Zerodha Takes on SEBI’s Job; Warns Investors of Market Manipulation
In a supreme irony, it is a stockbroking firm and not the market regulator that has stepped forward to warn investors of how they could be scammed by unscrupulous players. Zerodha, which is now India’s largest brokerage firm, has sent out messages warning its investor clients of two types of scams—unauthorised trading in illiquid options and ‘pump-and-dump’ schemes of penny stocks by market manipulators. 
 
That a stockbroker has felt the need to issue such a warning shows how deep-rooted and widespread the problem is. But the Securities and Exchange Board of India (SEBI) has been dragging its feet over action and ignores whistleblowers desperately trying to flag the issue. 
 
Indeed, we at Moneylife have been writing about this brazen price manipulation for over 10 years. We have highlighted the rigging of at least one scrip in every issue of the magazine for six years. 
 
 
However, there has been no end to such practices. 
 
It is surprising that a stockbroker is highlighting two modus operandi of scammers and creating awareness, setting up a back–end algorithm and additional features in its front-end trading software to alert investors about the stock market scams when it is the market regulator’s (SEBI’s) job.
 
1. Pump-and-dump schemes: This is extremely common and, in fact, over the years, SEBI has been ineffective in controlling it, despite spending hundreds of crores in Integrated Market Surveillance System (IMSS). In fact, in repsonse to an RTI (Right to Information) query filed by us in 2013, SEBI even replied that it does not have surveillance data!
 
 
The manipulation takes place in the form of stock tips that promise quick returns and is circulated through SMS and other forms of messaging asking you invest in penny stocks. “Many scammers send SMS using shortcodes that make it seem like it is from a reputed brokerage firm.Variations of the name Zerodha have been illegally used by scammers recently,” pointed out Zerodha. 
 
Zerodha suggests that “if you receive an SMS asking you to invest in a penny stock, make sure to report it to TRAI (Telecom Regulatory Authority of India) and help save others from falling to the fraud.” This advice is seemingly useless because TRAI is even worse than SEBI. It takes no responsibility whatsoever about spam messages and never acts on any complaints.
 
Zerodha has introduced a special feature in the form of a penny stock nudge on their buy order window (currently on the web and soon to be introduced on the mobile). The idea is to alert customers if they are unaware that they are investing in a penny stock. They also have an additional warning for stocks which they think are being manipulated through SMS tips and social media buzz. Zerodha says that the customer would be free to proceed, but, hopefully, the customer won’t proceed and even if the customer does proceed, the customer will reduce the trading size to as little as possible to reduce his/ her risk. 
 
 
 
While Zerodha has talked about pump-and-dump schemes, interested parties have used market manipulation to convert black money to white as unearthed by the extensive investigations by the income-tax department. However, SEBI has refused to act on such bogus trades, despite extensive documentation. Please see our exclusive Cover Story on this.
 
 
2. Illiquid options: In the second type of scam, Zerodha has given an example how scammers place illegitimate, non-genuine trades, which might later on land investors into trouble. “Over 30,000 options contracts are listed on the exchange, but only a fraction of them actively trade, while the rest are illiquid. These options contracts where there is no other trading are used by scammers to place illegitimate trades (buy high and sell low with the same account and in quick succession) which creates a loss in your account and profit in the other trading account. You would assume this is a genuine market loss, but it clearly isn’t."
 
Zerodha has advised that sharing your log in credentials with advisors or people claiming to be market experts, who offer to trade on your behalf, exposes you to the colossal risk of a fraudster who can create a loss in your account using non-genuine trades and move your money to another trading account, making it very difficult for you to even figure that you have been scammed. 
 
"Apart from the loss, you are now also exposed to regulatory action. Any such trading activity in your account would be looked upon by the income tax department as money laundering (creating losses to avoid taxes, or convert white to black money or vice versa). SEBI considers such trades circular trading. Apart from the monetary penalty that such trades entail, you could potentially be banned for life from the markets by SEBI."
 
Zerodha has also counselled that "If you had given access to someone who has created such an artificial loss, you can lodge a police complaint against the fraudster, let our compliance team know about it, and we will help you with the case."
 
What are non-genuine trades ?
 
Giving a brief idea about what exchanges consider abnormal or non-genuine trades, a BSE (Bombay Stock Exchange) guideline circular of February 2019, said, “Trading activity of clients concentrated in a specific security or contract, which is not traded frequently or trading with low volumes with client squaring up their position within a short span of time. Additionally, factors such as client’s earning significant profits or incurring losses on account of such transactions, and their consistent contribution to the daily average volumes of security, contract may also be looked at.”
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    COMMENTS

    Kumar123

    7 days ago

    Frankly don't see any thing ironic about these warning by a stock broker. We have motilal oswal TV ads talking about investing carefully. Likewise mutual funds magazine ads. It is like a value add that any company would do. Or like banks sending emails talking about phising and all sorts of SIM scams, to not share Pin etc.

    B. V. KRISHNAN

    2 weeks ago

    Stock market trading involves risk. Those who do not have basic common sense, are greedy, or do not have the stomach to face losses, better do not enter this activity.

    sactel

    2 weeks ago

    Excellent title for the article ! very sarcastic. SEBI wake-up !

    Newme

    2 weeks ago

    What Zerodha doing is commendable.
    However speculation is part of stock market. People knowingly trade on risky stocks for bigger profits. Let them be responsible for their act.
    For the last 6 months, we are hearing one big investor (even Bill Gates) after another supposedly looking to buy into Yes Bank. The share price rises 60s and then falls back to 30s going on in a circle.
    Even in other businesses we have such imprudent investments. Take the example of recent Rajnikanth movie Darbar, a flop movie. It was reportedly made at 250 crores budget with Rajni salary at 100 crores and Director at 38. It was sold at astronomical price. Previous Rajni movie his salary was 50 crores. So what made Lyca group a global mobile operator to pay double his salary. Are they stupid? Are they greedy? Tamilnadu theatrical rights distributors have lost 80 crores. They are going around threatening Director. Should some body warned them? What if the movie was a super hit and they made money?

    Ramesh Popat

    2 weeks ago

    ye stock excahnges hadson ka shahar hai, yahan zindagi hadson ka safar hai,
    yahan roz roz har mode mode par hota hai koi na koi ........hadasa..
    (from film- hadasa)

    ganesanjaicare

    2 weeks ago

    Not only penny stocks.Even stock like ITC manipulated today.one website mention ITC increased the prices of all sizes of cigarettes by 10 to 12 percent.noreport in nse and bse company information.In the morning ITC opened at 217 and went down to 212 .scamsters are able to manbipulate even a instituitional stock.Investors and traders have to be careful.Buyer beware .dont trust the regulator and exchanges.

    RBI’s Extensions on Asset Classification Standards Likely To Defer Asset-Quality Pressures, Says Fitch Ratings
    The Reserve Bank of India's (RBI) last week announced about forbearance towards stressed sectors signifying a gradual shift away from the regulator's earlier effort to enhance the quality and transparency of asset classification in Indian banking system. However, these extensions are only likely to defer asset-quality pressures unless there is a sustained improvement in macroeconomic conditions, says Fitch Ratings. 
     
    In a note, the ratings agency says, "Indian banks have a poor track record with restructuring. The RBI's asset-quality reviews in FY2016 and FY2018 found that a dominant share of loans restructured post-FY2012 had degraded into non-performing loans (NPLs). In that context, we will make appropriate adjustments in order to objectively assess the performance of the underlying loan book of its rated entities in India to ensure their comparability with those of global peers."
     
     
    The RBI's latest measures also nudge banks to lend more for specific purposes, namely, automotive and housing purchases, and to the micro-, small- and medium-sized enterprises (MSME) sector. Banks can now knock off the equivalent of additional loans disbursed to these priority fields between end-January and end-July 2020 from their net demand and time liabilities for the purpose of calculating their cash reserve ratio, Fitch added.
     
    According to the ratings agency, the move from RBI is intended to improve monetary transmission, supporting credit to fields that have multiplier effects within the wider economy. However, it says, most of these sectors have had above-average lending growth in the past few years, either directly or indirectly via non-banks, and could be at risk were the economy to slow. 
     
    Moreover, these measures are unlikely to support sustainable credit growth until capitalisation improves meaningfully across banks, in particular among state-owned banks, which account for nearly two-thirds of the sector's assets, Fitch says.
     
    According to the ratings agency, there is a risk that such regulatory forbearance will perpetuate moral hazard, as it follows aggressive lending growth and risk-taking in certain sectors in the five years, to the financial year ended March 2019 (FY18-19). 
     
     
    The RBI's extension of the one-time restructuring scheme for MSMEs and the announced relaxation in asset classification for certain real-estate projects mark a further dilution of the regulator's drive to enhance loan recognition. 
     
    "It is not clear at the moment whether this forbearance will be extended to non-bank financial institutions (NBFIs) as well, but we believe that the probability of this is high, considering the impact that the NBFI liquidity squeeze and a slowing economy have had on the MSME and real-estate sectors. In recent years, banks have preferred to lend to NBFIs, which lend heavily to the real estate and MSME sectors, as a way to deploy their excess liquidity, while limiting their own direct exposure to these areas," Fitch says.
     
    It is unclear whether the latest announcement marks a substantial shift in the RBI's policy approach. Nevertheless, the ratings agency says, it is not surprising in the current weak operating environment and is in line with a recent trend to weaken asset recognition standards. This was among the factors that prompted us to lower our operating environment score for India's banking sector in 2019.
     
    "Although we expect India's economic growth to pick up in the coming months, to 5.6% in FY21 from 4.6% in FY20, there are still risks to the country's economic outlook," Fitch concluded.
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    COMMENTS

    rrbudhkar

    2 weeks ago

    RBI please advise Maratha Sahakari bank ltd to allow us to withdraw our amount upto 5 lacs as per direction. Our more money is stucked and we are senior citizen. Pl allow us to withdraw and do not compel for submission of any documents for our own money

    rrbudhkar

    2 weeks ago

    Pl advise Maratha Sahakari bank to pay our money back to us without any documents as per new resolution of 5 lacs limit which was upto 1 Lac. Senior citizens are just suffering for no reason

    RBI to Set up Self-Regulatory Body for Digital Payment System; To Launch CTS Across India
    The Reserve Bank of India (RBI) is planning to set up a self-regulatory organisation (SRO) to improve security, customer protection and pricing, among others, in digital payment system. The central bank aims to release framework for SRO by April 2020.
     
    In a statement, RBI says, “With substantial growth in digital payments and maturity gained by entities in the payment ecosystem, it is desirable to have a self-regulatory organisation (SRO) for orderly operations of the entities in the payment system.
     
    The Reserve Bank will put in place a framework for establishing an SRO for the digital payment system by April 2020 with a view to fostering best practices on security, customer protection and pricing, among others. The SRO will serve as a two-way communication channel between the players and the regulator or supervisor.”
     
    The sharp rise in online frauds coincides with the government’s push for digital transactions without adequate cheques and balances. With the growth of digital payments, there has been increase in digital or online financial frauds. Digital payment methods such as unified payments interface (UPI) and mobile wallets have become latest target of fraudsters. Every day, many people are losing money in online transactions and have no idea how to retrieve it. 
     
    Under the current policy framework, the banking regulator has a totally hands-off attitude to the interface retail customers use for banking operations, which allow such frauds to occur. In this situation, it would be interesting to see how SRO would function and whether it will actually help customers in grievance redressal. 
     
    In other measures, the central bank also decided to expand reach of cheque truncation system (CTS) pan-India from September 2020. CTS essentially means that instead of sending the cheque in physical form by the collecting bank to the paying bank, an electronic image of the cheque is transmitted to the drawee branch for payment through the clearing house. This eliminates the cumbersome physical presentation of the cheque to the paying bank, thus saving in time and costs involved in traditional clearing system. 
     
    To capture extent of digitisation of payments effectively, RBI has decided to set up a digital payment index (DPI). The DPI would be based on multiple parameters and shall reflect accurately the penetration and deepening of various digital payment modes. The DPI will be made available from July 2020 onwards, the central bank says. 
     
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