Sending shock waves across investment fraternity, Odisha Cement on February 27 revealed that certain mutual fund units worth about ₹344 crore have been transferred illegally and without its authorisation by a depository participant from the demat account held by its erstwhile subsidiaries, OCL India and Dalmia Cement East.

The culprit is SEBI-registered broking firm Allied Financial Services Pvt Ltd (AFSPL), its five directors and four other entities.

Similarly, Novjoy Emporium Pvt Ltd was also duped of ₹21.7 crore worth of mutual fund investments by AFSPL.

In an interim order, the Securities and Exchange Board of India has banned these entities and persons from the securities market for misappropriating client securities and other violations.

The misdeeds by the broker and its associates came to SEBI notice after the NSE conducted a forensic audit for the period May 1, 2017 to February 22, 2019. The NSE sent the report to SEBI on February 23. The market regulator had also received separate complaints from the victims in early February.

The findings of the NSE audit report disclose that AFPSL has ticked all the wrong boxes such as misappropriating client securities, not maintaining the requirement of continuous net worth, wrong reporting to stock exchanges, not doing segregation of client funds from own funds, offering assured returns to clients and giving disproportionate exposure to clients.

Using the swindled amount, AFSPL and others have made investment in properties at Lodha Excelus, Apollo Mills Compound, NM Joshi Marg, Mahalaxmi, Mumbai, and New Delhi, the NSE said.

The market regulator has also barred 10 individuals and entities from disposing of or alienating any assets, or create or invoke any charge on their assets, without prior permission and directed them to provide a full inventory of all their assets, including their bank and demat accounts and mutual fund investments within five days (it must have reached SEBI by now).

Odisha Cement’s complaint

Odisha Cement has filed a criminal complaint with the Economic Offence Wing, New Delhi.

SEBI has asked the brokers and its associates to file their objections, if any, within 21 days.

At a time when SEBI is driving all investors to have compulsory demat accounts (March 31, 2019 is the deadline), this development could cause some embarrassment, as AFPSL had moved the units (that were in demat form) seamlessly to its cohorts without the knowledge of the holders.

The most important thing for SEBI is to make investors comfortable in keeping the securities in electronic form and show that the system is foolproof with various checks and balances.

Though the SEBI move of banning the entities from the market is a first step in the right direction, the real big challenge, however, is how quickly the victims get back their funds/units.

Besides, finding out whether any other brokerages have done these types of illegal or unauthorised transactions kept in their DP accounts is a herculean task. Currently, around 3,500 stock brokers are registered with SEBI. The market regulator can even consider pruning the list, ensuring that only big, fit and proper ones remain in the business. This may make its supervisory role easier.

The probe should also throw light on how the clients’ funds, shares and mutual fund units were used as collateral in F&O for proprietary trading.

The punishment should also be telling on the culprits so that others will fear to even fancy their chances with such a move.

This development has also left a big lesson to all investors: Keep checking credit balance and holding in demat accounts with your brokers regularly.

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