Retirement funds, insurance companies and several other institutions will have an easier access to the government bond market. The Reserve Bank of India (RBI) on Friday threw open the trading screen to various market participants.

These entities can now place orders on the screen through banks and bond houses who are direct members of the face order-matching system. Such trades will settle through the demat account that the bond buyers maintain with the bank and the latter’s current account.

Securities Trading Corporation of India COO Pradeep Madhav said the move would give all market participants a real-time online access to the bond market, thereby enabling them to place bids at their preferred rates directly without intervention from brokers.

The entities to benefit are deposit-taking non-bank finance companies (NBFCs), provident funds, pension funds, mutual funds, insurance companies, cooperative banks, regional rural banks (RRBs) and trusts. For years, the bond market was an opaque market where traders cut deals over the telephone. This began to change after July 2005 when the RBI introduced the screen-based trading.

Soon after, that bulk of the trade shifted from the age-old telephonic market to the screen, and several brokers shut shop. An IDBI Capital official said the move would boost trading volumes and ensure greater price discovery. Besides, it would help towards protecting the interest of smaller entities.

The central bank has however, cautioned members that though the system permits putting through trades on behalf of all gilt account holders, it is the responsibility of the respective custodians — the banks and primary dealers — to exercise caution not to permit any trade on account of entities which are not “qualified”.

Banks and PDs have been told to create a mechanism to ensure that participant satisfies all the eligibility criteria before allowing orders to be placed on the screen.

State Bank of India (SBI) will expand its footprints in one lakh more villages in the next two years, mounting a further challenge to its competitors.

“We are not facing any competition from the private or MNC banks. In fact, they are facing competition from us,” SBI Chairman O P Bhatt told reporters on Saturday night after launching the new online trading platform ‘ez-trade’ for its customers.

Bhatt was replying to a question on competition from the private and MNCs banks in the absence of any specific proposal for the merger of associates with the parent SBI.

He said the SBI will connect one lakh more villages in the next two years with the banking services to further enhance its network to tap the growing rural economy.

On the issue of merger of associate banks with the SBI and granting of autonomy to them, he said “there is no specific proposal as such for the merger of associates with the SBI at present. As far as the issue of autonomy is concern, the associates are autonomous institutions.”

Asked about credit card operations, he said though private sector ICICI Bank has more number of credit card holders than SBI, the government-run lender is growing faster than other rivals in this segment

Replying to a question on the Prime Minister’s 10-point social charter for corporates, Bhatt said, “we fully agree with the prime minister’s advice on the issue. As far as SBI is concerned it is spending one per cent of its profit every year for community development.”

Referring to the Basel-II norms, he said the country’s largest commercial bank is fully prepared to meet the global norms which will come into force from next year.
Earlier, talking about the ‘ez-trade SBI’, he said the bank has a lot of hope from the online trading facility for the high-end customers.

The state-of-the-art platform will cater to every trading need and offer a world class experience of online investing from anyplace and at anytime.

“With this new facility we will beat our competitors with the active support of the young and upwardly mobile customers,” he said.

“This service provide the customer three-in-one account which is an integrated platform of bank, demat and online trading accounts for convenient and paper-free trading experience,” Bhatt said.

Call them the ‘Rent-a-PAN-card’ investors.A flourishing network of investors are emerging in Gujarat, such as in its capital Ahmedabad, who are essentially renting their permanent account numbers, which are required for stock market trades, to brokers in return for a flat, predetermined fee.

This is how the arrangement, dubbed vyaj koshtak or pancard ka bhada, works. These individual investors apply for shares of an initial public offering (IPO) under the individual investor quota (usually 30% of an offering is set aside for such retail investors) in their own name, using their own PAN cards. But in reality, they are simply acting as a front for a broker who has agreed to pay them a pre-determined flat fee, ranging from Rs1,500 to Rs4,000, depending on the IPO, irrespective of how many shares they are allotted or what happens to the price of the shares once they list. Sometimes that fee, for “renting” the PAN card, is even paid upfront.

The investors then sell their allocated shares on opening day, turning over the profit to the broker, essentially enjoying a risk-free, fixed return for the service provided. Meanwhile, the broker is able to make profits on a significantly larger number of shares than he would get on his own.

Typically, the broker can take a hit if, for some reason, the shares list at lower than the IPO price, somewhat of a rarity in a nation that is obsessed with shares and IPOs, even in recent turbulent times in the markets.

“Since there is a risk of the shares getting listed below the issue price, the broker enters into such arrangement only in those IPOs where there is a high probability of listing at a premium,” says one Ahmedabad-based investor who didn’t want his name used.

For instance, the recent successful IPO of rating agency Icra Ltd as well Mindtree Consulting Ltd saw brokers pay Rs3,000 per application made on their behalf. Icra shares rose from Rs525 a share to Rs1,125 a share between 13 April and 17 April. Mindtree shares jumped from Rs575.20 on 7 March to Rs1,021.80 on 15 March.

On Friday, Mint first wrote about the plain vanilla koshtak, the grey market in cities such as Ahmedabad for IPOs, which usually involves one person promising to buy a stock that is to be listed, at a pre-determined premium on the issue price from someone who has applied for the shares. Mint noted the emerging demand under koshtak for shares of DLF Ltd, which is expected to be the largest IPO in India when it debuts on 11 June.

But the more complicated vyaj koshtak kind of deals highlight the way the retail quotas of IPOs can potentially be misused. Since there is nothing illegal about such applications from investors who are, on the face of it, genuine, it has largely escaped scrutiny by the Securities and Exchange Board of India, or Sebi, the nation’s markets regulator.

India has already been through a major stock market scandal in which multiple trading accounts were opened in the name of the same investor. The vyaj koshtak system is different in the sense these are real individual investors and the money is going from their trading accounts along with the IPO application, and shares are allocated to their accounts.

Back in 2005, Sebi’s investigations revealed that in 20 or so IPOs which hit the Indian stock market between 2003 and 2005, thousands of demat accounts were opened by certain large investors who then cornered shares that were meant for genuine individual investors. That sparked off a debate in the industry about the viability of the quota system in IPOs.

The system of subsidizing small investors in the allotment process is the root cause of the IPO abuse, says J.R. Varma, former member of Sebi and a professor at the Indian Institute of Management, Ahmedabad.

According to Prime Database, which tracks the primary market, Rs45,000 crore worth of IPOs are set to hit the Indian market this year alone, with a spate of mega IPOs lined up over the next few months, giving networks such as vyaj koshtak a significant yet under-the-radar role.

Here is how a broker and an investor would work under the vyaj koshtak network.

First, to further avoid any scrutiny, these “rented investors” typically apply for shares worth Rs96,000 as part of the the retail quota. That’s because any application of Rs1 lakh or less is considered a retail application according to Sebi’s IPO rules.

If the amount exceeds that, then an applicant comes under the separate category of high networth investors.

There is usually a gap of around three weeks between the closing date of an IPO and the listing day. Assuming that the rented investor gets an allotment of only Rs15,000 worth of shares, the balance Rs81,000 is refunded to his account. On the listing day, if the Rs15,000 worth of shares appreciate in value to, say, Rs25,000, he earns a “profit” of Rs10,000 on selling the shares as agreed to with the broker.

Out of this “profit,” he keeps the predetermined fee—which ranges from Rs1,500 to Rs4,000—and hands the rest to the broker who had rented his PAN card.

A 20-day return of, say Rs1,500, on an investment of about Rs1 lakh roughly translates into an 18% annualized return. If the commission is Rs3,000, then the return goes up to 36%. Even compared with a bank deposit, which is also risk-free, an investor not only has to put aside money for a much longer period to get a 10% or 11% return (on a one-year deposit), but he then would have to pay tax on any interest income of above Rs10,000, which is deducted at source. In vyaj koshtak, the fee for renting the card is paid in cash and is thus tax-free.

“The actual returns can be much higher as these investors constantly rotate their money in one IPO after another,” says the Ahmedabad branch manager of a leading brokerage firm who also didn’t want his name mentioned.

While the investor will attract short-term capital gains tax, currently at 10%, people familiar with the vyaj koshtak arrangements say investors don’t end up paying the tax as the broker also works out some arrangements, such as showing losses through sale of some shares before the end of the tax year, thus offsetting the capital gains, and depriving the government of legitimate revenues.

Since capital gains tax is clubbed with overall income, it is also possible to avoid paying taxes by having investors whose incomes are below the threshold level that attracts income tax. For the broker, such an arrangement turns out to be a neat deal because typically, he has a large and growing network of such “for hire” investors.

For instance, if a broker has 10 such investors in his network, he dishes out Rs15,000 as a fixed charge to these investors and ends up retaining the combined profit made by these investors, netting him Rs85,000. Of course, if for some reason the shares list at a discount, then he is out of Rs15,000 and also the difference between the IPO price and the listing price.

Some market participants do not rule out the possibility of connivance between merchant bankers, promoters and brokers in such arrangements.

These kinds of arrangements “existed on a massive scale during the earlier IPO boom of 1994-95 wherein the promoters used to connive with brokers and investors to control the kind of investors who invest in their company,” says Prithvi Haldea, managing director of Prime Database. “But I don’t think it’s rampant now.”

While we may be excited about investing, many of us avoid getting into it because of the hassles involved.

One is daunted by the prospect of maintaining bank and de-mat accounts (separately and manually), making endless calls to gather information, lack of tools and advice and just the deluge of paperwork (try filling an IPO form manually!) and most importantly – the lack of time to plan and keeping a systematic track of your portfolio.

As a result, you may end up in a situation of too much dependency on someone, total inactivity or sometimes even taking wrong decisions while planning your investments.

Fortunately, help is at hand through the online investing platforms that are available to investors. Today technology enables you to completely plan your investing needs in the comfort of your home and at the time you like, all at the click of the mouse.

All you need is a computer, net connection and a subscription to a 3-in-1 online investing account with any of such service providers. 

The online mode of investing largely eliminates all the major hassles of investing:

It provides a wealth of information, analysis and tools that enable you to take more informed decisions, virtually no paperwork involved as all transaction records are online and statements available in digital form, invest anytime and from anywhere at your time and convenience (yes, even at night)!

It allows you to invest across different asset classes like equity shares, mutua

If DPs find that carrying out ‘in-person’ verification of NRI/FN Client by their staff is infeasible, then in such a situation, DPs have to verify and ensure that;

(i) the KYC documents (account opening form, Proof of Identity and Proof of Address) are duly signed by all the account holders,

(ii) the KYC documents are attested by the Indian Embassy/Consulate General of the country where NRI and FN is residing, and

(iii) the attestation is to the effect that copies have been verified with the originals.

DPs should open the depository accounts only after it is satisfied with the authenticity of the documents (Proof of identity and Proof of Address duly attested).

In case where ‘in-person’ verification for these categories of Clients has been carried out by the staff of the DP, then NRI/FN would be exempted from obtaining attestation.

This has been informed to DPs vide Circular No. NSDL/POLICY/2007/0022 dated April 18, 2007

Consider this conundrum: derivatives trading is complex and meant for sophisticated investors, mainly institutions. Trading volumes are large. The two national bourses notch up a combined daily turnover in excess of Rs 20,000 crore (Rs 200 billion) during a bull market. Yet, the regulator says that a considerable chunk of this trading volume is generated by retail investors.

Demat accounts statistics, however, suggest that India does not have more than five million active investors, so how does one explain such large retail trading volumes?

Large brokers insist that retail investors trade actively in derivatives because the margin is an insignificant 15 per cent. But ask around and you will come across very few investors who even understand derivatives trading.

On the contrary, various investor surveys suggest that retail investors subscribe to initial public offerings and hold on to the shares.

Girish Mittal, a high networth investor, provides a clue. He says, “I am besieged by calls from various brokerage firms wanting to assign me an equity adviser or a relationship manager” who would offer telephonic investment tips.

He asks if Securities and Exchange Board of India rules allow relationship managers to dispense investment advice even if the broker is registered by the Sebi to offer portfolio management services. The answer is a clear no; there are specific operating rules for PMS registration and services.

Relationship managers are expected to persuade people to increase their trading business. Larger firms consciously hire Pretty Young Things in the belief that they are more effective.

Once a person signs on, a barrage of helpful stock tips lures him/her to trade more actively earning higher brokerage commissions for the firm. Once the initial tips pan out successfully, these clients are persuaded to hand over larger sums of money or sometimes their entire investment portfolio, including long-term shareholding, to be managed by the broker.

Over time, traders make investment decisions and merely inform clients or seek telephonic confirmation. Investors must remember that large brokerage firms record all conversations from trading room telephones in order to create records and audit trails in case of disputes.

Others ensure that they book profits on successful transactions, issue cheques and get clients to sign confirmation letters intermittently. When the going is good and stock indices are spiralling upwards, everybody is happy. The profits vanish in every bout of violent turbulence.

Within this broad framework, there are differing degrees to which investors can be short-changed. Some brokers are known to charge 10 per cent of the mark-to-market profit, claiming to offer PMS services.

One angry investor complains that his brokerage built positions of Rs 21.85 lakh (Rs 2.2 million) on his original investment of Rs 300,000 without even collecting margin money.

The brokerage firm insists he had telephonically approved of this high leverage. A sharp market correction caused him a loss of Rs 525,000, which he blames on the broker.

He supports his allegation saying the firm once bought Sun TV shares for him at 11.30 a.m. and sold them off at 11.37 a.m. Can this qualify as portfolio management? Or is it active speculation or momentum trading? The investors are not entirely blameless.

When such trading generates profits, they fail to do the math or even work out the fact that brokerage commissions — even at today’s low rates — are often higher than their profits. Their investigations begin only after the brokerage firm has wiped out their portfolio and they need to cough up more money.

At that time, you hear the constant whine that they do not even understand how derivatives trading works. Indeed, they don’t and most often their ‘relationship manager’ would have convinced them that they cannot possibly lose. The dice is always loaded against the investors.

I know specific examples of retired school teachers, software engineers, doctors and property developers who lost their money this way. The total investments are usually anywhere between Rs 300,000-10 lakh. There is also the true story of a woman who parted with Rs 500,000 saved for her son’s medical school admission to a sub-broker recommended by a close family friend.

She lost the entire amount, instead of being able to double it, as promised. This story has a slight silver lining because the principal broker passed the hat around and paid the son’s college fee of around Rs 200,000, but the rest of the money was gone. The unrepentant sub-broker brandished the rule-book pointing out that he had been careful enough to obtain signatures and confirmations from the woman when her investments were profitable and, hence, in the clear.

In case of the routine arbitration that follows investor complaints, the broker thus escapes liability. In this case, the sub-broker was sacked.

One brokerage firm is so tired of the problems arising from its franchisees and branch offices pretending to offer PMS that its letter confirming the opening of a new account has a standard disclaimer.

It says, “We do not indulge in Portfolio Management Services. We are retail investors and do not handle Client Funds for Investment/ Trading. Hence, any assurance by any sub-broker or any person on our behalf offering assured profit will not be binding on us. Further, we wish to inform you NOT TO KEEP your signed Delivery Instruction Book with your sub-broker/franchisee/Branch or any other person. In case of discrepancy, we shall not be responsible for any misuse of your DIB”.

All this is under the bold heading – Important points to be noted by constituents/investors. The disclaimer, in a nutshell, tells you everything that is wrong with the retail business today and how investors are lured to part with their money.

The same broker, who runs a retail brokerage firm says, “Let me admit there is also a lot of pressure from clients to offer such services and offer SMS tips for trading”. He says, not only does the broker earn out of generating trading volumes, but even the government and the exchanges earn a percentage of the volume generated.

So the regulator may prohibit brokers from giving advice to generate brokerage commissions, but the pressure to do so is high.

Thousands of new investors have again lost their savings to the stock market turbulence in the middle of March. Most will file complaints with the regulator and sometimes the brokerage firm may even be persuaded to settle a few disputes by writing off its claims.

The only way to avoid such heartbreak is not to be na�ve and foolish with your money and expect someone to make a millionaire out of you without understanding the risks involved.

So far, the regulator has had little sympathy for such recklessness on the part of investors, although when the number of complaints has soared, the broker loses the benefit of doubt and in that case — as happened with India Bulls — the regulator has cracked the whip and demanded resolution of complaints.

-Rediff

MUMBAI, APR 30 :  The Securities & Exchange Board of India (Sebi) has, in two separate orders, imposed a penalty of Rs 8 crore on NSDL and CDSL for violating the Depositories Act, 1996 and Sebi (Depositories & Participants) Regulations, 1996 in its latest crackdown in the IPO demat scam that took place between 2003 and 2005.
The Sebi-appointed adjudicating officer, in his order, said a penalty of Rs 5 crore had been slapped on NSDL and Rs 3 crore on CDSL. The penalty would be payable by the two depositories within 45 days.
 
The order said that in the course of investigations, NSDL and CDSL were found to have been responsible for various “commissions and omissions” leading to the opening of a large number of afferent accounts by the key operators.

Neither depository, when contacted, was prepared to comment on the Sebi order.

These afferent accounts were used to corner the portion reserved for retail investors in the IPOs of several companies. “These commissions and omissions on the part of NSDL and CDSL indicate that they have failed to comply with the conditions of registration under Regulation 7 (b) and also Regulation 34 of the Depositories Regulations,” the market watchdog’s order stated. The order also pointed out that both NSDL and CDSL failed to verify and satisfy the eligibility requirement of adequate infrastructure of the participants.

“Lack of adequate mechanisms for the purpose of reviewing, monitoring and evaluating the controls, systems, procedures and safeguards on the part of NSDL and CDSL has resulted in failure to prevent unauthorised outsourcing by the depository participants and also the failure on the part of NSDL and CDSL in taking actions against them”, the order added.

Besides, NSDL had failed to comply with directives issued on January 12, 2006, Sebi said.

The regulator said that the key operators had opened a large number of afferent accounts, which were used for the purpose of cornering the retail portion in the IPOs. Investors suffered great loss on account of this.