Another Case Of Alleged Misuse Of Power Of Attorney By A Brokerage Reaches Court
More than 70 investors allege that they suffered financial losses due to alleged unauthorized trading by Anugrah Stock Broking.
More than 70 investors have moved the Bombay High Court alleging that Anugrah Stock & Brokers Ltd. indulged “illicit” and “unauthorised” transactions, causing them heavy financial and monetary losses.
The investors had sought interim relief to ensure the brokerage doesn’t alienate its assets before the arbitration proceedings are initiated. A single-judge bench of Justice Gautam Patel has directed the high court’s receiver to take symbolic possession of Anugrah’s fixed assets, real estate and vehicles. The court has, however, allowed the brokerage firm’s directors to use certain assets with a stipulation that they do not enter into any transaction relating to them.
The case is similar to alleged misuse of clients' securities by Karvy Stock Broking, one of India's largest brokerage houses, for its own purposes. The regulator barred Karvy from taking new customers and dealing with their money. And it eventually led SEBI to tighten the rules to include, among other things, upfront margins from Sept. 1.
Anugrah Misused Power of Attorney, Investors Say
Anugrah Securities is a Mumbai-based brokerage founded by Paresh Kariya and is a trading member of the National Stock Exchange. Teji Mandi Analytics, its sub-broker, is run by the duo of Kalapi Shah and Anil Gandhi. Investors alleged that Teji Mandi came up with an algorithm-based trading system a few years back, promising that the shares lying in their demat accounts can be used for derivative trading.
Teji Mandi highlighted that its algorithm was designed in a way that maximises profits and at the same time, minimises any potential losses. The entities sought power of attorney from investors for executing delivery against trade transactions. As per the investors, no authority was granted for executing trades on their behalf.
Investors alleged that Anugrah and Teji Mandi started placing client securities in the brokerage pool accounts and used these securities for leverage purposes to execute their own trades. Further, in their complaints before various authorities, they also alleged:
- Most trades executed by Anugrah or Teji Mandi were illegal since they were not pre-authorised by the demat account holders.
- They misused the power of attorney and misappropriated funds for their own purposes.
- Margin statements and contract notes issued against the executed trades were false and had no co-relation with actual trades or did not reflect the true position of the client securities.
- Anugrah handed over the securities to Edelweiss’ clearing function, which failed to verify the actual ownership and sold them off.
A group of several hundred investors, represented by advocate Yusuf Iqbal, lodged complaints against both the entities and certain connected individuals at the Economic Offenses Wing as well as the Enforcement Directorate. "We will also be approaching the high court in a few days seeking formation of a special investigative team comprising of the EOW, ED, Income tax officials and the Central Bureau of Investigation," Iqbal told BloombergQuint.
Last month, via an ex parte order, NSE barred the brokerage from taking any fresh position in the futures, options and the derivative segment.
NSE concluded that Anugrah had allegedly dealt in unauthorised derivative advisory services through itself, its sister concern and had collected more than Rs 165 crore. The Securities Appellate Tribunal granted a stay on the ex parte order till Oct. 15.
Separately, market regulator SEBI had imposed a penalty of Rs 5 lakh on the broker after concluding that Anugrah was not settling some of its clients’ accounts.
High Court Refuses Submissions in Sealed Cover
In granting relief to the investors, the Bombay High Court refused to entertain Anugrah’s request to submit certain documents in a sealed cover. The brokerage said it apprehended certain material may leak out to the press.
"I could not care less. That is not my concern," Justice Patel said in his order, emphasising that it’s the only way to ensure an open and transparent decision-making process.
“The fourth estate will do its job and I will do mine. I decide matters before me on the basis of the papers filed in Court, not newspapers delivered to my doorstep. The press exists for a reason. It has a purpose, one that it serves. I cannot and will not curtail the rights of the free press at the instance of this or that party. I refuse to proceed on the basis that the press is always irresponsible. There will be no gag orders here.”
In any case, Justice Patel said in his order, "I am making it abundantly clear that at least in my Court there is no question—and there will be never be a question—of anything being done ‘in sealed cover.'"
The high court will next hear the matter next on Oct. 5.