Time and again, the National Stock Exchange (NSE) has been found more focussed on brokers increasing their turnover than what they are doing to increase business for the exchagne. So, when the now crisis-hit Anugrah Stock and Broking Pvt Ltd (ASBPL) reported a sudden jump of 2546% in volumes in 2014, instead of triggering alarm bells and a subsequent investigation, the NSE was sending congratulatory messages for robust volume growth in Bank Nifty Options. What is more shocking, the submission on Bombay High Court shows that even in 2013, Anugrah was already misusing client funds.
Even as the Bombay High Court had noted failure of statutory authorities in performing their duties while dealing with failed Anugrah Stock and Broking, in 2014, the NSE, however says its congratulatory letter to the brokerage is a standard and routine matter. The reason is obvious. Salaries of all senior executives in NSE are linked with their performance and bottom-line! This explains the congratulatory letter from NSE official to the brokerage.
On 1 September 2014, Ravi Varanasi, chief business development officer (CBDO) of NSE sent a letter to Paresh Kariya, the founder and director of Anugrah Stock and Broking. "It has been quite heartening to note the significant contribution made by your team in the growth of volumes in Bank Nifty Options category. The market grew by 33.8% compared to last month, whereas your volumes grew by 2546% in Bank Nifty Options. We commend you and your teams for making this happen," the letter says.
The tone and tenor of the letter seems to suggest that NSE's primary concern was over trading volumes that brokers built up and not what they were doing or how they conducted their business. Even though the matter is seven years old, such a huge jump in volumes by a broker should have raised alarm bells at NSE, the first regulator in line. Yet, its CBDO was found congratulating Anugrah Stock & Broking.
When asked about the letter, a spokesperson of NSE said, "Average gross premium turnover of Anugrah Stock & Broking in July 2014 was Rs4 lakh and the same increased to Rs93 lakh in August 2014 which is less than 0.5% of trading member's turnover across equity and equity derivatives. The high percentage increase mentioned in the letter was primarily because of the lower base transacted by the trading member in the previous month and as mentioned above, the trading member was not a major contributor to the volumes."
"As you are aware, as per regulatory requirements, there is complete segregation and independence of the regulatory function of the exchange. We assure you that complimenting trading members on business growth by the business development team is independent of the regulatory function of broker supervision and disciplining the trading members. Appropriate actions are initiated against trading members wherever activities indicate possible market abuse practices," the spokesperson added.
Earlier this month, after hearing the grievances of investors and clients of Anugrah Stock & Broking, the bench of justice SS Shinde and justice MS Karnik says there exists a prima facie case and the statutory authorities have, indeed, failed in performing their duties under the law.
The observations of the HC came after Dr Birendra Saraf of Parinam Law Associates representing investors, pointed out in his submission how clients and constituents of Anugrah have suffered due to the lapses of Securities and Exchange Board of India (SEBI), National Stock Exchange (NSE), NSE Clearing Ltd (NCL) and Central Depository Services Ltd (CDSL).
Dr Saraf, in his written submission, also contended that NSE, NCL, and CDSL acted as silent spectators until SEBI intervened in April 2020, after which, inspections into the affairs of Anugrah were initiated. He says, "...NSE was aware of the active misuse of client funds and securities by Anugrah. On one occasion, Anugrah had also advanced loans worth over Rs300 crore to certain entities, the fate of recovery of which is unknown to the petitioners and which will go a long way in securing the recovery of the outstanding dues of the petitioners and other clients and constituents of Anugrah. It appears that NSE has not taken any steps to recover the same from these entities."
"NSE was aware that Anugrah was giving incorrect ledgers and not reporting the correct holding positions to the clients," the senior counsel says, adding, "NSE was aware that Anugrah was incorrectly and wrongfully reporting the margins to NSE which is a serious offence and that is the same misconduct, which resulted in Anugrah trading in huge volumes without informing its clients."
"Though nominal penalties were levied, no action was taken to suspend the broker and clearing member or inform the investors about such violations, which would have put the investors to notice about the same. These instances of violation, inaction of the NSE to take appropriate measures and having measures on paper without implementation clearly shows the way the purported investor protection is done by the largest stock exchange in the world," Dr Saraf added.
On 4 September 2020, NSE had withdrawn all trading rights of the crisis-hit Anugrah Stock and Broking. Earlier on 1st September, the stock exchange had withdrawn Anugrah's trading rights in future & options (F&O), currency derivatives and commodity derivatives segments.
According to Dr Saraf, who is representing investor clients of Anugrah, when the other violations came to light, NSE did not freeze the assets or market operations of Anugrah, its directors, Teji Mandi or its directors, or Edelweiss.
"The petitioners discovered that in the meantime, Anugrah carried out several transactions and withdrawals from its bank accounts, transferring amounts to its sister concerns and directors, which the petitioners brought to the notice of this Court in the arbitration petitions," he says.