Revealed: How brokers siphon off securities and funds abroad

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A couple of days back when five stock brokers were placed under watch by the SEBI for siphoning off securities and funds worth Rs 500 crore from investor accounts to foreign locations it indicated how vulnerable a part of the system is.

One must also recollect in this context the 1500 verification notices sent to the National Stock Exchange in the year 2011 seeking details on the non payment of securities transaction tax.


Certain questions come to mind in the backdrop of both these cases and unless answered we may witness a huge scam in the making that began in the year 2011.

Are the brokers diverting funds?

The investigation that was conducted by SEBI shows that 5 stock brokers had siphoned off securities and funds worth Rs 500 crore from investor accounts to Singapore and Switzerland. All these New Delhi based brokers had diverted money from the accounts of their clients and parked it outside the country. It was revealed that the same was done for their own personal gains.

Ironically some of these brokers who were issued with a show cause notice were not even at their addresses. The notices were returned, which indicates that some had given fake addresses with an intention of siphoning of securities and investor money.

Several investors had complained about non-receipt of funds. These brokers under the scanner had even given an undertaking to the National Stock Exchange that the claims would be settled. However this was never done, the SEBI had noticed.

How safe is your money?

One may recollect a major incident that took place in the year 2011. The NSE was served with 1500 verification notices. The NSE was asked to provide details of transactions for the past few years and the Security Transaction Tax paid.

The security transaction tax is paid for trades in which stocks are delivered to the buyer. It is also the amount paid for an intra day transaction in which the buyer as well as the seller square up the positions before closing hour at the stock exchange. It had been found that there were discrepancies in the STT that had been collected by the NSE which are responsible for such collections.

Further the investigations also found that there were problems in the software that the NSE had been using. The NSE had charged a lower STT on delivery based deals which were done by the FIIs.

What is NSE doing to prevent self trade

Several complaints had been raised that it was the duty of the NSE to prevent self trade. While all major exchanges had put up mechanism to prevent self trade, the NSE was found wanting.

A self trade is the cost for the company since it is paying transaction charges and securities transaction tax on both legs of the transaction and not achieving any profit in the said transaction. It was alleged that companies are not in a position to prevent self trade since the orders were being matches on the NSE servers.

The NSE however claims that they have monitored the self trade mechanism and improvements in the future using the PAN based system would be made. NSE further says that all brokers will be alerted about all trades being directly linked to the investors. In this way the broker will not be able to rig the share prices and if he does it would come under the scanner.

Further the NSE says in a bid to prevent self trade, it would introduce the periodic alert mechanism. Three alerts at 11 AM, 1.30 PM and 3.30 PM would be in place to alert about self trade. In case self trade is not restricted despite this alert then brokers could be liable for suspension.

The restriction of self trade would also go a long way in ensuring that individuals will not be able to convert illegal money into legal.

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