"Guns and Ammunition I know but finance, I am clueless about," wrote Brigadier N Pereira to me after a tough battle to recover money from his so-called stock broker. He won this battle only because he turned lucky and received quick help from the Securities and Exchange Board of India (SEBI) and the Bombay Stock Exchange (BSE).
The Brigadier, who lives in Pune after retirement needed to raise funds for his wife's medical treatment by liquidating his investment in Telco and Tisco. He went to a nearby stock broker recommended by friends, taking at face value the SEBI registration number printed on the broker's letterhead.
He initially sold a small lot of shares and received quick payment. But when he sold the rest of his holdings, worth Rs 1.70 lakh (Rs 170,000), the broker suddenly turned cold. Despite repeated visits and requests he simply refused to pay up. Pereira wrote to me and I sought help from SEBI and BSE. The Pune-based broker was registered with the Mangalore Stock Exchange, which is not recognised anymore and the OTC Exchange of India (OTCEI), which is defunct. His letterhead carried the Mangalore exchange registration number while his address was the one he had submitted to the OTCEI.
He had sold the shares through a BSE broker, but SEBI's database showed that he was not registered even as a sub-broker! A top SEBI official concluded that he was operating either as an un-registered sub-broker or in the guise of a client.
Senior BSE officials cooperated with my enquiries and quickly found out which broker had accepted the Pune operator's trade. And here is where the Brigadier turned lucky. Other bourses would probably have advised Brigadier Pereira to file a police complaint and possibly write off his money. SEBI would have taken a holistic view of regulatory infringements rather than tackle the specific complaint.
However, the BSE adopted an unorthodox, problem-solving route. Its officials simply called the BSE broker, told him that his client had operated as an illegitimate sub-broker and said he was in for big trouble if the problem wasn't fixed. Brigadier Pereira received his cheques almost immediately.
Not everybody is so lucky. The rest of us need to be very careful about the intermediary we deal with. A good starting point is to use information available on the Internet for background checks. Unfortunately, I discovered that SEBI's Web site no longer posts a list of brokers and sub-brokers registered by the regulator or actions against them. The SEBI Web site (www.sebi.gov.in) is a good source for specific searches and www.investor.sebi.gov.in for filing complaints in the correct format.
A better option is www.watchoutinvestors.com sponsored by the Investor Education and Protection Fund and is probably the best source of easily searchable, pre-digested information on orders of over a dozen regulators. A free registration gives you access to quick and easily searchable information including SEBI action against stock brokers and other intermediaries.
In the last few months, SEBI has been announcing dozens of actions almost everyday against stock brokers for their involvement in market manipulation and other regulatory transgressions.
The stock exchanges have also cancelled some broker memberships. A warning, penalty or suspension by SEBI does not necessarily mean that a broker is unsafe to deal with. Quite often the brokerage firm may have corrected its systems under regulatory orders. But an informed investor armed with knowledge of a firm's track-record is in a position to decide on the risks and potential pitfalls to guard against.
Sucheta Dalal is the Consulting Editor of MoneyLIFE. She can be reached at sucheta@moneylife.in