A 1000 Crore Scam?

In today’s Finshots, we talk about another scam that’s rocked Dalal Street. Or at least we think it did.

The Story

The case facts are rather straightforward. Anugrah Stock and Broking Limited, a Mumbai based stockbroking company raised money from prospective investors and promised to deliver attractive monthly returns by dabbling in the stock market on their behalf. Unfortunately, they bailed on the promise and soon enough, all hell broke loose. Customers stopped receiving their money. They noticed some of the shares were missing and Anugrah's offices had been cleaned out. So what really happened?

Well to get to the bottom of this story, we need some background on stockbrokers. A stockbroker, much like your real estate broker facilitates transactions when you want to buy and sell shares of publicly listed companies. And they can facilitate this exchange primarily because they have the Power of Attorney (POA) i.e. They can transact on your behalf with impunity.

Obviously, the idea here is to make your life easier. If the broker did not have these all-encompassing powers, selling your own shares would be an extremely tedious task. For instance, customers would be expected to share a physical delivery instruction slip with their brokers before executing a sell order in the absence of a POA. Imagine doing this each time you want to execute a trade*. It would be a logistical nightmare. And although you now have alternatives that include online delivery instruction slips (e-DIS) most customers simply offer their brokers the Power of Attorney because it’s so much easier.

Now bear in mind, brokers still have to have some sort of consent (on most occasions) before they execute a trade on your behalf — A communication trail that could establish for certain that you explicitly gave that order. If they don’t follow these guidelines, you can take it up with SEBI (India’s market regulator). So when customers at Anugrah stopped receiving their monthly returns, they went looking for the assets they owned i.e. the shares that were being traded on their behalf. And when they noticed they no longer held the shares either, they began suspecting the broker. After all, only brokers have the wherewithal to move shares inconspicuously from one place to another. They believed the owners of the broking firm had sold these shares and used the proceeds to invest and trade elsewhere.

And they had good reason to suspect this. Because the broker’s assessment of what stocks the clients owned wasn’t tallying up with another independent assessment from the entity that’s responsible for holding your Demat Account.

Think of a Demat Account as a special place where you can safely store all the shares you own. It’s imperative to your cause.

In the online universe, you no longer need to have a physical copy of the share certificate to authenticate your ownership. You simply need a digital copy. However, if you have a digital copy, you need a digital locker to hold this stuff. Demat accounts facilitate this electronic storage and two entities NSDL and CDSL offer this service. They are also responsible for a few other things but let’s not muddy the water by diving into that subject.

Anyway, when the numbers didn’t add up, customers stormed the gates at Anugrah. But the brokerage firm simply passed the buck stating unequivocally that it had nothing to do with this whole fiasco. But that’s a bit hard to believe. Because nearly two months ago the owners were found running an unauthorized derivative advisory service through an associate company Om Shri Sai Investment — using client money of course. And for the uninitiated, derivative trading is extremely risky business. You have the potential to take a few lakhs and make crores out of it. But one small misstep (or the tiniest market movement) could wipe you clean and put you in a hole. The only way to stay alive then is to put up more money. When you don’t have the money, however, you are forced to sell everything you and your clients own. So missing shares from client accounts aren't exactly unheard of in this business.

In fact, their derivative trading license was only recently suspended when certain irregularities began to crop up. But they filed an appeal contesting the suspension. The appeals committee (SAT) offered some reprieve. They ordered a stay on the suspension and asked the brokerage firm to deposit 165 Crores — allegedly the amount collected through that associate company, Om Shri Sai Investment. But that never happened. And now the owners have gone incommunicado.

But 165 crores is peanuts compared to the 800 crores Anugrah Broking apparently raised through its flagship entity — Teji Mandi Analytics Limited, the alleged principal cast in this story. In fact, it was customers associated with Teji Mandi that initially raised the complaints. So in effect, we don’t know where their money is at. We don’t know if all the shares exist and poor unsuspecting investors have been left in the lurch with very little recourse.

So remember when somebody makes a promise that’s too good to be true. It is probably too good to be true.

Until next time…

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*Cash and Carry trades only

Point of Interest: If you are an investor, you might also want to follow the coverage at Moneylife. They've been reporting on this story for over 2 weeks now.

Correction: In yesterday’s edition we erroneously reported the name of Videocon’s founder as Venkatesh Dhoot when in fact it was Venugopal Dhoot. The error is regretted.