Sebi restrains broker from liquidating DHFL shares after Rs 2-bn default

Regulatory authorities suspect similar defaults at a few other brokerages that were dealing in shares of Indiabulls Ventures and Infibeam Avenues

The Securities and Exchange Board of India (Sebi) has restrained a Delhi-based brokerage from selling shares of Dewan Housing Finance Corporation (DHFL).

The broker had defaulted on Rs 2 billion in payment to a non-banking financial company (NBFC), which had pledged shares of DHFL with it. Sources say the broker used the shares for proprietary trading and incurred a huge loss, following a sudden 60 per cent drop in shares of the housing finance company last month. The source said the broker and NBFC are at loggerheads over certain trades in DHFL.

“The NBFC has complained to Sebi that the broker transacted without its consent. However, the broker claims the trades were executed at the behest of the client,” said a source, adding the default amount could be as high as Rs 5 billion.

“A team of Sebi and stock exchanges officials have visited the premises of the brokerage to ascertain facts. It has directed the broker to not deal in shares until further notice,” said the person.

Regulatory authorities suspect similar defaults at some other brokerages which were dealing in shares of Indiabulls Ventures and Infibeam Avenues, which have also seen sharp sell-offs without any news trigger.

This is the first big default which has surfaced after shares of several NBFCs had crashed last month, on worry that liquidity conditions could tighten due to contagion risk from the debt-laden IL&FS default. The sharp fall in the shares resulted in triggering of margin calls at several brokerages.

The Nifty Midcap 100 and Smallcap 100 indices have dropped 15 per cent and 20 per cent, respectively in a month. A little over 40 stocks lost a third of their market capitalisation. Sources say that the market regulator is examining whether there was intent of manipulation by broker and client. Market players said these were one-off cases and did not pose a systemic risk. “Given the sharp fall in the market, there could be some cases of default. They don’t pose a major risk to the markets. All the risk management systems continue to be robust,” said Rajesh Baheti, president of ANMI, a brokers’ lobby.

According to Baheti, regulator and market intermediaries are working on a new mechanism, one which would look to further ring-fence clients’ money from any utilisation for proprietary trading by brokerage firms. 

In such trading, a brokerage trade in stocks, bonds, currencies and commodities, among others, with its own funds rather than the customer’s money, to make a profit for itself.

Recently, cases have surfaced where brokers were found to have been in manipulative activities involving proprietary trades. In some cases, clients’ money had been misused for their own trading interests, a source said. An email sent to Sebi remained unanswered. The name of the broker and the NBFC could not be ascertained.

REGULATOR’S DIRECTIVE

• Sebi directive comes after broker defaulted on Rs 2 billion payment to an NBFC
• The NBFC had pledged shares of DHFL with the broker
• People in the know say the shares were used for proprietary trading and incurred huge loss
• Authorities suspect similar default at few other brokerages
• Market players feel these don’t pose systemic risks; are one-off cases