SEBI & NSE Need To Identify Habitual Offenders through Data Analysis and Use Severely Escalated Action as a Deterrent
As a member of the consumer complaints committee (CCC) of the Advertising Standards Council of India (ASCI) for a few years, one noticed that two powerful personal-care companies had a nice trick to their fairness cream advertisements. These advertisements inevitably portrayed those with a darker skin as being less confident or losing out on life’s opportunities. Such regressive advertisements would be launched with a massive blitzkrieg on multiple channels. There would immediately be a complaint, which was always upheld by the CCC, and the advertisement had to be withdrawn. The entire process would take four to five weeks during which the advertisements were carpet-bombed across media. By the time the ad was asked to be withdrawn, the campaign was over. A few months later, the cycle would be repeated and the advertisement withdrawn after the same process. 
 
After watching this charade for about a year, some of us felt that the companies were making a mockery of the process and demanded escalated action against ‘habitual offenders’ who are repeatedly pulled up for the very same offence. We asked ASCI to fix a threshold number, where the action has to be considerably more serious than merely withdrawing the offensive advertisement. Nothing happened. ASCI is dominated and controlled by top advertisers and ad agencies that were happy with a process which looked fair and equitable by packing half the CCC with public-spirited citizens devoting their time virtually free in public interest. Then the ‘black lives matter’ movement took the world by storm. It, finally, made multinationals realise the bad optics and potential backlash to their fairness product ads. So they clambered on a high moral platform and declared they would no longer be advertising fairness products!
 
What has this got to do with stock markets and investors, you would ask. Think about it, the very same game is being played to prevent investors from making an informed choice, when it comes to selecting intermediaries who play a fiduciary role in safeguarding their investment. Last week, I wrote about two horror stories of super-senior citizens who were systematically tricked by their brokerage firm. Worse, the broker’s employee had tried to fake compliance with SEBI (Securities and Exchange Board of India) rules to make the bad decisions seem those of the client. I have received scores of messages asking why I did not name the brokers, even though the IGRC (investor grievance redress committee) ruled against them. The answer is simple—singling out two brokers to name & shame does not fix the larger issue. Investors need easily accessible information in the public domain; also, repeated issues signal a bigger problem that needs urgent escalation and stricter action. 
 
Here is how the process works today. When an investor files a complaint against a broker, the exchange, typically, sends it to the broker for redress. If the dispute is unresolved, it goes to the IGRC available in every large city. If either side is unhappy with the outcome of the IGRC, the matter goes into arbitration. SEBI has a common list of arbitrators across exchanges to ensure neutrality. The exchanges report all data and awards to SEBI which carries it forward.
 
There are strict, mandatory timelines for the functioning of the IGRC and, when ruling favours investors, the exchange automatically debits the broker account and pays investors, up to a certain threshold. Cases can be escalated to arbitration by either side. SEBI then takes up cases for adjudication, but has no fixed timelines; so, its orders, although public, are at least five to seven years later. This is too little and too late. The key is that the whole process is an individual battle; there is no aggregated information available to make an informed choice before selecting a broker; nor are there any early warning signals. 
 
How Important Is This? 
I searched for information on watchoutinvestors.com, a public service resource that provides access to searchable orders across regulators and tribunals. Going through each order was hard work. So I requested Pranav Haldea, founder of watchoutinvestors.com, for data on the top-10 brokers who had the maximum arbitration orders against them. Mr Hadlea’s team painstakingly and generously sorted through innumerable orders, from 2007 onwards for the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), and 2012 onwards for the Metropolitan Stock Exchange of India (MSEI), and came up with the table below. 
 
 
Those who have read my previous article would know that the odds are invariably stacked against investors in these battles, because brokers and their lawyers know the rules better and, often, game compliances to cover dubious actions. Investors, on the other hand, usually fight their own battle unless the sums involved are huge. Few can afford lawyers with domain knowledge about securities laws and regulations. 
 
The second point to note is that most of investor victories in the list above were well before a broker was expelled as a defaulter. Of this list of 10 firms, as many as six have been expelled or declared defaulter—it makes you wonder whether investors would have been better protected with early action. Dreams Broking Pvt Ltd was declared a defaulter by BSE in December 2015, Moongipa in October 2015,  Unicon Securities Ltd was expelled in September 2014, Sunchan in July 2009, BMA Wealth Creator in February 2020 and Karvy in November 2020. It raises a serious question about whether early warning signals were available.
 
For instance, there are 44,306 applications to the investor protection fund (IPF) of NSE against Karvy, after it was declared a defaulter. The arbitration cases referred to above are from a time when the going was good and it was considered among the top brokerage firms with over 250,000 customers. The same is true for BMA Wealth Creators which has 16,492 investors who have applied for compensation after it was expelled.
 
The BMW Wealth Creators case continues to make headlines. On 21 February 2022, the Securities Appellate Tribunal (SAT) dismissed a SEBI order imposing a penalty of Rs1 crore on HDFC Bank for invoking client securities illegally pledged by BMA Wealth Creators and BMA Commodities to the tune of Rs158.68 crore. Readers should note that another trick to obfuscate a negative trail is to change the name of the company – the companies named above now call themselves BRH Wealth Kreators and BRH Commodities, respectively. 
 
A heartening development here, reported by the The Economic Times (ET) on 25th May, is that SEBI, NSE and BSE have challenged the SAT order in favour of HDFC Bank in the Supreme Court. In terms of past precedent, it must be remembered that HDFC Bank is involved in multiple disputes of invoking securities pledged by brokers. In August 2020, HDFC Bank invoked a pledge of fixed deposit in India Nivesh (which shut operations) which is under arbitration
 
HDFC Bank is also among the six entities which provided a loan against illegally pledged shares by Karvy Stock Brokers (Karvy Default: For Once SEBI Acts Quickly To Protect Retail Investors’ Interest) which is also under dispute. When a bank is repeatedly on the wrong side of investor issues, one has to wonder whether SEBI needs to work with the Reserve Bank of India (RBI) for more stringent oversight on their capital market-related activities. 
 
India Infoline, a listed entity, is among the top-10 brokers with the highest arbitration orders against it. As recently as 21st May, SEBI imposed a penalty of Rs1 crore on the firm, after multiple audits, for failing to segregate its own funds from client funds, misusing client funds and not appropriately designating client bank accounts. It will be interesting to know whether the SEBI audits were triggered on the basis of IGRC and arbitration complaints; if not, SEBI needs to create a threshold to initiate detailed scrutiny. 
 
A third important point is that the list above does not tell the whole story. Many IGRC orders are not challenged; this list reflects the small number where investors had the ability to make a successful challenge. It is the IGRC data that is significant, because these are complaints which the broker has refused to redress, in the first instance, and chosen to challenge the investor. 
 
Did early warning signs remain hidden behind confidential orders in the absence of data aggregation in public view? We would urge SEBI to initiate two actions—upload unchallenged IGRC orders on stock exchange websites, they cannot be ‘confidential’. Commission a study of IGRC and arbitration orders going back at least five years to check if: a) the number of complaints provide an early warning signal; and b) check if there is a pattern among large brokerage firms of increasing trading volumes by encouraging employees to deceive investors, target senior citizens or illegally promise assured returns through derivatives trading strategies. 
 
These actions are easily possible and will do a lot more to protect investors than mindless multiple SMS and email alerts (from brokers, depositories and exchanges) for the very same transaction. Multiple alerts put the onus exclusively on investors, to maintain a constant vigil on their demat accounts, even if it comprises long-term holdings. It also allows intermediaries to blame investors for negligence. At the very least, SEBI needs to allow investors to lock their long-term demat holdings and provide confidence that their life savings are safe and protected. After all, it is SEBI that has made dematerialisation mandatory and the onus to protect long-term investments must be on the regulator and intermediaries, by getting an insurance cover, if required. 
 
 
Comments
bowdenkate28
4 weeks ago
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memon.asif
1 month ago
Suchetaji,
Your contribution to upholding the integrity of our financial markets deserves appreciation.
In this regard, I take the liberty of suggesting if you could help in coming up with a study that lays a roadmap of holistic reforms for SEBI, NSE, and other bourses. This could cover complete governance system and best practices that need to be implemented. With your knowledge you can come up with meaningful proposals and your credibility will ensure your proposals are taken seriously.
Regards,

kpushkar
1 month ago
I am scared .. Angel broking also has complaints !! In top ten bad guys list !
snatarajan1985
1 month ago
Excellent article. Arbitration process is not time bound? Are they not fall under the purview of Arbitration and Conciliation Act, 1996- which has been amended in 2015 wherein time limits were fixed for conducting arbitration vide Section 29A?
rmganatra
1 month ago
Big applause for your dedication for investors' cause! The article recommends practical steps required for investor protection from legal bandits!

Hope the regulator actd fast.

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