Anugrah Scam: How Collective Action Focused Attention on Role of Regulators and Intermediaries
In a breakthrough for retail investors, concerted action by hundreds of victims of a failed brokerage firm is holding regulators accountable and focusing sharper attention on the lapses of clearing members and intermediaries. They are getting far better results than individual complaints with the market regulator that have to wait endlessly for action. 
In a major development, on 20th October, NSE Clearing Ltd (NCL) issued a 60-page order for ‘restitution’ of clients’ shares worth Rs460.32 crore that were wrongly sold by Edelweiss Custodial Services Ltd, (Edelweiss) the clearing member of Anugrah Stock & Broking Pvt Ltd (Anugrah). An NCL committee has held Edelweiss responsible for failure to comply with various circulars of the Securities and Exchange Board of India (SEBI) and the National Stock Exchange (NSE) and also imposed a fine of Rs1 lakh which has to be deposited within 15 days. 
Moneylife was the first to report about Anugrah, the latest in a long list of brokerage firms that duped investors by illegally using their securities for higher leverage in derivatives trading which finally went bust. Anugrah had collected over Rs1,300 crore by promising high, risk-free, monthly returns in derivatives trades, but was essentially a ponzi scheme.
Things took an interesting turn when Anugrah charged Edelweiss Custodial Services, its clearing member, with unauthorised sales of clients’ shares (without first invoking a bank guarantee provided) to meet settlement obligations. Although Edelweiss has aggressively denied wrongdoing, NCL has issued a unique order that calls for ‘restitution’ after holding it squarely responsible for several lapses. Moneylife has reviewed a copy of the order which was issued after a show-cause notice to Edelweiss.
Operative Part of the Order 
The order, by NCL’s member and core settlement guarantee fund, says that Edelweiss’s “improper action of disposal of clients’ securities done in gross disregard of the SEBI circulars/guidance” warrants remedial action. After a detailed discussion on whether it has the powers to order such an action, it has ordered Edelweiss “to reinstate the securities wrongfully disposed of.”
The term ‘reinstate’ means that Edelweiss “shall buy the same quantity of the same securities from the market,” it says. The reinstated securities will be credited to a “new identifiable beneficiary demat account” and will be “dealt with appropriately for restitution to the clients” as per directions of NSE. Further, no encumbrance, direct or indirect, will be created on this demat account.
Point 26 of the order says, it is “clearly established that there is misuse of client securities, the exact quantum of securities to be restituted is dependent on the outcome of the scrutiny being carried out by the NSE.” Further, that “the actual quantum of securities to be reinstated by the noticee (Edelweiss) will follow the receipt of instructions from NSE/NCL in this regard, post detailed scrutiny of NSE.”
While the order is very clear, Edelweiss, in a written response to Moneylife, seemed to suggest that no obligation has been cast on it, at the moment: “We are given to understand that as of date, neither NSE or NCL are in possession of the full details of the exact balances of the complainant clients’ in the books of Anugrah.” But NCL unambiguously told us on 22nd October that, “ECSL (Edelweiss) is required to reinstate the securities disposed of belonging to clients of Anugrah. The reinstatement shall be required to be done within a period of fifteen (15) calendar days from the date of receipt of instructions by ECSL from NSE / NCL.” Our sources at the Exchange also assure us that the shares to be purchased for restitution will be quantified in two or three days and will not be a long-drawn affair, because the forensic audit of Anugrah is already complete. The final tally has to be adjusted for cases where clients owed margin or payment to Anugrah when it shut operations.
Not only will Edelweiss have to complete the restitution process in 15 days but, on failing to do so, “an amount equivalent to the value of the securities as on the 16th day (end of day/closing price on NSE, on BSE if NSE prices are not available) plus a mark-up value of 5% shall be blocked from the available collateral,” it is pointed out.
Why Edelweiss Is Accountable
Edelweiss, in response to the show-cause notice, had argued that its actions were bona fide and the NCL committee has no ‘omnibus power’ to order reinstatement of securities (although it admittedly has powers to expel, suspend, fine, penalise under censure and or withdraw all or any membership rights of the clearing member).  
The order notes that Edelweiss, “sold off clients’ securities worth about Rs460.32 crore in utter disregard of the SEBI circular and NCL regulations and without any proper due diligence to ensure that it only sold securities of defaulting debit balance clients, to the extent of their respective defaulted obligations…”
While deciding that this is a fit case to levy a penalty of Rs1 lakh on Edelweiss, the committee notes that there was “no penalty matrix available” at present and “a uniform penalty structure across all the clearing corporations is being formulated.”
Break-up of Wrongly Sold Shares
A break-up of the Rs460.32 crore worth of securities sold by Edelweiss, provided in the order, is as follows: 
a) Rs252.09 crore worth of clients’ securities were sold without any instruction from Anugrah and, therefore, without due diligence.
b) Rs37.90 crore worth of clients’ securities was sold off on instructions from Anugrah. While this indicates that they belonged to clients with debit balances, Edelweiss did not do adequate due diligence by asking for client-wise debit balances and relied on unsubstantiated statement of Anugrah. 
c) Rs149.26 crore worth of clients’ securities were sold off on instructions of Anugrah without ascertaining if they belonged clients with debit balances.
d) Rs21.07 crore worth of clients’ securities were sold off on the basis of instructions from Anugrah to meet mark-to-market obligations, without any record or data to check if these belonged to clients who had failed to meet payment obligations. 
It notes that Edelweiss was also unable to provide client codes and information on whether clients whose shares were sold had debit balances, establishing inadequate due diligence. 
Multi-pronged Action
Edelweiss will undoubtedly contest the NCL order before the securities appellate tribunal (SAT), but it already faces multiple legal challenges of a similar nature. 
A petition (Bombay High Court: Investors Plead for Multi-Agency Special Investigation Team Probe into Rs1,300 Crore Anugraha Scam), filed by a few hundred investors through advocate Yusuf Iqbal Yusuf, has asked for a multi-agency special investigation team probe into the case. There is a third set of investors that has filed arbitration petitions before the Bombay High Court, which gave investors their first breakthrough, with the Court appointing a liquidator and ensuring that Anugrah’s promoters do not alienate assets. 
Another petition, filed by Nimesh C Shah and other investors, has made market regulator SEBI as the first respondent followed by NSE, NCL, CDSL (Central Depository Services Ltd) and Edelweiss and Anugrah. The petition, filed through advocate Ravi Hegde of Parinam Law Associates, accuses SEBI and the other intermediaries of ‘failing to protect investors’ by ensuring compliance with the many circulars issued by NSE and SEBI from time to time, which are documented by the petition. It charges the regulator with failing to “devise an appropriate mechanism to detect diversion of clients’ funds and securities” as well as wrong reporting of client funds and securities. It wants eligible investors to be compensated through the investor protection fund of the Exchange. 
In response to complaints, the economic offences wing (EOW) of the Mumbai police is conducting a separate investigation which has placed a lien on Rs460 crore with a clearing account at ‘City Bank’. The Metropolitan Magistrate’s court provided interim relief by vacating the lien on 1st October on condition that of Edelweiss “submitting bank guarantee or security of assets worth Rs460 crore till disposal of the main application.” 
A big differentiator in Anugrah’s case is the network effect. Nearly 500 victims of the failed brokerage came together quickly in a social media group (created by Moneylife Foundation) that could tap into high-quality advice (both professional and pro bono) and guidance from legal and market experts to file complaints and support them in a decision to hold regulators accountable and get results. It is collective actions like these that will pave the way for viable class action cases in future.

3 years ago
Being a senior citizen, I have been
cheated by lakhs of rupees, could
You please tell me what are the
chances of getting back my hard
earned money.
3 years ago
Keep me posted for latest developments in Anugrah scam case.
Balaraman Sriram
3 years ago
what is going on with India Nivesh? They shut down operations in march 2020 just before Lockdown.?
3 years ago
Excellent work by ml.
Continue to save hard earned money of small investors.
3 years ago
Commendable action by MoneyLife! Request MoneyLife to assist MODEX investors who are similarly impacted.
3 years ago
Excellent work ML team! Such actions are highly commendable. Keep up the great work.
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