Presentation to SEBI Committee for reviewing and making recommendations for

further strengthening of governance norms at MIIs:

Moneylife Foundation’s perspective on the sharp rise in broker defaults, severe lack of
accountability and changes required from the investor perspective

I have been asked to present the investor perspective on broker defaults and how they
have been handled. Moneylife Foundation, a not-for-profit organisation that I co-founded,
receives hundreds of complaints of broker defaults and has taken the lead in helping and
guiding investors on how to file complaints in such cases, because many investors were
clueless about the process. This gave us a ring-side view of the difficulties, anguish and
unfairness of the process including the lack of standard operating procedures (SOPs) for
complaint handling.

Relevant Data from NSEs from the latest annual report and Profitability:
- Consolidated Revenue for FY 2020-21 Rs 6,202 crores -- 59% increase
- Profit before tax was Rs 4,465 crores
- Profit after tax was Rs 3,573 crores (90% increase).
- Operating margin of 76%, perhaps the highest in India
- Dividend: 4200% (Rs42 per share of Rs1)

BROKER DEFAULTS:
NSE has admitted to 32 broker defaults (since May 2019) and counting in just 2.5 years. I
understand that the exchange claims that the spike in broker-defaults is part of a clean-up
action initiated by it. Let’s look at the numbers. NSE has expelled:
• 4 brokers in 2019
• 14 brokers in 2020
• 10 brokers in 2021 and
• 4 brokers in the first four months of 2022
Less than this number led to the move to demutualise BSE in 1992.

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What NSE says about itself in 2020-2021 Annual report:

“At the heart of NSE’s technology-driven approach lies the interests of that one
stakeholder that matters most – the investor”
“NSE is more than an Exchange in India; it is a symbol of investor trust in markets.”

Yet, its state-of-the-art monitoring technology appears to have repeatedly failed to catch
mismanagement of funds or wrong reporting by brokers.

Moreover, NSE annual report is completely silent on broker defaults, their handling and
any analysis on what went wrong and how it is being fixed. So the claim of a clean-up is
only being made to SEBI and not to the key stakeholders (investors) and intermediaries.

Caveat: Our data is based on complaints we have received and what NSE has revealed on
its website. Naturally, it is not complete, but more than adequate to reveal the need for a
change in approach.

SEBI regulations: SEBI has issued a series of circulars for investor protection casting
specific duties on exchanges. The key ones are:

26.09.2016: SEBI’s guidelines of 2016 make the Exchange responsible, among other things,
for monitoring the use of client funds, pledge and transfer of client securities by brokers
and monitoring their financial strength

11.01.2018: Enhanced supervision of stockbrokers: This circular required naming/tagging

& reporting of Demat & bank accounts; Monitoring use of client funds, as well as pledge
and transfer of client securities by brokers. Restructuring of internal audit system;
Monitoring of financial strength of brokers; Uploading of client information to the
Exchange for dissemination to investors.

17.12.2018: Prevention of Unauthorised Trading by Stock Brokers: Early warning

mechanism and sharing of information between the stock exchanges, depositories and

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clearing corporations to detect diversion of client securities by stockbrokers at an early
stage, so that appropriate preventive measures can be taken.

2017: Circular about monitoring client funds, standardisation of statements etc. NSE has
the power to appoint an inspecting authority to undertake inspection of books of accounts,
other records and documents of brokers.

Issues noticed in broker defaults between end-2019 to mid-2022:

1. NSE did not act strongly enough on yearly inspection reports, where gross violations
were detected and levied only minor penalties. Anugrah Stock and Broking (Anugrah)
is an example (discussed later).
2. Right until 2022, no warning was issued to investors to help protect themselves or
move away from potential defaulters in time.
3. In the Anugrah case, it was SEBI that first asked NSE to conduct a forensic audit based
on feedback and court submissions show that NSE has repeatedly failed to initiate
strict action. Investors are paying a huge price for this.
4. Karvy Stock Broking (Karvy) is a case that we have followed very closely. A big chunk
of investors was protected by SEBI action when it ordered depositories to return their
shares. Even then a massive 42,000 complaints have been received by NSE. Here is a
case where the exchange and regulator has failed to use its powers to attach Karvy’s
other assets in time. Instead, both repeatedly expressed confidence (for over a year)
that Karvy would bring in funds from a foreign investor. Today, investors are being
fobbed off by NSE’s Investor Protection Fund Trust (IPFT) and can get a maximum of
Rs25 lakh as compensation. This is a large brokerage and attracted investors because it
was an R&T agent (now sold) as well as other tentacles across the market through
different regulated entities. It is a fit case where the regulator needs to ensure fair
compensation to investors.
5. Investors inability to be heard by the regulator is established by the fact that victims of
BMA Wealth got together to block the entrance of SEBI Bhavan in December 2019 to
draw attention to their grievances.
6. How could the Derivatives Advisory Scheme (DAS) of Anugrah remain hidden from
the radar of NSE and SEBI when it was heavily marketed through social media

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 channels offering guaranteed returns? Since Anugrah was a registered broker,
investors assumed it was marketing a regulated scheme!
7. NSE as a highly profitable MII with a near monopoly position must be mandated to
have a social media team to monitor misselling and initiate proactive action.

NSE Investor Protection Fund: Here are some details of the IPF fund and claims against
brokers.

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Issues:
1. NSE does not provide the total value of claims received and rejected for one reason or
another. Reporting the number of claims is highly misleading because the money
involved is vastly different for each investor.
2. Claims provided indicate that compensation from IPFT is meagre. Until Anugrah and
public pressure forced NSE to increase IPFT corpus (Rs594.12 crore on 31 March 2020),
it was less than that of BSE (Rs784.24 crore as of 31 March 2020) although BSE has less
than 10% of cash market trades and marginal trades in derivatives.
3. NSE’s chief regulatory officer had argued that just about Rs500 crore was adequate,
despite large broker defaults, right until SEBI asked it to treble the amount.
4. IPFT payments needs independent oversight by SEBI, since NSE is an interested party
and interested in minimising payments. This is evident from lack of uniformity and
even a reversal of its stand.
5. NSE process discourages appeals to the appellate tribunal (data provided)
6. The Rs25 lakh cap on compensation is completely arbitrary. It is unclear whether this is
approved by SEBI and what is the basis for arriving at this figure or even the size of the

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 IPFT. A public discussion is required with inputs from investors who are the largest
stakeholder and very concerned with this issue.

Anugrah Stock & Broking: Broad Issues

2013-14: NSE imposed a penalty of Rs1.59-lakh, after an inspection revealed serious
violations including non-settlement of client funds, operating out of unapproved terminals
and funding client operations.
2014-15: NSE imposed a penalty of Rs82,500 for similar violations as above-mentioned. By
now, Anugrah’s turnover had jumped 2546%; but NSE was unperturbed. Instead of the
loud ringing of alarm bells, Ravi Varanasi, chief of business development, issued a Letter
of Appreciation to the broker. The tone and tenor of the letter suggest that NSE's primary
concern was over trading volumes that brokers built up and not how they conducted their
business.
2015-16: NSE imposed a penalty of Rs75,000 for the very same violation, primarily non-
settlement of client accounts.
2017-18: NSE’s penalty increased to Rs1.93 crore. Violations included: misuse of client
funds, acting as a principal and giving loans to certain entities of Rs304.8 crore and loans
to directors of over Rs1.65 crore. More seriously, this inspection revealed a shortfall in
funds of Rs429.79-crore and that the broker was reporting to NSE incorrect ledgers and
margins paid.
2019-20: From 7th August 2019 to 22nd July 2020, various system-generated alerts about
Anugrah were raised by the Central Depository Services Ltd which were also ignored.
2020-21: It was SEBI and not NSE, which was first alerted about Anugrah’s fraudulent
business through ‘market intelligence’. NSE was ordered to conduct a forensic audit in
April 2020. The existence of an unregulated product, Derivatives Advisory Service (DAS)
was revealed by the audit and also the fact that Anugrah along with Teji Mandi and Om
Shri Sai had raised over Rs1300 crore from investors.
On 15 October 2020, NSE finally added some serious violations in a supplementary show-
cause notice: i) falsification of accounts; ii) misuse of clients’ funds of Rs297.6 crore; iii)
misuse of clients’ securities of a massive Rs683.8 crore, and iv) payments of over Rs134.15
crore to clients with debit balances, engaging in fraudulent acts and failing to resolve
investor complaints, etc.

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SEBI knows all of this and has imposed a penalty of just Rs 90 lakh on Anugrah, but that is
of no comfort to investor victims. The money, even if it is paid, does not compensate
investors. (https://www.moneylife.in/article/sebi-imposes-rs90-lakh-penalty-on-
anugrah-stock-and-broking-for-repeated-violations-of-norms/63169.html)

On 26 February 2021, NSE received “claims of Rs761.35 crore from 2614 clients and it has
sent out demands of Rs223.15 crore to 854 clients.” Can NSE simultaneously refuse
compensation to one set of DAS victims and send demand notices to extract payments
from another 854 investors?

Contradictions in NSE’s handling of Claims in Anugrah:

There is no transparency in handling complaints. Since the exchange is an interested party,
the process it follows needs outside oversight or much more transparent reporting and
SOPs. We have found the following flaws.
• Same Family, similar investments, different treatment.
• Investors paid the price for NSE's inaction on wrong misreporting by brokers detected
as far back as 2013-14.
• Appeal to SAT is used to reject claims and has a chilling impact on investors who want
to fight.
• We know of instances where NSE has changed its stand when investors managed to
get police complaints registered. In the Anugrah case of Hyderabad, enormous
pressure was put on the investor to withdraw the complaint. There was an offer to
compensate after earlier rejection.

Specific Issues in Anugrah

Reversed Stand:
Geeta Tumbalam: Claim of Rs1.77 crore from Anugrah Share and Broking. Of this Rs1.76
crore was initially admitted on 7 May 2022 and a small amount was rejected due to the
difference in claim and valuation of shares etc. Rs 25 lakh was remitted as the upper
amount payable under the IPFT (which is an arbitrary ceiling). She filed a police complaint
after which the admissible claim was increased.

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Different Strokes for Different Folks

1. Patel Family:
• Abbas Abdulali Patel: Claim Rs 1.14 crore: Fully rejected because of litigation before
SAT.
• Ammar A Patel: Claim Rs 14.25 lakhs. Fully rejected as Derivatives Advisory client.
• Hussain Patel: Claim Rs 14.04 lakhs: Fully rejected due to debit balance and difference
in ledger amount. (Note: NSE admits broker was misreporting balances and details
since 2013-14.
• Tasneem Abbas Patel: Claim Rs1.18 crore. Fully rejected due to debit balance.
Litigation in SAT.

2. Chandak Family:
• Girish Nandkishor Chandak (HUF): Claim Rs 21 lakh: Rs 8.24 lakh rejected on NSE
evaluation of ledger balances and due to SAT litigation
• Anup Ramesh Chandak (HUF): Claim Rs 15.55 lakh; Fully Rejected as Derivatives
Advisory client.

3. Band Family:
• Satyajeet Vijay Band: Claim Rs8.48 lakhs: Fully rejected as DAS Client
• Ranjeet Vijay Bank: Claim Rs 11.17 lakh: Rs 6.19 lakh rejected as differences in ledger
balances and SAT litigation

4. Deshmukh Family:
• Himanshu Deshmukh: Claim Rs 1.13 crore: Fully rejected as DAS client
• Bhagyashri Deshmukh: Claim Rs 6.80 lakh: Only Rs 2.23 lakh was rejected as the
difference in ledger balance and form

5. Karwa Family:
• Mohinidevi Karwa: Claim Rs 45.08 lakh: Amount rejected Rs30.62 lakh: SAT Litigation
• Ramnarayan Karwa: Claim Rs22.38 lakh: Fully rejected as DAS client
• Sunita Pravinkumar Karwa: Claim Rs9.74 lakhs: Fully rejected as DAS client
• Ashutosh Sharad Karwa: Claim Rs8.98 lakhs: Fully rejected as DAS client

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• Vaishali Sharadkumar Karwa: Claim 16.53 lakhs, Fully rejected as DAS client
• Anushree Sharad Karwa: Claim Rs11.06 Lakhs, Fully rejected as DAS client

6. Sikchi Family:
• Meenakshi Rajesh Sikchi: Claim Rs1.43 crore: Fully rejected as DAS client
• Vimalkishor G Sikchi: Claim Rs50.73 lakhs: Fully rejected as DAS client
• Radheshyam Ballabhdas Sikchi (HUF): Claim Rs5.43 lakhs: Fully rejected as DAS client
• Sulochana Sikchi: Claim Rs33.26 lakh: Rejected Rs26.07 lakh due to differences in
ledger balances and NSE evaluation
• Suresh Gangabisan Sikchi: Claim Rs8.39 lakhs: Rejected Rs3.56 lakh due to differences
in ledger balances and NSE evaluation + SAT litigation
• Radheshyam Ballabhdas Sikchi: Claim Rs3.35 lakhs: Rejected Rs3.21 lakh Differences in
ledger + SAT litigation

Conrad Securities Ltd:

• Expelled on 26 March 2021, the promoter of Conrad Securities. We learn that the same
promoter/ family had another brokerage firm called Manoj Javeri Stock Broking
Private Limited, incorporated in 1997, which was declared a defaulter in June 2017. The
directors were Mr. Manoj Mohancandra Javeri, Mr. Alok Jain and Ms. Pramila Manoj
Javeri. The very next year, Conrad Securities was incorporated in January 2018 with
Rajdeep Manoj Jhaveri and Shikha Hemang Shah as promoters. This firm is again
expelled in 2021. What background check did NSE conduct before admitting Conrad as
a broker? How did it meet any ‘fit and proper criteria? This happened after SEBI rules.
• No warning to investors despite its past record. Even after the brokerage failed, NSE
made no effort or haste to impound its assets and initiate action to protect investors'
funds. We would submit that NSE, although hugely profitable does not even invest
resources for such checks, since the only focus is maximising profit.
• Here too the handling of complaints is erratic. In one instance an investor wrote to the
exchange to say his claim was rejected although in an identical situation that of the
family member was accepted, NSE responded that it will make the family member
return the payment. This establishes – no SOP, application of mind and high handed
attitude.

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Flagging GRC/Arbitration Cases:
This presentation does not include an analysis of arbitration cases and orders of the GRC,
which have chilling examples of how SEBI rules are flouted with impunity by brokerage
firms. Investors are rarely able to put up a proper fight, so the number of orders does not
tell the real story. Also, the outcome is barely adequate. An investor is lucky to avoid
losses – there is no compensation, costs or damages. I understand that the larger
arbitration orders of GRC (Grievance Redress Committees) are reported to SEBI, and need
to be analysed and acted upon.

Conclusions & Suggestions:

Investors alone cannot carry the burden for the failure of oversight leading to broker
default when NSE has failed in various primary regulatory functions as explained above
and in fact, sided with brokers who whipped up frothy turnover by hook or by crook.

1. Flaws in IPFT compensation process: NSE cannot be the judge and jury in its own
case, especially when court documents show that failed as a first-line regulator and did
not act adequately even when brokers like Anugrah were repeatedly punished. Similar
details will be revealed only if there is independent scrutiny or the matter goes to court
and is handled by competent securities lawyers. We need to put in place adequate and
independent oversight.
2. So-called clean-up has to have an expiry date: There has to be time-bound with a hard
end date for the claimed clean-up accompanied by a significant transfer of funds to
IPFT to ensure fair and equitable compensation.
3. Disgorge NSE earnings: A clean up is an admission of failure to monitor adequately
and is established beyond doubt by court documents in the Anugrah case. In all cases
where IPFT claims are rejected because it is an illegal PMS or Derivatives Advisory,
NSE must be asked to disgorge all earnings on those trades for failing to catch illegal
DAS in its audit. The exchange cannot enjoy the fruit of illegal activity, especially as a
first-line regulator, while punishing ordinary investors for ignorance/greed. SEBI must
calculate and disgorge all earnings from those trades to be added to a separate
compensation pool.
4. Pool Penalties & Disgorgement: All penalties imposed on NSE following SEBI show-
cause notices in the 32 broker defaults (and counting) plus the disgorgement must be

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 put in a separate pool and used to provide fair and equitable compensation to
investors. It cannot go to SEBI’s Investor Protection Fund because there is a direct
correlation between NSE’s lapses and investors’ losses.
5. Remove Arbitrary cap on compensation: At present NSE has put in place a completely
arbitrary and unilateral cap of Rs 25 lakhs on compensation paid from IPFT. This must
be immediately reviewed. Has SEBI approved the cap? What is the basis of fixing Rs 25
lakhs and when did it come into existence? In the early years, NSE’s IPFT and
settlement guarantee fund assumed that there will be no broker failures or, at least,
investor money would be protected. Instead, clearing brokers help protect the fund at
the cost of investors (Anugrah case).
6. Nexus with Clearing House and Clearing Brokers: Investors have repeatedly alleged
a deep nexus between the exchange, clearing corporation and clearing brokers to
protect their interests first. This is a large and different issue that needs separate
examination and analysis because of repeated charges involving Edelweiss as a
clearing broker. (Anugrah and India Nivesh are examples in court).
7. Early Warning to investors: Just as corporate governance rules mandate information
to exchanges, SEBI must mandate that issues with brokers have to be communicated to
investors. The regulator and exchange are obliged to provide investors with all the
information to make a considered decision while choosing a brokerage firm or to see
early warning signs and switch brokers. This must be done through the existing system
of sending SMS and email, in line with the dissemination of balances.
8. Helpline for specific queries: There should also be a process for investors to write to
exchanges to clarify whether schemes, advisory services and trading apps offered by
brokers are regulated and legal. This will also act as an early warning mechanism for
exchanges by using the large body of investors as its eyes and ears.
9. Ensure easy porting of brokerage and demat accounts: SEBI must mandate and
ensure that investors can switch brokers easily by making porting of Demat accounts
hassle-free and swift. Recently, a Moneylife reader complained that several bank
brokerage firms and old-time brokers are rejecting registrations on the Central
Depository Services Ltd (CDSL)’s ‘easiest’ facility that allows investors who have
signed up to access their Demat account, conveniently and quickly effect a transfer of
shares through the portal and to move shares between Demat accounts. Out of the total
of 584 DPs registered with CDSL, only 350 DPs are on the platform.

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10. Malpractices by brokers: SEBI must commission a study of GRC and arbitration
orders. For starters, the bigger ones that are escalated by the exchanges can be taken
up. Repeat offenders with five cases or more against them need to be punished with
exemplary damages which alone can act as a deterrent. Many of the brokerage firms
that are repeat offenders are large listed entities and brokerage arms of banks. This
indicates that exploitation is widespread. A majority of investors do not have the
knowledge or ability to fight back, especially when they are ensnared in well-laid traps
and the powerful legal teams of brokers arm-twist them even before the complaint is
lodged. It is unclear how and why broker and their employees are permitted to offer
daily trading tips by skirting the rules, while registered advisors and research analysts
are subjected to endless red tape and scrutiny. This is a separate issue which needs to
be discussed.
11. MIIs benefit from an expensive legal system: Exchanges and intermediaries have an
unfair advantage against investors. They exploit India’s slow and expensive legal
system and are the most sought after clients by the legal community. Often, top
lawyers will not take investors’ cases for fear of losing out on lucrative business from
regulators, exchanges and MIIs. In the absence of government notifying class action
regulations, investors distressed by the unfair redressal policies and arbitrary cap of Rs
25 lakhs compensation can rarely afford to fight through the tribunal or legal system.
When they do, they are pitted against powerful MIIs using corporate funds.

The few class actions that Moneylife helped put together have yielded enormous data that
was unknown to investors. Unfortunately, SEBI has joined litigation in an adversarial role
instead of finding ways to discuss, act as a mediator and find a solution. We expect this
committee to give adequate weightage and empathy to the major handicaps that investors
face in every possible way and hold the exchanges accountable for their lapses.

Sucheta Dalal
Founding Trustee
Moneylife Foundation
13th May 2022

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Moneylife Articles on this issue:
1. Broker Defaults: https://www.moneylife.in/article/20-broker-defaults-its-time-the-finance-minister-
demanded-these-specific-actions/63186.html
2. SEBI asks NSE to increase IPFT: https://www.moneylife.in/article/sebi-asks-nse-to-increase-its-ipf-
corpus-to-rs1500-crore-from-rs594-crore-at-present/62128.html
3. SEBI penalty on NSE: https://www.moneylife.in/article/sebi-imposes-rs90-lakh-penalty-on-anugrah-
stock-and-broking-for-repeated-violations-of-norms/63169.html
4. Lessons from NSE broker default saga: https://www.moneylife.in/article/lessons-from-nse-saga-
heads-it-wins-tails-investors-lose/67008.html
5. When NSE feted Anugrah for a 2546% increase in turnover: https://www.moneylife.in/article/in-2014-
ravi-varanasi-of-nse-feted-anugrah-for-2546-percentage-jump-in-volume-nse-calls-it-routine-
matter/63355.html
6. Telangana High Court case: https://moneylife.in/article/telangana-hc-refuses-to-quash-proceedings-
against-nse-vikram-limaye-and-priya-subbaraman-in-anugrah-stock-and-broking-case/67012.html
7. Porting accounts: https://www.moneylife.in/article/make-it-mandatory-for-brokers-to-subscribe-to-
cdsls-easiest-facility-to-transfer-shares-retail-investors/66920.html
8. SEBI’s officers engaged in pointless work, rather than timely
action: https://www.moneylife.in/article/needed-a-powerful-sebi-chief-to-stop-markets-from-
regressing-to-the-1990s/61071.html
9. Brokers Cheating Investors: https://www.moneylife.in/article/stockbrokers-still-cheat-investors-even-
as-sebi-tightens-rules-for-15-years-now/60232.html
10. Brokers Ripping off senior citizens: https://www.moneylife.in/article/how-brokers-sidestep-sebi-rules-
to-rip-off-investors-now-targeting-super-senior-citizens/67150/116066.html

About Moneylife Foundation:

Moneylife Foundation, established in 2010, is engaged in building consumer awareness, advocacy,
spreading financial literacy and protection of savers and investors. We have more than 1,42,000 members
across India; the membership is Free. In the past 11years, we have conducted over 490 workshops and
seminars in Mumbai and other cities. We also run two helplines (a Legal Helpline and a Credit Helpline)
and conduct Daily Guidance Sessions every evening at the Moneylife Knowledge Centre to offer free
counselling to people on a wide range of issues.
Trustees: T S Krishnamurthy (former chief election commissioner), Walter Vieira (Marketing expert),
Debashis Basu and Sucheta Dalal (founder trustees).
Website: http://www.mlfoundation.in
Address: 304 Hind Service Industries Premises, Off Veer Savarkar Marg, Shivaji Park Seaface, Dadar 400028.
Tel: 022 24441058 ; Email: [email protected]
Contact: Sucheta Dalal [email protected] (9820141236); Debashis Basu [email protected]

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