Card Fraud Also Behind Indemnity Rumpus
The illegal transfer of ownership of broking cards by some members of the National Stock Exchange (NSE) has boomeranged on them after NSE's recent decision to make all majority owners of corporate broking houses personally liable for all trades made on the exchange.
Last month, the NSE had asked its members to sign a personal indemnity bond to that end. This proposal has been rejected outright by the NSE broker associations in Delhi and Mumbai. While brokers have reacted strongly against this step, stating it to be illegal, unethical and unfair, market sources here say that in some cases fraudulent ownerships of cards is also an important reason.
According to a Delhi based broker, "A lot of brokers are caught on the wrong foot because they bought or sold cards. The current owner is actually operating on the card, while in NSE's books, the original owner is responsible for trades. So the latter may end up having to pay up crores for the mistakes or criminal acts of the former."
According to the current rules the shareholders in a corporate body, in this case broking houses, are responsible for operational losses or debts to the extent of their investment in the company only. This is concordant with the Companies Act of 1956 and the concept of limited liability.
Thus a notional loss of Rs 20 crore, incurred due to either of the above two reasons, would be borne by the company.
The company may either pay it back or go under. However, shareholders are protected from having to dispose assets, outside the company's books, to make good the loss. Theoretically the assets may be a personal bank account or a house.
However, NSE's proposal, if implemented, effectively means that the losses incurred through defaults on delivery or introduction of fake/forged shares could have to be made good by the majority shareholders from out of their own pockets. NSE does allow the transfer of majority ownership from one party to another but only on payment of a Rs 25 lakh fee. In actual fact the cards were sold, either for profit or due to declining returns form the business, without payment of this fee. These were therefore benami deals.
In such a company and in the proposed new system, assuming that losses have been incurred, the NSE will ask the original, non-operating owner to make good for the outstanding money. Whereas they have actually been made by the current owner. "There is no way that the original owner is going to sign this indemnity," says a market source.
"After all, why should he be responsible for the acts of another. He would prefer to resign his membership. The current owner is also trapped; he has paid up for the card but is now is in no position to get his money back or get the earlier owner to sign NSE's bond."