MUMBAI: Stock exchanges are holding back close to Rs 40 crore in payouts to several high net-worth individuals who are clients of a handful of brokers that are under investigation. Most of these investors have dealt with the wealth management division of the Mumbai-based brokerage Prime Securities, two sources with direct knowledge of the developments said.
Capital market regulator Sebi had directed the exchanges to hold back payouts of investors who had dealings with Prime which owes a large amount to the National Stock Exchange (NSE).
A few months ago, NSE had disabled trading terminals of Prime, but this was never announced by the exchange. NSE is yet to declare Prime as defaulter with the bourse not having completing its probe, said a source.
Market players said that Prime and a few members first faced trouble in December when eligible securities to be placed as margin with exchanges were changed at a short notice. Prices of stocks which could not be placed as margin dropped and some members were unable to further fund their trading positions. Such notices are issued from time to time.
Exchanges have identified funds flowing in through client’s code to differentiate between Prime’s proprietary investments and that of its clients. NSE is holding back around 35-37 crore payment to Prime’s clients.
Most market players think that punishing investors for the fault of a broker is unfair on the part of the exchange, but exchanges are defending the move as investigations are underway. The authorities are probing whether funds were linked to market manipulation and the possibility of related party transactions between Prime and a clutch of other brokers active in small- and mid-cap stocks.
Sebi has received complaints from other trading members alleging manipulation in certain counters.
Several small- and mid-cap stocks had crashed in January and February as brokers holding the scrips in lieu of margin finance deals started dumping them. Prime and a few other members placed these small- and mid-cap shares as collateral to trade in derivatives. But some were pushed to the brink of default as they failed to top up margins when the value of collaterals shrank.
More recently, it has come to light that some of the derivative deals in illiquid options were pre-negotiated funding arrangements that were routed through exchanges.