Black Wednesday (17 Oct)/Unauthorized Trading/Misuse POA

#1
Dear Everybody,

Wednesday 17 October was a black day in the history of the Indian Exchange. A lot of people got hurt that day! Most of these people stand alone, don't know what to do?, feel powerless, etc. I say YOU CAN DO SOMETHING about it! And you only have to think like Gandhi, "fight whithout fighting" or "fight without violence".

Facts :

1. On October 16 Sebi made a categorical statement that Overseas
Derivative Instruments (where the underlying asset is the futures and options of Indian market) through the Participatory Note (PN = an instrument just like stocks that Foreign Institutional Investors (FIIs) issue to overseas investors wanting to remain anonymous and yet invest in Indian stock markets) should be over within 90 days with no allowance for renewals or issuance of fresh ODIs via the PN route.

This means that FIIs have 90 days to pull out their money from stock investment and no re-entering the market again (ban).

2. On October 17, in less than 5 minutes after the opening of the market at 9:55 AM, came a crash of over 1,700 points. The 30-share sensitive index (Sensex) of the Bombay Stock Exchange was ruling at 17,307.90 points - down 1,743.96 points or 9.15 per cent over the previous day's close. All 30 shares that go into the Sensex were trading in the red. This led the authorities to suspend trading for an hour till 10:55 AM. In percentage terms, the broad based Nifty of the National Stock Exchange was also down 9.25 per cent at 5,143.90 points, a fall of 524 points. Investors' wealth of over Rs four lakh crore (Rs 4,06,000 cr !?!) was eroded within minutes of the market's crash.

(Wonder what halts trading? It's circuit breaker system!)
As part of a regulatory directive issued by SEBI over six years ago on June 28, 2001, the bourses need to implement an 'index based market-wide circuit breaker system' every quarter that brings in a coordinated halt in trading across all equity markets in case of any sudden movement.
The circuit breaker system becomes effective at three stages of the index movement, which has been fixed as 10 per cent, 15 per cent and 20 per cent in either BSE's Sensex or NSE's Nifty whichever is earlier.
In case of a 10 per cent movement on either side in either of the two benchmark indices, there would be a one-hour halt if this movement takes place before 1 pm. If the movement is at or after 1 pm, but before 2.30 pm, there would be a trading halt of half an hour, while in case of such a movement after 2.30 pm, there would be no halt triggered by a 10 per cent fall or gain.
In case of a 15 per cent movement, there would be a two-hour halt if such a movement happens before 1 pm, while if the 15 per cent trigger is reached on or after 1 pm but before 2 pm, there would be a one-hour halt. If the 15 per cent trigger is reached on or after 2 pm, the trading would halt for the remainder of the day.
In case of a 20 per cent movement of the index, the trading would be halted for the remainder of the day.
Importantly, the percentages are calculated not on the basis of the previous day closing levels of Sensex or Nifty, but on the basis of the closing value of the previous quarter.

3. FM's statement at 17 Oct 2007 - 10.30 am Finance Minister P Chidambaram today said the government was not in favour of banning participatory notes (PNs). We have not banned PNs. We have simply placed a cap on proportion of money coming through PNs," he said, and added that the proposed move by Sebi was part of a series of steps aimed at moderating inflows of foreign capital. The Finance Minister said the alarming situation will quieten as the day progresses. "Before the day is over, everybody will think it over and market will cool down," he said.
''Fundamentals of the economy are still strong and there is no need for alarmist statements,'' said Mr Chidambaram.

Finance Minister, Mr. P. Chidambaram said, Investors through PNs are certainly welcome to invest in India, but for the present it is important to moderate these capital flows. If an investor through PN wishes to register as an FII and invest, he or she is most welcome. There is no need for alarm or panic statements. These are unfortunate.

4. SEBI chairman M Damodaran also issued a clarification that the regulator had not sought any restrictions on renewal or rollover of Indian exchange-traded derivative contracts by foreign institutional investors.

http://www.sebi.gov.in/Index.jsp?contentDisp=Section&sec_id=3

'It is made clear that there is no proposed bar on offshore derivative instruments contracts, expiring this month or in the following months, being renewed, provided the renewal does not go beyond 18 months,' said a release issued by the regulator today. The SEBI clarification came minutes after Damodaran said proposals on ODIs were a "well-designed package" while urging investors not to be carried away by rumours.

Both statements comforted investors, and took the key indices within striking distance of their previous day's close.

5. Re-opening market at 10:55 AM : The markets immediately bounced back after re-opening after the Finance Ministers comments. Indian stocks mostly bounced back from a steep morning plunge after the country's finance minister sought to reassure investors that authorities were seeking to limit not ban a financial instrument used by many foreign funds to invest here.


Situation :
As the crash halted the trading the brokers used their POA (or a clause that gives them the right to intervene in incidents (crisis-situations, sudden movements, etc.)) with or without informing the client or accountholder. In other words : The shares in your account will be automatically sold at re-opening of the market with RS .......... loss, without your (needed) permission or authorisation!

The brokers have that right to protect your and their interest. Ok, I can go with that, it's a good thing, like a parent watching you and guard you from harm and prevent you from doing stupid things.

But the brokers also have the obligation to do this in a wise and sensible manner, like a good parent. So the parent has to watch out to be over-protective, because it can do more harm than good.

The brokers made a decision that morning in a crisis situation (the IT-specialists will recognize this as incident management under the ITIL flag) and overlooking a few important indicators that should stipulate their decision.

a. The statement of the FM : no need to alarm or panic.
b. Waiting for SEBI's advice/statement as SEBI is the market regulator by law.
c. Information from NSE/BSE which can aid the decision making (within legal bounds).
d. The re-opening of the market showed strong recovery.

There are 2 other basic rules which you have to keep in mind before making a decision :

e. Don't react in panic, what will lead to worse (disaster). In other words : Selling in panic will lead to more panic what will lead to disaster!
f. Every market that falls will bounce back. It's only a matter of time!

So can I say that the brokers made a good (wise and sensible) decision?

No they didn't! They reacted in panic and they didn't protected the interests of their clients. They robbed the clients from the time and the oppurtunity that the market recovered. This would mean that the losses of their clients would be substantially less. (If you waited till the next day, you even made profit till 12:00 AM.)

The brokers are liable for the loss their clients suffered because of their poor judgement and decision.

The next question is : Can I (still) trust my broker? It is obvious that a employee at a broker at any time can or is allowed by the broker to make decisions for the accountholder on his own judgement without permission and authorisation of the accountholder!

Procedure:
People who want to do something about this injustice can follow the next procedure.

1. Write a grievance to your broker. Some brokers have a grievance form on their website or an emailaddress for this. Send the grievance also in printed form with proof of delivery (postal). (Search for grievance on the website of the broker).
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My grievance letter (to use and modify to your liking).

Subject: Complaint Unauthorized Trade Transaction (F&O) in Religare Securities Ltd.

Dear Sir/Madam,


I have an account at Religare Securities Ltd/ Future & Options (accountnr: XXXXXXXX) and I am trading for some time at Religare Securities Ltd. (further named Religare).
Until today I have traded at Religare without any debt or too less margin and without any restrictions or problems whatsoever.

On Tuesday 16th October 20007, I have bought 5 lots of Jindalstel and kept them at the end of the market day for the next day, Wednesday 17th October 2007, without selling them.

Today Wednesday 17th October 2007 I was not allowed to trade at Religare and I saw the message on Odin that the market would open at 10:55 AM and all stocks are frozen till this time without any explanation or any other feedback. I also get the information from Religare (representative) that the 5 lots of Jindalstel, I still had in my account, would be sold automatically by Religare at the new opening time of the market at 10:55 AM on 17th October 2007 without any other option or alternative.
I have not given any permission or authorisation to anybody from Religare to sell these 5 lots of Jindalstel, which were in my possession, by buying these on Tuesday 16th October 2007.
Normally I should trade and wait till the market recovered and then sell my 5 lots of Jindal against a better price.
This is how everybody whom are trading and taking their lots to the next day for selling at a better price normally is dealing with.

Today somebody at Religare has sold these 5 lots of Jindalstel (without my authorisation) in the morning at the opening at 10:55 AM with a huge loss of RS600000,= .

How is it possible that anybody at Religare at any time can or is allowed by Religare to make decisions for the accountholder on his own judgement without permission and authorisation of the accountholder? Is this fair towards any client or accountholder at Religare or any other brokerage?

By not giving the client or accountholder (me) the possibility or opportunity to recover or try to decrease loss in trade (Jindalstel) Religare has caused a bigger loss by selling directly at the reopening of the market.

At least Religare could have and should have given themselves or the accountholder the opportunity to wait for market recovery by waiting till the end of the day, to make up the proper balance (of how much actual loss or gain) before selling the 5 lots of Jindalstel with a huge loss.

Also Religare should have known that according to the situation of the opening of the market at 09:55 AM (a fall of 524 points of the Future & Options index) that the freeze in trading at the market would mean that NSE would go into corrective actions to stabilize the situation or recover.

By not waiting for the corrective actions by NSE to stabilize the situation or recover or give time to await how the market will develop and what impact the actions taken by NSE will have on the market index, Religare decided on their own to take action by selling 5 lots of Jindalstel which I had in my possession and has caused me a huge loss of RS600000,=.

I was under the assumption that Religare securities is having a very efficient research team to help and guide their clients to take wise investment decisions.
You can ask yourself if the decision made by Religare in my case was a wise decision? No it was not, it seemed more like a panic reaction then a well thought action of people whom you trust in having the experience, the knowledge, know-how and knowing and operating with the rules and regulations of NSE and SEBI. And above all knowing what is fair (trading)!

In my case I think it is reasonable and fair that Religare at least must compensate and bear my entire loss in full.
Because Religare has caused and is responsible for the loss I have beared by selling 5 lots of Jindalstel on their own decision with the above mentioned loss without my permission or authorisation or not giving me or at least themselves the time or opportunity to sell the 5 lots of Jindalstel at a better moment.

According to the close of the market today we have noticed that Jindalstel has recovered from reopening at 10:55 AM with the amount of more than RS800,= per share. This would mean that my loss would be substantially less then it is now.

I will file this complaint also to NSE and SEBI but hope that Religare will solve this matter in a professional way. Please notice that surely there will be more client/accountholders whom are disadvantaged in the same situation as I have been. I will take all necessary actions to bring this matter into public discussion and attention.
I believe that all investors should be aware of this because it is the interest of the investors what is at stake and of a balance of the Indian Stock Exchange. This may not happen again by learning from this matter.

Please notice that also because of the action taken by Religare is, that I am not able to trade any further because of insufficient margin on my account, what would not have happened if Religare followed and take into consideration the corrections of NSE and awaited to make a wise decision instead of acting on their own without permission or authorisation of the accountholder.

Since this has happened in one day I am expecting that Religare would take the courtesy to solve this matter within three working days from today. Each day of delay and not being able to trade causes more loss..


Yours Sincerely,
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2. File complaint at SEBI on their website http://www.sebi.gov.in/Complaint7.jsp

This will log your complaint.

3. File complaint at NSE (on the website of NSE -> look at bottom of page -> button "site search" -> enter " Investor Grievance Cell")
For BSE do the same.

Check also : http://iepf.gov.in/FAQs-InvestorGrievance.asp

Nse will send you an email with 2 documents, which you have to fill in.

In case of complaints against trading members/registered sub-broker, the following documents need to be enclosed:

1. Copies of contract or purchase/sale notes
2. Statement of accounts
3. Acknowledgement of securities delivered to the TM
4. Copies of previous correspondence with the TM
5. Other documents as listed on the reverse of ICF-I

Complaints against Trading Members/sub-brokers

Complaints received from the investor if accompanied by all the relevant documents as mentioned above are forwarded to the respective TM/sub-broker asking them to provide their comments or for resolving the case. The TMs are expected to file their replies within 21 days.

In case the TM/registered sub-broker disputes the claim of the investor, the response of the TM is forwarded to the investor. If required, both the parties are called for a joint meeting. Most of the complaints are resolved in this manner. In cases where the disputes remain resolved in Investor Grievance Cell, the parties may refer the matter to Arbitration if they so desire.


Please do note that SEBI and NSE/BSE will require a lot of formalities/copies of proof/etc.

The broker is the first in line to whom to complain. If the broker doesn't respond in the given time then start the procedure for BSE/NSE/SEBI. BSE/NSE/SEBI will communicate with the broker and ask for a comment. If the response from the broker is negative then BSE/NSE/SEBI will take up the case (even invitation to hearing of parties) and a decision will come out. If this decision is negative then the next step is arbitration. The last resort is a civil lawsuit (a class action suit would be nice).

There is also a Consumer Rights/Grievance Forum. Haven't had time to check it out. Untill now I'm doing this all by myself.

Tip:
1. Make printouts and screenprints (Alt + Prt Scr) from your ledger before "they" change something. Also to proof your trading/financial conduct and soundness if necessary.
2. Check out the terms and conditions stated by the broker which he is obligated to give you in printed form. Read about your rights as client and especially the part about you having the right to sell and the part about the broker intervening in incidents.
3. If you can consult a lawyer, try to get more info or see if there are precedents (similar cases like yours with a verdict).

I believe that all the people who got hurt should file a complaint to the broker. In most cases the broker probably will not answer or delay your case. So if you start the procedure i. e. at NSE, the broker will be forced to answer in 21 days. Let family and friens help you with the paperwork if you don't know how to handle the forms. I'll try to post a form as an example.

The positive thing here is : the more people file a complaint, the more they can't be ignored. Involve the media (local and national) as much as possible and bring it and keep it under their attention. This will put pressure on the brokers.

I'll try to update this thread with new developments. I hope that the community will share their info and help each other, because that is the power of the NET. And I also believe that God is by my and your side in the fight against evil and injustice.

JZ

[email protected]
 

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