Sucheta Dalal :Vanished Funds
Sucheta Dalal

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Vanished Funds  

Nov 27, 2005

‘‘We are desperate. How can such a fraud go unnoticed and unpunished? I hope you can help us,’’ wrote Amrutha Radhakrishnan. The anguish stems from an eight-month battle with Indiabulls Securities the firm that attracts international attention. Amrutha’s husband S. Radhakrishnan opened a demat account with Indiabulls at Chennai in May 2001 and signed a Power of Attorney allowing the broker to issue instructions on his behalf. Although he lost some money earlier, his real problems began only in 2004 after depositing 16,104 HCL Tech shares (received as ESOPs) into his account. Soon after, he swapped 16,000 HCL Tech shares for 4,000 shares of Infosys. A little later he discovered that his Internet-based demat account viewing facility was inaccessible. In January 2005, after informal warnings by an insider, he went to Indiabulls and was shocked to discover that instead of the expected balance of over a Rs one crore, his account had just Rs 300. Radhakrishnan claims not to have received any detailed statement of transactions even today and is convinced that he is the victim of a major fraud. They are running from pillar to post, speaking to Indiabulls, the Police at Chennai, the National Stock Exchange (NSE) and the Securities and Exchange Board of India (Sebi) to get justice. He has even filed two FIRs with the police. Responding to our query, Indiabulls says, ‘‘The client has lost money in speculation in the markets. It has been over one year, the client has willingly not initiated a lawful process to address his greviances (sic)’’. Indiabulls wants an arbitration process to decide this issue. But other investors have had similar problems with the firm too and a more astonishing story begins here.


Mystery shopper


Acting on a similar complaint, the National Securities Depository Ltd. (NSDL) discovered that Indiabulls asks investors to sign a compulsory Power of Attorney (POA) at the time of account opening. This allows it to issue trading instructions for the client. This is akin to banks holding customer POAs allowing it to move cash in and out of accounts. When NSDL confronted Indiabulls, it denied the charge claiming POAs were not mandatory. It told us, ‘‘These days clients typically prefer POAs to avoid any auction in the T+2 settlement system’’. The NSDL however verified this claim through a ‘‘mystery shopper’’ process. This not only confirmed the POA compulsion but also revealed that Indiabulls often stipulates that the investor cannot ever issue instructions to operate his/her own account (Indiabulls response is that investors are always free to revoke the POA). National Securities Depository Ltd’s chairman C.B. Bhave says that Indiabulls has been told that it cannot mandate POAs or prevent investors issuing demat instructions. This raised worries about potential misuse and the depository decided to inspect Indiabulls with help from the National Stock Exchange (NSE). This, in turn, led to further revelations.


Pooling accounts


The joint inspection by NSE and NSDL in September revealed muddled audit trails in several transactions at Indiabulls. Bhave says that once shares were credited into a broker pool account under Sebi rules, Indiabulls moves them to two other pool accounts it has created. In one account it credits investments of those clients who operate margin trading accounts funded by a sister finance firm and in the other it credits investments of those clients who have not availed of a margin trading facility from Indiabulls. These two accounts are separate and distinct from the broker pool account mandated by Sebi. Indiabulls says that it is no different from other brokers and that it keeps audit trails of every transaction. More importantly, it says, ‘‘share movements of random clients is verified by NSDL in their surprise inspections. There have been never (sic) a single instance at Indiabulls where shares of some other client has been delivered for someone else’s obligations’’. This is contrary to what the NSDL Chairman tells us. In fact, Bhave says that the issue is not about the software or its vendors but about blurring audit trails by routing transactions through the second-stage pool accounts. NSDL is not alone in questioning Indiabulls’ methods. NSE’s deputy managing director Chitra Ramakrishna says, ‘‘The exchange has already issued a show cause notice to the member (Indiabulls) and the disciplinary process is underway’’. Senior SEBI executives tell us that the regulator has also conducted its own investigation of Indiabulls and appropriate action will follow.


Investor Beware


In September, we warned investors about the practice followed by many large brokerage firms of getting investors to sign POAs giving themselves sweeping rights over investors’ shares and money. The POA is often slipped into the account opening forms. The example mentioned above shows how dangerous this is. The broker remains in the driver’s seat as the exchange and Indiabulls try to push the investor into a tedious arbitration process, when he believes it is a criminal matter. Sebi needs to ensure that investors are forced into a lengthy arbitration only after a serious attempt to settle cases involving individual investors through persuasion, otherwise they are always at a disadvantage.



-- Sucheta Dalal