Investments are a double-edged sword. They are a personal choice of the investor based on several factors, such as the amount to invest, where to invest, risk-taking quotient and reward expectations. Due to the growing market volatility, it has become somewhat of a gamble. Due to these factors, private and retail investors are increasingly relying on portfolio management organisations. These are often trading brokers who manage funds for their clients. While these brokers play an important role in boosting the economy, in recent times an alarming increase in fraudulent transactions and mishandling of funds by them has also come to light.
Common frauds include tampering with existing rules and regulations, taking advantage of funds that are kept in a pool account instead of individual demat accounts, playing with numbers and scale of transactions that may miss the attention of the investor, etc. While regulating bodies such as the Securities Exchange Board of India (SEBI) define and continue to revise mandates to align with the needs of current-day investment patterns, the playing field for swindlers is still very large. Digital transactions have further complicated the landscape, all of which create more loopholes for unscrupulous traders. While largescale frauds orchestrated at global levels or local ones may come under the media scanner, the breadth and depth of such frauds continue to rise. Some of the major frauds that have taken place in recent times are:
Carbanak Attack: This is one of the biggest frauds in recent times and came to light in late 2013 when several banks and financial institutions were attacked. In all these attacks, the same modus operandi was used. Initial breaks were achieved through emails sent by the attackers. These seemed like legitimate banking communications. However, the attachments with the emails exploited vulnerabilities in the system and created a backdoor entry for the attackers. This backdoor was designed for espionage, providing access to infected machines and data exfiltration.
Once the attackers gained access to the critical systems, they would plant additional software and malware. After the system was completely compromised, the attackers would dispense cash from ATM machines, the locations of which were preplanned. Cyber attackers would also transfer money to their accounts or some other accounts that were created for this purpose. These attacks were made in more than 100 financial institutions all over the world. The total amount lost was estimated to be more than $1 billion.
Sumpoorna Portfolio Limited: It is a big stockbroking firm in India which provides equity broking services. However, it also allegedly had the greatest number of complaints lodged against it in 2018-19.
One FIR against the company deals with multiple sections of fraud, forgery, cheating, criminal breach of trust, fabrication of documents, criminal intimidation, causing wrongful loss to the complainant and his company and wrongful gain to the tune of crores. The FIR states that the complainant met the broker who painted a rosy picture of his company. The broker allegedly got the complainant to open an account and invest money. In good faith, the complainant also gave power of attorney, resolutions, etc., to the broker. Later, the broker, without the consent of the complainant, allegedly forged his signature on a consent form and siphoned off crores. It is also alleged that the broker had filed a complaint against the complainant with the National Stock Exchange with regard to adjustment of some negative outstanding amount of a third party.
An email sent to Sumpoorna Portfolio Limited evoked no response at the time of going to the press.
Karvy Stock Broking Limited: This was a big name in the stock and equity broking industry. However, last year, the company was involved in a huge stockbroking scandal and SEBI had to ban it. The National Stock Exchange as well as the Bombay Stock Exchange suspended the broking membership of Karvy.
The scandal was that Karvy Stock Broking Limited took loans against the shares of clients and transferred the money to its group company, Karvy Realty Private Limited. The amount so transferred was approximately Rs 1,096 crore and was done without the consent of the shareholders.
These are just some of the cases that have come to light. The actual number of such frauds is not clear. In countries such as the US, the system is very transparent and investors can check on the credibility of service organisations to minimise fraudulent players.
However, India has a long way to go in this regard. While financial regulators like SEBI will continue to do their bit, safeguarding their investments is the responsibility of investors too. The National Stock Exchange had issued a few guidelines that will enable a person to easily monitor his investments and help keep his money safe. These guidelines are:
- Ensure that pay out of funds is received in the account within one working day.
- Be cautious while executing power of attorney and specify all the rights of the stockbroker and the duration for which the power of attorney is valid.
- Register on online applications provided by depositories for online delivery of securities.
- Ensure that the contract notes are received within 24 hours of trade and statement of accounts once in a quarter.
- Note that the securities provided are not permitted to be pledged by the stockbroker in order to raise funds.
- In case of a running account, make sure that the stockbroker settles the account regularly.
- Do not keep funds and securities idle with the broker.
- Regularly log into your accounts to verify the correctness of the balances and demat statements.
- Always check emails and messages received from depositories and immediately raise concern on noticing any discrepancies.
- Always keep contact details updated with the stockbroker.
- On noticing any discrepancies, take it up with the stockbroker or depositories.
At the end of the day, the investor himself is responsible for his investing decisions and actions. He is the one who solely benefits or loses not just from the outcomes of transactions, but also the results of dishonest activities of a trader.