9 months ago

No law to compensate investors defrauded by stock brokers

Whatever little money they received was under negotiations between DSE and brokerage firms

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No regulatory authority in Bangladesh is obliged by law to provide any remedy if a brokerage firm siphons off clients' money or assets.

That is the reason why investors have not yet been paid back even three to four years after four brokerage firms -- Tamha Securities, Banco Securities, Crest Securities and Shah Mohammad Sagir -- defrauded them.

Before the 2013 demutualisation, law permitted the stock exchanges to sell broker's licence or membership for settling customer claims without any delay, but that is no longer the case, said Supreme Court lawyer Kazi Ershadul Alam.

The Securities and Exchange Rules, 1987 that could ensure some protection against fraudulent activities of brokerage firms lost its effectiveness when demutualisation removed the membership system.

Now, brokerage houses share the ownership of the stock exchanges.

The demutualisation was approved by the Bangladesh Securities and Exchange Commission (BSEC) to separate management from owners to ensure transparency in the operation of the bourses. Prior to demutualisation, the stock exchanges were non-profit cooperative organisations.

And then the 1987 act was repealed through amendments to the Securities and Exchange Rules 2020.

As per the demutualisation act, 40 per cent shares of the stock exchanges were credited to the members' accounts, 25 per cent sold to strategic investors, while the remaining 35 per cent were kept aside for offloading through IPO.

There is a way to pay back investors by selling the 40 per cent share of the defaulter if the brokerage firm itself agrees to do so. No authority can force it to sell shares.

The four brokerage firms embezzled investors' money amounting to more than Tk 2 billion between 2019 and 2021. Trading at the firms has been suspended.

The financial crime took place in absence of strict monitoring by the Dhaka Stock Exchange and the BSEC, market analysts said.

Meanwhile, the DSE refunded Tk 47.60 million to 423 affected investors of Banco Securities, Crest Securities and Tamha Securities proportionately by July last year following a directive of the BSEC.

The bourse made the payments by exerting pressure on the brokerage firms to deposit money to its account for the refunds, not by exercising any law.

Clients of Shah Mohammad Sagir are yet to get any refund. The DSE took a move last week to settle claims by selling the broker's licence after discussions with the firm.

M Shaifur Rahman Mazumdar, chief operating officer of the Dhaka bourse, said a process was on to sell 40 per cent shares of Tamha Securities under a mutual understanding.

"We are getting proposals from buyers. If everything goes well, we can sell its [broker's] stakes and refund the affected investors," he said.

Mr Mazumdar added that the exchange was in dialogues with other brokerage firms too and was looking for buyers to sell the 40 per cent stakes of the defaulters.

Tricks to defraud investors

The brokerage firms used different tricks to defraud investors of their investments.

Tamha Securities, for example, sold shares of its clients and kept them in the dark by generating fake transaction details with the help of software.

Md Harunur Rashid, owner of Tamha Securities, used two back-office accounting software -- one for the regulator and the other for its clients to provide misleading information.

Such illegal acts could be prevented if there were strong monitoring by securities regulator, said Md Shakil Rizvi, managing director of Shakil Rizvi Stock Ltd and one of the shareholder directors of the DSE.

Investor Protection Fund

Meanwhile, Investors' Protection Fund was formed in August 2014 through a gazette notification, but it was meant to compensate investors after a broker has refrained from executing a trade as requested.

An investor will receive up to Tk 0.5 million against his/her claim from the Protection Fund. The claim has to be filed with the trustee of the Protection Fund against the broker within six months from the day the transaction was supposed to be done.

A decade went by after the Fund was launched, but victims of fund misappropriations by stock brokers have not received any benefit.

At the end of June this year the Protection Fund had Tk 190 million. The Fund has been created by the DSE contributing 0.50 per cent of quarterly listing fee and TREC holders paying Tk 1 for every Tk 1 million turnover on quarterly basis.

Besides, all benefits accrued against unclaimed shares shall be transferred to the Protection Fund in every five years' time.

The existing Fund balance of Tk 190 million is far too low than the amount needed to pay back affected investors. The securities regulator has recently decided to settle claims with the money available in the Investors' Protection Fund on a pro-rata basis.

As the time to get refunds stretches, investors lose hope.

SC lawyer Ershadul Alam said investors could file a case for recovery of their assets but the lengthy legal procedure was a deterrent.

"If all the affected investors file one case together, there is a possibility that they will get their money back. Otherwise, the court battle will go on for years," Mr Alam added.

Mohammad Rezaul Karim, spokesperson & executive director of the BSEC, said the regulator had taken some measures to avert misuse of investors' money in future.

"Now we are running inspections frequently. If we find any brokerage firm with a big deficit in its customer consolidated account, we will take disciplinary action."

The regulator is also considering introducing insurance coverage to protect investors, said Mr Karim.

Policies deployed elsewhere to protect investors

In India, brokerage houses cannot misuse customers' money and assets due to strict monitoring.

As a prevention mechanism, money from customers' consolidated accounts is transferred to the customer's bank account after the daily trading session in the evening. The money returns to the consolidated account the next morning to facilitate trading, according to media reports.

In the USA, if a brokerage house fails, another financial firm may agree to buy the defaulter's assets, and accounts will be transferred to the new custodian as quickly as possible, according to investopedia.

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