    2 weeks ago

    Borrow small Banks run & coerce you out Borrow big Banks are beggars, not choosers Role Play changes Values Systems Trades off Country's Finances NPA's /Bad Debts GenNext suicides drugs drinks womanizes all is well or all is in the same well as Global Unconscious Capitalism has wiped the
    the worth of $ to Euro to Yen & created even negative interests in systems created by Governments that Cryptos are traded like speculations not Value Mahesh Bhatt Author Read Buy Universal Values of Rich Kingdoms at www.amazon.com


    raneamrane

    2 weeks ago

    Hope the recommendations r implemented in true spirit in the interest of Industry and Nation.

    s5rwav

    2 weeks ago

    Affidavit Filed by Complainant Babubhai Vaghela on 09122019 in Mirzapur Court at Ahmedabad in Criminal Case against Mr KV Kamath and Mrs Chanda Kochhar Headed ICICI Bank Limited. I am Babubhai Vaghela from Ahmedabad. Thanks.

    https://docs.google.com/viewer?a=v&pid=forums&srcid=MDM3NzY0OTcwNTkzMjU3MDQ4MjQBMDI4OTAwNDYyNTE1ODk3MzY5OTkBRzJKTG5nWFhBZ0FKATAuMQEBdjI&authuser=0

    s5rwav

    2 weeks ago

    Undemocratic and Unconstitutional Report Submitted by Mr #KVKamath the #FinancialFraudster Banker Facing Criminal Court Case No CR EN of 219 in Mirzapur Court at Ahmedabad. I am Babubhai Vaghela from Ahmedabad. Thanks.

    REPLY

    shetyerb

    In Reply to s5rwav 2 weeks ago

    Yes Babubhai. In fact this task should have been given to you. And you should be the next Finance Minister or RBI Governor. Anyway you have the basic qualifications, you are from Ahmedabad.

    s5rwav

    In Reply to shetyerb 2 weeks ago

    Thanks for the Compliments. I am 71 plus. I am Retired Senior Manager of Indian Oil Corporation Limited . I am RTI User. I am CVC Registered Whistle Blower. I am PIL Petitioner. I am Writ Petitioner. I am Concerned Citizen of India. I am a Very Happy Person 😄😄😄

    muruguselvank

    In Reply to s5rwav 2 weeks ago

    keep going Sir

    RBI revises priority sector lending norms, raises credit limits
    The Reserve Bank of India (RBI) on Friday released its revised priority sector lending guidelines wherein the credit limits have been raised for farmer producer organisations, renewable energy and for health infrastructure.
     
    As announced by the RBI governor, startups have been brought under the ambit of priority sector lending. Bank finance of up to Rs50 crore has been included as a fresh category under priority sector, an RBI statement said.
     
    The RBI statement said that a higher credit limit has been specified for farmers producers organisations (FPOs) or farmers producers companies (FPCs) undertaking farming with assured marketing of their produce at a pre-determined price.
     
    Further, "loan limits for renewable energy have been increased (doubled)" and "credit limit for health infrastructure (including those under 'Ayushman Bharat') has been doubled".
     
    Apart from startups, loans to farmers for installation of solar power plants for solarisation of grid connected agriculture pumps and loans for setting up Compressed Bio Gas (CBG) plants have been included as fresh categories eligible for finance under priority sector.
     
    "RBI has comprehensively reviewed the priority sector lending (PSL) guidelines to align it with emerging national priorities and bring sharper focus on inclusive development, after having wide ranging discussions with all stakeholders," it said.
     
    As per the central bank the revised guidelines will enable better credit penetration to credit deficient areas, increase the lending to small and marginal farmers and weaker sections, boost credit to renewable energy, and health infrastructure.
     
    The guidelines aim to address regional disparities in the flow of priority sector credit, higher weightage have been assigned to incremental priority sector credit in 'identified districts' where priority sector credit flow is comparatively low and the the targets prescribed for "small and marginal farmers" and "weaker sections" are being increased in a phased manner, as per the RBI statement.
     
    Commenting on RBI's circular on revised priority sector lending guidelines, Krishnan Sitaraman, senior director of CRISIL Ratings feels that this will incentivize credit flow to specific segments like clean energy, weaker sections, health infrastructure and credit deficient geographies. "    These measures are also aligned to focus areas of development as per extant policy environment and will support funding requirements in these specific sectors," he added.
     
     
  • Like this story? Get our top stories by email.

    User 

    COMMENTS

    iamviveksri

    2 weeks ago

    but what is the regulator doing ? why are we not able to ask those who are supposed to make investing safe in India to come clean on this- how come it is always Caveat Emptor only. then dont have these institutions. or are we to believe that the entire thing was unknown to the monitoring agencies? if we are paying tax on all the deals will not a picture emerge to anyone who is monitoring those taxes?

    We are listening!

    Solve the equation and enter in the Captcha field.
      Loading...
    Close

    To continue


    Please
    Sign Up or Sign In
    with

    Email
    Close

    To continue


    Please
    Sign Up or Sign In
    with

    Email

    BUY NOW

    online financial advisory
    Pathbreakers
    Pathbreakers 1 & Pathbreakers 2 contain deep insights, unknown facts and captivating events in the life of 51 top achievers, in their own words.
    online financia advisory
    The Scam
    24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
    Moneylife Online Magazine
    Fiercely independent and pro-consumer information on personal finance
    financial magazines online
    Stockletters in 3 Flavours
    Outstanding research that beats mutual funds year after year
    financial magazines in india
    MAS: Complete Online Financial Advisory
    (Includes Moneylife Online Magazine)
    FREE: Your Complete Family Record Book
    Keep all the Personal and Financial Details of You & Your Family. In One Place So That`s Its Easy for Anyone to Find Anytime
    We promise not to share your email id with anyone