Sucheta Dalal :Here's Why Scams Recur Year After Year (29 April 2002)
Sucheta Dalal

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Here's Why Scams Recur Year After Year (29 April 2002)  

A little market-intelligence on the part of our regulators would go a long way in protecting investors. Take Home Trade for example. For almost two years, people who have nothing to do with business and markets have been riveted by its advertisements, featuring three most expensive celebrity endorsers — Sachin Tendulkar, Hrithik Roshan and Shahrukh Khan. Hrithik’s scintillating dance sequence, which was apparently the broking firm’s product advertisement, certainly grabbed viewer attention. At the end of it, people turned to each other and asked, what is Home Trade?

Some web surfing would have revealed that it is a dotcom plus brokerage firm. But even at the peak of the dotcom mania, a Rs 60 crore advertising budget (say sources close to the company) for a financial product aimed at a sliver of the population should have set off alarm bells and put the company in a “watch-carefully” category. It didn’t.

Switch now to April 2002 and you see the utter lawlessness that is bred by the regulators’ somnolence. A few days ago the tiny, politically-controlled, Nagpur Cooperative Bank admitted that a cabal of brokers had taken it for a ride. It registered a First Information Report against five brokers for failing to deliver Rs 125.60 crore of securities. The brokers: Home Trade and Giltedge Management of Mumbai, Indramani Merchants of Kolkata, Century Dealers and Syndicate Management Services of Ahmedabad.

Traders in the government securities or G-Sec market say that they haven’t even heard of these names except, of course, Home Trade which left you agape with its ad blitz. Further checking provides more surprises. None of these brokers even have a Wholesale Debt Market membership — the only legal passport to trading in G-Secs. At best, some have equity dealerships. The dealings of co-operative banks are under the Reserve Bank’s supervision while brokers are registered by the Securities and Exchange Board of India and the two regulators hardly exchange any information except when they need to pass the buck. The RBI, as is its wont, now wants to transfer its responsibility to Sebi by asking it to initiate action against these brokers. But since they are not debt market brokers, Sebi and the stock exchanges are scrambling to find a way to stop their equity brokerage businesses.

But what about Nagpur Cooperative Bank, which is under the direct supervision of RBI? Why did it deal with these brokers unless its management is hand-in-glove? Does it not have any verification and empanelment procedures for brokers? Apparently not. Nor has the RBI insisted on it. The brokers figured out that as long as they do not attract attention, nobody would check what they were doing. Moreover, the RBI in fact had facilitated the scam in physical G-Secs when it decided that it would not allow smaller entities such as trusts, cooperatives etc to hold Subsidiary General Ledger accounts with it. These were SGL-2 account holders who have since been forced to trade in physical securities.

With the stage set for a scam, the next question is — are the missing securities worth Rs 125 crore as claimed by Nagpur Cooperative Bank or more? Again, nobody knows. The RBI is understood to have told Sebi that Home Trade had Rs 500 crore of purchase transactions and Rs 450 crore of sales transactions with the Nagpur Cooperative Bank. Does this mean that the remaining securities were delivered to Nagpur Coop Bank?

Another issue is, who financed these brokers? We learn that a few large and aggressive private banks had extended financing facilities to Home Trade. Has RBI investigated who the bankers of these five brokerage firms were, what kind of financing arrangements had been provided to them and whether the banks had verified if the money was used for equity trading or debt? One learns that HDFC Bank had closed down Home Trade’s financing facility a couple of months ago when its cheques began to bounce. Does either the RBI or Sebi have a mechanism whereby banks are forced to alert the regulators about the financial difficulties of capital market intermediaries? Had such a system existed, Nagpur Bank’s losses could have been minimised and its complicity in the fraud exposed even earlier. In fact, there is a good chance that several other banks had similar deals with the same brokers.

Let us now look at the background of these brokers. Home Trade and Giltedge along with a third company called Ways India (an equally big advertiser) are one group. They claim to be subsidiaries of Euro Asia Ltd whose starting point was Lloyds Securities, a firm purchased by Sanjay Agarwal and one Baluchan Rai. The Home Trade website suggests that Euro Discovery Technology Ventures Ltd or EDTV, a Mauritius based global technology venture fund, provided the finance. The venture fund has either run out of money, or was just a convenient front for the funding.

The website says that Ketan Sheth is another director of Home Trade. He is described as a “recognised figure of the debt trading market through his firm Gilt Edge Management Service (‘GEMS’)” who it claims “has been a key catalyst in the development of computerised trading in the country’s stock markets”. A boast that nobody in the market is willing to endorse.

Giltedge (or is it Gilt Edge?) started out as Ketan Sheth & Co, converted itself into KSC Securities Ltd, and has now spawned a number of intermediaries with the Giltedge prefix. Sanjay Agarwal, Ketan Sheth and Nandkishore Trivedi (he controls the financial and treasury operations of EDTV and according to sources is the brain behind the group of companies) are the trio that run Home Trade and Giltedge; none of them were reachable at their home, offices or on their mobile phones.

The other four brokers are completely unknown. A source who tried to answer the question ‘who Indramani?’ with a web search came up with this startling information. The only known Indramani in the financial markets is Indramani India, one of the 36 companies belonging to the CRB group whose credit balances were frozen in 1997 in the wake of the scandal. Is Indramani the same company? Nobody knows, but there is a good chance that it is. Since there is no way of verifying company registrations on a national level, or a bar on companies with the same name being registered by different groups, only the RBI can find out if it is the same Indramani. But even if it is, the RBI is unlikely to tell us what it found. Is it any surprise then that we have a scam every year?

-- Sucheta Dalal