Strange things happen in strange times. Odisha Cement Limited, a large (Rs 24,000 crore market cap) listed entity, recently revealed that:
"…certain mutual fund units, valued at approximately Rs 344 crore, have been illegally and unauthorisedly transferred by the Depository Participant ('DP') from the demat account(s) held by our erstwhile subsidiaries, OCL India Limited ('OCL') and Dalmia Cement East Limited ('DCEL').
We have already reported the matter to National Securities Depository Limited ('NSDL') National
Stock Exchange ('NSE') and other appropriate authorities including SEBI. The investigation has already been initiated by SEBI and we understand that appropriate actions are being taken including keeping the transfer/redemption of the said units on hold. We have also filed a criminal complaint with the Economic Offences Wing, New Delhi."
This is of course a problem, but is there more to the story?
So SEBI also, on the same day, releases an order against a broker named Allied Financial . This says that Allied doesn't have enough money to pay back its clients. But also one more strange thing.
SEBI says the broker has received mutual funds from unregistered clients. In that list, there is the entity OCL India Limited – the listed entity we spoke about. (This is related to Dalmia Bharat/Dalmia Cement)
What SEBI is saying is that three entities related to the broker's promoters – a certain Awanish Kumar Mishra – have used these mutual fund units as collateral against their F&O trades.
OCL India seems to have provided Rs 340 crore of mutual funds to the broker (Allied) which has then used the money for their own trades. This raises many questions.
Why did OCL give mutual funds to Allied?
Mutual fund units are bought in the name of the payer – you can't buy in the name of someone else. Then why did OCL – a listed entity – give its mutual funds to Allied Financial? SEBI clearly mentions that OCL was not a registered client of the broker – so if you aren't a client, why give your mutual fund units to someone else at all?
The broker then used the mutual funds as collateral. And many brokers do offer a service in which they will give you 1 percent or so more if you place your mutual funds with them. But you wouldn't expect a public company to do this, would you?
(Don’t answer that – we’ve just seen an IL&FS where even companies like Apollo Tyres parked Rs 400 crore with IL&FS to earn some extra returns, and now have had to write off that amount as a loss)
Allied has used the collateral against large F&O trades which, apparently, have more than Rs 300 crore in margin required. The SEBI order says that if the trades were unwound, Allied would have to pay Rs 312 crore – which they don't have. And they don't own the mutual fund units either. So they’re in trouble.
But there’s a more pertinent question:
Why did OCL director Jayesh Doshi's other firm get Rs 25 crore "extra" from Allied?
See what SEBI has said – that Allied paid a bunch of clients a lot more money than they were supposed to – basically, in excess of their ledger balances. One such entity is Cointribe Technologies Private Limited, which got a whopping Rs 25 crore more in payments.
Note this: Cointribe Technologies has a director named Jayesh Nagindas Doshi (see link). This Jayesh Doshi is also a director in OCL India (Odisha Cement Limited), which just has accused Allied Financial of stealing its funds worth Rs 344 crore.
The evidence is circumstantial, but it’s difficult to believe that a director’s other company got paid Rs 25 crore by a broker, more than its balance without this being construed as a "side deal". SEBI needs to investigate this angle.
And then, a major systemic lapse:
Why did NSE accept collateral as third party mutual funds? Were they pledged?
NSE's settlement mechanism requires collateral – and you can give shares, or deposits or mutual funds also. However, when you (as a customer) provide stocks, they must be transferred to the broker’s pool account and will be "pledged" to the broker in order to give you margin. Meaning: For the time you need the margin, the stocks are in the name of the broker.
The same with deposits – when you provide a fixed deposit, the deposit is pledged to the NSE clearing mechanism so that if you default, they can break it.
In mutual funds too, you can put a "lien" on units – in effect, pledging them. If NSE took such units as collateral the only reason can be if the units were pledged.
Did OCL India pledge the units? If it did, they were probably also aware that the units would be used for pledging for margin. You don’t generally pledge your units for no benefit to yourself. If the pledge exists, then OCL knew something was going on.
If OCL didn't pledge the units, then it's NSE's fault for accepting such collateral. You can't accept third party collateral without a pledge – how will you ever be able to sell it?
What's the end game? Will investors suffer a loss?
It seems like:
- OCL India provided mutual fund units worth Rs 344 crore to Allied, a broker. They weren’t even clients of Allied.
- The broker used this to fund margin trades. Way more than his net worth. (Broker = related entities to the top bosses of the broker)
- OCL realized on February 7, that Allied has somehow sold or unwound its mutual fund units. And they lodged a police complaint, etc.
- But OCL's director – a Jayesh Doshi – has another company, Cointribe. Which received an extra Rs 25 crore from the broker – more than it's ledger balance. This stinks.
- It's quite likely the OCL top brass knew that the margin financing game was on.
Margin financing isn't bad – but this is akin to giving money to your broker and trying to earn some extra money from him. And a company like OCL India shouldn’t be doing such things – especially when a large extra payment has been made to a company related to a director.
The simplest explanation is: OCL wanted to help out Allied who promised to pay some extra returns if they could use the mutual fund units. And then, the broker made some bad trades and is in trouble.
There's only two ways to solve this:
- Stick it to OCL – let their mutual fund be cashed to pay for the broker’s folly. (Investors in OCL lose)
- Stick it to NSE – let OCL get the mutual fund units back, but settle the trades via NSE's settlement guarantee fund (and sell the property of the broker to recover the money)
It's quite likely things will go the way of sticking it to NSE – but only after a long legal process. However, such actions erode the trust of common investors in the demat system and in SEBI/NSE. The regulators should act fast and fine or arrest the wrong-doers quickly, and ensure that losses are kept to a minimum.
And there should be clear rules – if a public company's mutual fund units are pledged, they should be required to reveal that on the MCA portal and as a disclosure to exchanges.
"…certain mutual fund units, valued at approximately Rs 344 crore, have been illegally and unauthorisedly transferred by the Depository Participant ('DP') from the demat account(s) held by our erstwhile subsidiaries, OCL India Limited ('OCL') and Dalmia Cement East Limited ('DCEL').
We have already reported the matter to National Securities Depository Limited ('NSDL') National
Stock Exchange ('NSE') and other appropriate authorities including SEBI. The investigation has already been initiated by SEBI and we understand that appropriate actions are being taken including keeping the transfer/redemption of the said units on hold. We have also filed a criminal complaint with the Economic Offences Wing, New Delhi."
This is of course a problem, but is there more to the story?
So SEBI also, on the same day, releases an order against a broker named Allied Financial . This says that Allied doesn't have enough money to pay back its clients. But also one more strange thing.
SEBI says the broker has received mutual funds from unregistered clients. In that list, there is the entity OCL India Limited – the listed entity we spoke about. (This is related to Dalmia Bharat/Dalmia Cement)
What SEBI is saying is that three entities related to the broker's promoters – a certain Awanish Kumar Mishra – have used these mutual fund units as collateral against their F&O trades.
OCL India seems to have provided Rs 340 crore of mutual funds to the broker (Allied) which has then used the money for their own trades. This raises many questions.
Why did OCL give mutual funds to Allied?
Mutual fund units are bought in the name of the payer – you can't buy in the name of someone else. Then why did OCL – a listed entity – give its mutual funds to Allied Financial? SEBI clearly mentions that OCL was not a registered client of the broker – so if you aren't a client, why give your mutual fund units to someone else at all?
The broker then used the mutual funds as collateral. And many brokers do offer a service in which they will give you 1 percent or so more if you place your mutual funds with them. But you wouldn't expect a public company to do this, would you?
(Don’t answer that – we’ve just seen an IL&FS where even companies like Apollo Tyres parked Rs 400 crore with IL&FS to earn some extra returns, and now have had to write off that amount as a loss)
Allied has used the collateral against large F&O trades which, apparently, have more than Rs 300 crore in margin required. The SEBI order says that if the trades were unwound, Allied would have to pay Rs 312 crore – which they don't have. And they don't own the mutual fund units either. So they’re in trouble.
But there’s a more pertinent question:
Why did OCL director Jayesh Doshi's other firm get Rs 25 crore "extra" from Allied?
See what SEBI has said – that Allied paid a bunch of clients a lot more money than they were supposed to – basically, in excess of their ledger balances. One such entity is Cointribe Technologies Private Limited, which got a whopping Rs 25 crore more in payments.
Note this: Cointribe Technologies has a director named Jayesh Nagindas Doshi (see link). This Jayesh Doshi is also a director in OCL India (Odisha Cement Limited), which just has accused Allied Financial of stealing its funds worth Rs 344 crore.
The evidence is circumstantial, but it’s difficult to believe that a director’s other company got paid Rs 25 crore by a broker, more than its balance without this being construed as a "side deal". SEBI needs to investigate this angle.
And then, a major systemic lapse:
Why did NSE accept collateral as third party mutual funds? Were they pledged?
NSE's settlement mechanism requires collateral – and you can give shares, or deposits or mutual funds also. However, when you (as a customer) provide stocks, they must be transferred to the broker’s pool account and will be "pledged" to the broker in order to give you margin. Meaning: For the time you need the margin, the stocks are in the name of the broker.
The same with deposits – when you provide a fixed deposit, the deposit is pledged to the NSE clearing mechanism so that if you default, they can break it.
In mutual funds too, you can put a "lien" on units – in effect, pledging them. If NSE took such units as collateral the only reason can be if the units were pledged.
Did OCL India pledge the units? If it did, they were probably also aware that the units would be used for pledging for margin. You don’t generally pledge your units for no benefit to yourself. If the pledge exists, then OCL knew something was going on.
If OCL didn't pledge the units, then it's NSE's fault for accepting such collateral. You can't accept third party collateral without a pledge – how will you ever be able to sell it?
What's the end game? Will investors suffer a loss?
It seems like:
- OCL India provided mutual fund units worth Rs 344 crore to Allied, a broker. They weren’t even clients of Allied.
- The broker used this to fund margin trades. Way more than his net worth. (Broker = related entities to the top bosses of the broker)
- OCL realized on February 7, that Allied has somehow sold or unwound its mutual fund units. And they lodged a police complaint, etc.
- But OCL's director – a Jayesh Doshi – has another company, Cointribe. Which received an extra Rs 25 crore from the broker – more than it's ledger balance. This stinks.
- It's quite likely the OCL top brass knew that the margin financing game was on.
Margin financing isn't bad – but this is akin to giving money to your broker and trying to earn some extra money from him. And a company like OCL India shouldn’t be doing such things – especially when a large extra payment has been made to a company related to a director.
The simplest explanation is: OCL wanted to help out Allied who promised to pay some extra returns if they could use the mutual fund units. And then, the broker made some bad trades and is in trouble.
There's only two ways to solve this:
- Stick it to OCL – let their mutual fund be cashed to pay for the broker’s folly. (Investors in OCL lose)
- Stick it to NSE – let OCL get the mutual fund units back, but settle the trades via NSE's settlement guarantee fund (and sell the property of the broker to recover the money)
It's quite likely things will go the way of sticking it to NSE – but only after a long legal process. However, such actions erode the trust of common investors in the demat system and in SEBI/NSE. The regulators should act fast and fine or arrest the wrong-doers quickly, and ensure that losses are kept to a minimum.
And there should be clear rules – if a public company's mutual fund units are pledged, they should be required to reveal that on the MCA portal and as a disclosure to exchanges.
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