The case covered in January 2024 on our YouTube Channel detailed an incident that forced a broker to file a complaint against one of his clients.
However, what emerged proved to be destructive for the stockbroker himself. How?
Let’s dive into the details.
So, the dispute was between one of the leading stock brokers IIFL and his client, Mr. Rakesh Bhanusali, where the stock broker claimed a margin shortfall in the account of Rakesh and asked for the amount of ₹37 lakhs.
But what made this shortfall?
Did the stock broker get the amount?
What action did the exchange take on this?
Here is the detail of the case.
How did it All Start?
On May 25, 2018, Rakesh opened a demat account with the IIFL. Initially, he engaged in regular trading and later applied for Margin Trading Facility (MTF) to avail additional fund for trading.
This is a common practice among retail traders. Right?
However, there was something unusual about this account. The stockbroker discovered that Rakesh frequently traded in a stock called Ashpura Intimates Fashion Ltd. (AIFL). He continuously placed buy and sell orders for the same stock.
However, SEBI delisted this stock due to some reasons.
Although the broker noticed this, it did not take action until the stock price of AIFL dropped significantly. This prompted the broker to raise the concern with the Stock Exchange. When they did not receive a satisfactory response from the Grievance Redressal Committee (GRC), they escalated the case to arbitration.
But why did the broker have to take such actions? Let’s consider what broker put forward in the panel discussion.
The broker told the panel that Rakesh Bhanusali frequently took trade positions in AIFL and used leverage to trade in large volumes in this particular stock.
One day, a significant drop in the stock price increased the margin requirement, leaving the client liable to pay ₹37,95,621.40. However, even after contacting the client multiple times, he didn’t respond.
Oh! so that was the concern, the refund of the margin amount.
It seems like a genuine case, Right?
But before drawing any conclusions, let’s consider the client’s side.
When the arbitration panel asked the retail trader about the margin cost he had to bear, he denied any liability and claimed he had never used the account in question. He also questioned why the broker didn’t sell his holdings to recover the amount if there was a margin requirement.
Now this was something confusing and raised the possibility of unauthorized trading.
To clarify, the arbitration panel requested the stockbroker to provide documents related to Margin Trading Activation and call recordings with the client.
The call recordings astonished the panel when they discovered that the case was completely different from what was initially presented.
The panel found that both parties’ statements were partially correct and they were involved in fraudulent practices, called Circular Trading.
Circular Trading, now what’s that?
What is Circular Trading?
Circular trading is a type of fraudulent trading where two or more people trade a particular stock with the objective of inflating its price and increasing its liquidity. This practice is intended to mislead other retail traders, who, seeing high liquidity and a rising stock price, may take positions in the stock.
Circular trading is banned and illegal in India and in other countries.
Here is one of the call recordings reviewed by the arbitration panel:
Broker’s Executive: “Haa 22 Lakh.”
Client: “Hold for a minute.”
The client then called his friend, Chitranjan, from another number.
Client to his Friend: “₹22 Lakh ghumana hai. He is saying ki koi share kharidna aur bechna hai, mujhe kuch samajh nahi aa raha, but I trust that person.”
Broker’s Executive: “Ek sahab dusri line par hai unke account se ₹10 lakhs ke shares bechenge and aapke account se kharidenge. Bus unke account se share nikalkar aapke account me daalna hai. Aur aisa karte rahenge.”
This call directly indicated and proved that both the stockbroker and the client were involved in Circular Trading Fraud.
In simple terms, when the broker knew about buy and sell orders in a particular scrip they engaged in such trades with one or multiple clients to inflate the price of illiquid or less liquid stocks.
This practice is also mentioned under SEBI’s PFUTP (Prohibition of Fraudulent & Unfair Trade Practices) Clause 4 – Chapter 2.
On hearing this the panel concluded that Rakesh Bhanusali was aware of what’s happening and the broker was involved in this fraudulent trading. Mentioning this the panel closed the case.
But WHY?
Why didn’t the panel penalize the broker? Even if not the broker and one of his sub-brokers or executives was involved, it was the duty of the broker to keep check on such activities.
And also that was not the first case, there were many Circular Trading fraud cases in the past where SEBI took a strict action and penalized brokers and other parties involved in such practices.
However, unlike other cases, the Arbitration Panel did not take any action. Finally, the case was closed on January 17, 2024. This left a huge question mark for the retail traders who lost their capital due to such fraud.
This case offers several important lessons for retail traders, such as:
- Never take positions in stocks that surge unexpectedly.
- Avoid trading in stocks where liquidity suddenly increases without any clear reason.
- Keep an eye on unusual activities in a particular scrip before trading.
