Tag: scam

Categories
Editorial

IndusInd Bank In Trouble Over Whistleblower Allegations

IndusInd Bank had a tremendous Q2 FY22 quarterly result after its profits rose by 72% YoY. Its Interest Income rose by 6.59%, Provisions and Contingencies fell by 7.6% and Gross NPA reduced by 2.77%. Despite such great results, IndusInd’s share price had a freefall last day. This piece covers the allegations made by a group of senior employees, IndusInd Bank’s stance on it, and the way ahead. 

What Went Wrong With IndusInd?

IndusInd Bank was set up in 1984 by the Hinduja Group and was one of the first private sector banks that helped in accelerating the process of reforms in post-liberalised India. You can read more about the Hinduja Group here.

IndusInd Bank, like any other bank, gives out loans from which it earns Interest Income. IndusInd’s loan book is managed by Bharat Financial Inclusion Limited (BFIL), a 100% subsidiary of IndusInd Bank.

Some of the senior officials at BFIL have alerted the Reserve Bank of India (RBI) and alleged some mismanagement and malpractices at IndusInd. The whistleblowers allege that IndusInd Bank has been ‘evergreening’ loans since the beginning of the COVID-19 pandemic. 

What Is ‘Evergreening’ Of Loans?

Banks give out loans to earn interest income. A portion of the loans disbursed by banks remain unpaid by borrowers, or certain borrowers tend to ‘default’ on loans. If the loan remains unpaid for a certain period, it gets classified as a Non-Performing Asset or NPA. For every loan declared NPA, the bank has to set aside some money as ‘provision’. These provisions are set aside as assets to pay for anticipated future losses. They eat into the company’s profits. To avoid cutting down on profits, it is in the banks’ best interest to reduce the number of NPAs.

‘Evergreening’ of loans is when banks try to revive loans on the verge of being classified as Non-Performing Assets. A Bank gives out loans to the same borrowers to pay their older dues. Essentially, borrowers are paying back the bank by borrowing from the same bank. Evergreen loans are also known as Revolving Credit or Revolving Loans.

The evergreening of loans benefits both the banks as well as the borrowers. It gives the borrower more time to pay back the loan amount and prevents banks from getting higher NPAs, eventually translating into profit. But it can also be seen as pouring fuel into a fire, trying to get back cash by doubling down on the bad loans. This is not ideal in the long run.

What Is IndusInd’s Stance On The Allegations? 

IndusInd Bank has refuted allegations made by the whistleblowers. In a PR statement, IndusInd has clarified the following:

  • It has refuted whistleblower allegations on loan evergreening as “grossly inaccurate and baseless.” 
  • Due to a ‘ technical glitch’, it admitted to disbursing 84,000 loans to customers without their consent in May 2021. The problem was reported within two days and rectified.
  • Due to ‘Operational Issues’ in the second wave of the COVID-19 pandemic in India, the bank disbursed some loans in cash at the village/panchayat level.
  • The bank continues to follow biometric authentication, and has disbursed loans only in the bank accounts of clients. 
  • Any additional liquidity or assistance given to borrowers was done within the ECLGS (Emergency Credit Line Guarantee Scheme) framework or other restructuring or moratorium guidelines issued by the RBI.

Even after the clarification by IndusInd Bank, its shares tanked 12% on both of the Indian exchanges. IndusInd Bank has reported an increase in stress in its microfinance loans portfolio. The NPA ratio in the microfinance segment went up from 1.69% to 3.09% in the September quarter. The allegations come after a stellar quarterly performance by IndusInd Bank. 

The possibility of foul play can neither be confirmed nor be denied. A panel of the RBI is conducting a technical audit looking into the whistleblower’s allegations. An external audit might be ordered in case the need arises. Till then, it is in the best interest of investors and shareholders to stay alert about any updates on the audit by the RBI. 

Categories
Editorial

Binary Options Are A Scam!

If you frequently browse YouTube, chances are that you might have come across ads that promote ‘Binary Options’. These ads look pretty authentic at the first. However, these ads turned out to be a menace. So much so, that YouTube decided to restrict any advertisement that promotes binary options. These ads promised clients a way to get rich quick while operating a scandalous operation in the underbelly. These ads look like something given below. 

Well, if one trades on these platforms, chances are they might be in for some trouble and lose quite some money, Let’s find out why. 

What Are Binary Options?

First, let us understand binary options in the simplest way possible. Binary options use a simple ‘Yes or No’ proposition. In binary options, an investor predicts or bets whether the price of scrip will go up or down. If the prediction is true, the user retains the original amount invested plus an additional bonus on top. However, if the prediction is wrong, the investor loses money. 

Most of these companies that operate in India operate from outside of India in tax-havens or countries where the securities laws are favorable to binary options. They offer a high margin amount going up to 1000%. This means that you can double the money with a 0.1% change in the price. Additionally, one can wipe out their entire capital in a 0.1% change in price. 

Binary options have managed to catch prey in financially less sound countries, countries with poor financial regulation and countries with poor financial laws. The developed and technologically advanced countries have duly taken note and banned them from being traded.

The Scam

  1. Binary options are generally run by private brokers or companies and NOT on stock exchanges, unlike regular options. This means that prices can be manipulated by the company and not the normal market forces. Binary options generally derive value from globally traded scrips like Oil, Gold, or Forex.
  2. Binary options are an all-or-nothing proposition. This means that either you make a lot of money, or you lose all of it in one go.
  3. In most cases, binary options brokers hold positions against that of their clients. This means that if you lose money, they make money. The odds are in the favour of the brokers since they are the ones who influence the option pricing.
  4. Binary options offered high profits initially to encourage users to invest more capital on their platform. Once the user had invested a good amount, they would lose all their capital at once since the operators manipulate the price.
  5. There has been frequent news of binary options brokers being arrested and being sentenced for up to 22 years.

Legalities of Binary Options

Binary options are not traded on BSE, NSE or any other exchange in India. SEBI forbids trading of binary options in Indian exchanges. One may however use foreign platforms to trade binary options. 

Trading in binary options is a sticky subject when it comes to the legalities of it. Trading in binary options is a violation of the Foriegn Exchange Management Act(FEMA). There are no companies with a physical setup in India that can offer binary options.

The European Union has banned binary options. In most developed countries, trading in binary options is banned, officially. The gambling like nature of binary options has forced countries to take strict action against participants.

Binary options have been restricted from advertising by Google Ads. However, miscreants have been exploiting India’s financial illiteracy with a greed for quick money and now have taken to partnering with online web-series and youtube channels to promote their business.

Binary Options may not be scandalous always, but the intent with which it is operated in almost all cases is dishonest. It is advisable to market participants that they refrain from trading binary options since it can land them in jail for violating FEMA act and also make them lose a lot of money to fraudulent means with not much legal remedies.

Categories
Editorial

Dabba Trading, Another Stock Market Scam

Since the stock market’s inception, traders and investors have found various different ways to profit out of deficiencies. Some have been beneficial to the public, whereas others have cost people their life savings. For example, the ‘Free Stock Tips’ Scam, The Harshad Mehta Scam, and many more. Out of the pool of illegal activities, one such scam has been going on for over two decades, It’s called Dabba Trading. 

Small-time operators/bookies have reported a market of Rs 6,000 crores per day in Dabba Trading. On the other hand, some operators/bookies have reported a market of up to Rs 1 lakh crores per day. Nobody knows how big the sea of Dabba Trading is. Dabba Trading is an illegal activity and can get you in trouble with the authorities. First, let us understand what it is.

What is Dabba Trading?

In a normal trade, where one has to buy shares, the trader places a buy order with a broker (Zerodha, Upstox, etc.). The broker, on its client’s behalf, executes the order in the stock exchange. Once the broker finds a seller in the stock exchange, it buys and deposits the shares into the client’s Demat account. Once the trader sells the shares, the broker takes back the shares from its client and deposits money into its client’s accounts. This is a legal transaction that is approved by the regulatory authorities. 

In Dabba Trading, the trader places an order with a bookie. A bookie in our case is an unethical middleman who ‘writes down’ trades in a record and executes them ‘off the market’ or ‘outside of the trading system’. The bookie uses real-time stock market prices as a benchmark to execute trades. In case a trader makes a profit, the bookie has to pay the trader from his own pockets and in case a trader makes a loss, the trader gets the differential amount as profit. Since this market is unregulated, the bookie accepts or operates order in a way that benefits the bookie. Oftentimes, when the market turns against odds, bookies tend to abscond, causing the trader or client to lose money. 

Many people fall for the ‘Dabba Trading’ trap out of greed to make easy money and then find out that their ‘bookie’ is absconding. This kind of trading takes place across all segments like Futures And Options, Commodities, and even Bitcoins.

More About Dabba Trading

Dabba traders are often SEBI-Registered companies that give out advertisements that promise ‘multi-bagger’ returns in a short period of time. These ‘agencies’ are often small-time places that get clients registered on their platform and generally accept cash or UPI payments. Sometimes traders don’t even realize that they are a part of an illegal trading ring. It is after they lose their money that they realize that they were a part of a fraudulent scheme.

Why do people indulge in Dabba trading though? It is not just the people with less knowledge about the markets who participate in Dabba trading, sometimes professionals or full-time traders indulge in Dabba trading as well. Whenever someone buys or sells shares, there is a certain tax charged called the Securities Transaction Tax or STT. When you trade off the market, this STT essentially gets waived off. 

Another reason why professional traders sometimes tend to participate in Dabba trading is, margin requirements. Margin trading is when individual investors buy more stocks than they can afford to buy – by borrowing money from the broker. This allows traders to assume higher risks and make bigger bets. Traders need to have a basic minimum amount of money in their trading accounts to be able to execute certain trades, mostly futures and options. However, when this amount is large, certain participants are left out of the market as they do not have such kind of money. This is when some traders resort to Dabba Operators since they offer lower margin requirements and therefore can easily make trades. 

On December 1, 2020, SEBI’s new ‘peak margin rules’ kicked in, this keeps certain traders from making big bets, and therefore there is speculation that Dabba Trading might go up after this.

Scammers evolve with time. Scammers have now started developing their own trading apps and websites. This is a shift from trading over phone calls to trading over apps. This increases the number of clients that a dabba tarder can have.

Can I Get Into Trouble For Dabba Trading?

The forgery of the electronic records avoiding Securities Transaction Tax attracts section 467/471 of IPC or Forgery. Moreover, you can be tried under Section 420(Fraud), Section 477-A of IPC(Falsification of Accounts), and Section 120 B or criminal conspiracy. You can also be tried under various different codes of the IT Act 2000. All of this can amount to the imprisonment of up to 10 years in jail. 

It is advised that market participants avoid unethical ways of making money in the market and stick to well known and registered brokers when trading. Be aware and stay safe from these types of scams!

Check out our article on how amateur investors lose money in the ‘Free SMS/Telegram Stock Tips’ Scandal.

Categories
Editorial

What is the Karvy Stock Scandal all about? Explained.

On 22nd November 2019, SEBI announced that it had prohibited Karvy Stock Broking Limited (KSBL) to add any more clients after NSE found some irregularities. This order meant, no new trader can open his/her account with Karvy Stock Broking.

After a year-long investigation, on 23rd November 2020, National Stock Exchange (NSE) declared Karvy stock broking limited as a defaulter. They also expelled the broking firm from its membership. NSE also stated that it has settled the claims of more than 2 lakh investors whose funds worth Rs 2,300 crore. Bombay Stock Exchange (BSE) followed NSE’s path and expelled Karvy stock broking limited from its membership. They asked the investors to file for their outstanding claims against Karvy before 22nd February 2021. These claims will be considered for compensation of up to Rs 15 lakh. KSBL in the response have decided to accept their wrongdoings and do not wish to present their case. 

What exactly happened with this very successful brokerage firm? Let’s find the whole story here.

The Process of Karvy Scam

To take loans from banks, people are required to submit some type of collateral. Higher the amount of loan demanded, more valuable the collateral required by the banks. This collateral can be the portfolio of stocks you hold as an investor or a trader. Just like an individual has a Demat account, the broker has a pool account. This pool account is nothing but the broker’s Demat account.

Whenever you buy or sell a share, that share comes from the opposite seller or buyer. It first goes into the broker’s pool account and from there it comes to your Demat account. Now, suppose that you want to get a loan against your shares. Then, those shares are transferred into the broker’s pool account, who gives it to the banks. Banks issue loans to the broker against the shares submitted to them as collateral. The broker increases the interest rate and passes the money borrowed to the individual whose stocks are submitted. The difference between the two interest rates is the brokers’ profit. 

How Karvy Scam Worked

There would be a doubt in your mind that how the stocks owned by the investors can suddenly be pledged by the broker. Here comes the entry of POA or Power Of Attorney. This Power of Attorney gives the authority to the brokers to take shares out of the individual’s Demat account. Shares are stored with NSDL and CDSL, who are the only two depositories in India. Their work is to keep the shares safe in an electronic form in the customer’s Demat account. Both NSDL and CDSL give weekly or monthly reports to the account holders about all the transactions done. Thus, brokerage companies have to be honest in their practices because any variation can be caught by the account holders. 

But, Karvy found a loophole here. They identify those accounts in which the holder is not very active. For example, some of the investors do not trade very often. Some of them buy shares and keep them in their account for 1-2 years doing no further activity. Karvy transferred some of the shares to their pool account from these dormant accounts with the help of PoA. They approached different banks and took loans against these loans. Imagine you are taking a loan by giving someone’s house as collateral just because they don’t live there for the previous 2-3 years. Is that legal? NO. To whom these loans were issued? No one, Karvy kept it with themselves.

Misuse of funds by Karvy

The loans taken from the banks were transferred to one of their subsidiaries, Karvy’s Realty private limited. This subsidiary is engaged in real estate and property services. They offer investments, financing and advisory services to the customers related to the realty sector. So the loans were taken against the shares of the individuals without their consent. Then, the sums acquired were transferred to their own business in another sector. When this scam came into notice for the first time in 2019, it was rumoured that Rs 1,100 crore has been transferred till then. This is when SEBI banned Karvy Stock Broking company to add any more clients. Later, the amount misused in the scam was calculated to be much more than Rs 2,000 crore.

What Now for Karvy?

A major chunk of the clients has received their funds back as they were not the one who defaulted. But that does not cover the system failure which happened just a year back. There are still plenty of unanswered questions.

How did NSDL/ CDSL fail to find an anomaly in the Demat accounts if Karvy was putting these stocks in their pool account? How did NSE, who keeps an eye on all the brokerage firms, not find any wrongdoings for four years? Did they do any checks? How did banks not do any background checks before taking the shares of a third-party as collateral? Shouldn’t they have cross-checked with the owner of those shares? For now, it is difficult to answer any of these questions. As an investor, your responsibility is to maintain regular checks of your Demat account. If there is something odd happening in your account, you should straightaway call your brokerage firm and ask for a reason. Until, next time.

Categories
Editorial

NSE Algo Scam, All About The National Stock Exchange(NSE) Co-Location Scam

nse

Scams have taken place within exchanges and the stock market, but have you ever heard of a stock exchange itself scamming someone? The National Stock Exchange did exactly that in what is called the ‘NSE co-location Scam’. This scam involved close to 62 brokers, advisories, traders, and the employees of the National Stock Exchange. Here’s a quick brief on what the co-location scam was all about.

What is Co-location?

  • Generally, brokers and proprietary traders have machines at their offices which are connected to a primary server at the National Stock Exchange through which they place orders. Sometimes, because of too many people trading on this server and technical glitches, there was a delay in placing orders which caused losses to these brokers and proprietary trading firms.  
  • The National Stock Exchange, in the year 2009, started providing ‘co-location services’ to brokers for a fee. In this, brokers and firms were allowed to place their servers within the premises on the National Stock Exchange for a premium. This provided them tick-by-tick price data, faster than others and hence giving an advantage over them. A tick by tick data is the most detailed data available showing each and every trade, every second, that is made on the exchange.
  • Even though this was a question of a few seconds, this led to huge amounts of profits for the firms that availed of the co-location services. Most of these firms used algorithmic trading or high-frequency trading (HFT), where machines and computers buy and sell shares within a matter of seconds based on algorithms. A faster price feed caused them to profit almost every day out of this.
  • Co-location services are completely legal and NSE had done nothing wrong in offering these services. However, the Securities and Exchanges Board of India (SEBI) had decided to turn a blind eye to the regulation of this service. SEBI did not launch any ‘working paper’ or strict guidelines regarding these services. Some say that there was a political nexus behind this motive. 

The Co-location Scam

  • Secondary Server: There are two kinds of servers at NSE that process all the trades, primary servers and backup secondary servers. In co-location, broker’s servers were connected with a primary server and in case of a technical snag, they were connected with the backup servers.
  • Preferential Treatment: Some brokerages tied up with the employees of the National Stock Exchange (NSE) in order to know which secondary server would be switched on and when. These brokers would therefore be the first ones to connect to the secondary server and would later populate the server by connecting more than twice. This would cause the server to act slowly for other brokers due to increased traffic, giving an advantage to them. Mainly, one firm called OPG Securities is said to have taken advantage of the above-given situation. Many brokers were given preferential connections to the servers of NSE. It is said that the senior management of NSE plus some politicians had their personal interests in these firms.
  • A company named AlphaGrep with the help of a company named Sampark Infotainment set up ‘dark-fiber’ links connecting the NSE servers with its own. A dark-fiber is an unused optical fiber. There is no traffic or disturbance on the dark fiber, which means that AlphaGrep could get the tick-by-tick data faster than others. This was done with irregularities. The company, Sampark Infotainment did not have the necessary licenses from the Department of Telecommunications. 

How the Scam Got Public

  • A whistleblower by the name of ‘Ken Fong’ from Singapore wrote to SEBI in 2015 regarding irregularities in the co-location system in NSE and the use of dark fiber lines. As time passed, the whistleblower wrote more such letters to SEBI and business-media houses. Sucheta Dalal who exposed the Harshad Mehta scam published the first letter on her website MoneyLife, you can check it out here. 
  • Fun Fact: NSE filed a Rs 100 crore defamation suit against MoneyLife for the article regarding the co-location scam, but itself ended up paying 3 Lakhs to MoneyLife in restitution. They were also fined another Rs 47 lakhs to be paid to Tata Memorial Hospital and Masina Hospital in Mumbai.
  • SEBI formed an Expert Committee (EC) for the preliminary investigation of the claims. The Technical Advisory Committee (TAC) of SEBI investigated the technical matters of the claim. Ironically, the NSE formed a Disciplinary Action Committee(DAC) to act against brokers who were involved in the scam. 
  • Deloitte, Ernst and Young, and the Indian School of Business were appointed to perform a forensic audit of the scam. The Income Tax Department and CBI probed the co-location ‘scam’. 
  • In December 2016, NSE’s then CEO Ms. Chitra Ramakrishna and Vice Chairman, Ravi Narain, resigned. The National Stock Exchange’s IPO was stalled and still has not happened. The NSE was ordered to pay close to Rs 1,300 crores in fines which it tried to recover by fining other brokers and firms involved in the co-location scam.

The Current Situation

In January of this year, regulatory body SEBI dropped charges on nine current and former officials of the exchange, including ex-MD and CEO Ravi Narain, saying they cannot be held responsible for any misconduct or non-compliance in the so-called ‘dark-fibre issue’. Then who can be held responsible?

What happens when the people and institutions who are supposed to protect us turn villains? Are these fines enough to stop or scare them? Is this not comparable to cheating retail consumers? And why was no one sent to jail even after clearly profiteering and getting caught? A lot of questions remain unanswered. NSE is even saying that it has ‘strong grounds to contest the above orders including monetary liability raised by SEBI’.

Would certainly love to get more clarity on who actually are involved, with the top courts of the country taking strict action against officials trying to loot us.

You can read more about the co-location scam in the official SEBI order over here.

Categories
Editorial

The Barings Bank and the Rogue Trader

How many times have you heard that a single employee of the bank has caused the whole bank to shut down? How many times have you heard that a single employee was the reason behind the collapse of a 200-year old bank? I am sure, not very often. Today, we bring one such story which amazed the whole financial sector and led everyone to do some deep thinking.

About Barings Bank

Barings Bank was a British merchant bank in London which collapsed in 1995. The bank was the second oldest merchant bank (modern banks) which was founded in 1762. It went on to become one of the largest and safest banks in the world. It was a very reputed bank and it even offered personal banking services to Queen Elizabeth. Barings Bank was also popular as it was financing the Napoleonic Wars, Louisiana Purchase by the US and the Erie Canal. 

In February of 1995, Nick Leeson single-handedly led the bank to bankruptcy. But how did a single man became so significant that it left no option for Barings Bank but to shut down? 

The best trader in town

Nick Leeson, the former employee of Morgan Stanley, joined Barings Bank at the age of 28. He was transferred to Jakarta, the capital of Indonesia, and was able to settle £100 million worth of back-office contracts. He performed better than expected as he rectified all problems faced by them in just 10 months. This impressed the bank’s senior management.

They promoted Leeson to the post of general manager of Barings Securities in Singapore. He was sent to head both front-office and back-office operations. He was also responsible for hiring new staff, including a team of traders which will help him during the market hours.

Nick Leeson was Baring’s face on the trading floor. He was the person who made all the decisions regarding the trading of the bank’s money in the derivatives market of SIMEX (Singapore International Monetary Exchange). He made unauthorized speculative trades which helped the bank to earn huge profits on a consistent basis. At the end of 1992, more than 10% of the bank’s profits came because of Nick Leeson’s wondrous trading moves. Normally, the contribution of investments in a company’s profit is nowhere near 10%. This earned him unlimited trust from his London bosses. But, they were not aware of the implications their decision will have.

The Collapse

Nick Leeson’s good luck in trading didn’t last wrong and soon he started losing money. To hid his incompetency from the management, he created an ‘88888’ account. He hid his losses in this account. In front of the senior managers, Leeson mentioned that these losses were of one of the inexperienced junior traders. Till 1993, the losses in this secret account were around £23 million. But by the end of 1994, the amount had increased exponentially to £208 million. For context, £1 is almost ₹100 today. That means this amount would have been close to ₹2,000 crores.

On January 16, 1995, Leeson used a short straddle strategy at Singapore and Tokyo stock exchanges. He was sure that the market would not have any significant movement, neither upwards nor downwards. But, he didn’t know what would happen next.

On January 17, 1995, a big earthquake, registering magnitude 7.2 on the Richter scale hit Japan. This caused a sharp drop in the Asian markets, specifically Tokyo stock exchanges where the Nikkei dropped 1000 points. To cover for his losses, Leeson made more risky trades hoping that the market will lift again. He purchased even more Nikkei futures contracts in hopes that he will be able to drive the market upside alone. But to his dismay, the market fell continuously. 

Failed and Fooled 

One question which comes in mind after reading this is, where was the audit committee? Why was there no checks when the single account was recording such huge losses? The review committee ‘failed’ in their checks and were successfully ‘fooled‘ by Nick Leeson. There were multiple factors which played in Leeson’s favour. As he operated in both the front-office and back-office, he had unlimited autonomy. 

He was making trades through front-office and was in command of the back-office which had the role to keep checks on the trades made by the front-office. Thus, he was making highly risky trades and was approving himself without any restrictions. That means, he had the ability to hide whatever he wanted to hide from the official books. Leeson made false declarations to regulatory authorities to avoid any strict checks on his work. He hid huge amounts of losses and forged the signatures of his seniors to get access to more money.

The Shutdown and Aftermath

By the time Barings Bank investigated and discovered the ‘88888’ account, the losses were too big for the company to stay afloat. Nick Leeson was accountable for the losses worth £827 million. This was twice the Barings Bank available trading capital. With no way out to recoup the losses he has incurred, Leeson decided to flee away. He left a note which read “I’m sorry”.

On February 26, 1995, the 233-year-old Barings Banks bank was declared insolvent. After 10 days, on 6th March 1995, it was officially acquired by a Dutch investment group, ING. They paid a meagre amount of £1 for this acquisition, just imagine buying a bank for ₹100! The collapse caused 1,200 people to lose their jobs in Singapore alone. In 2001, ING Barings was sold to ABN Amro. 

After flying away to Malaysia and Thailand, Nick Leeson was arrested in Frankfurt, Germany. He was brought back to Singapore after 9 months and was sentenced to a jail term of 6.5 years. Leeson was charged on two grounds: deceiving the bank’s auditors and cheating the Singapore exchange. He served his term in jail during which he was diagnosed with colon cancer. 

After being released from his prison, Nick Leeson has started a new life. He is now a public speaker and lecturer. He is also a personal trader and gives out regular comments on market performance.