Brokers lure investors with assured returns, but for a cut

Written by Jash Kriplani | Mumbai | Updated: Jul 24 2013, 19:06pm hrs
Stock-brokers, who have seen their business get impacted by falling volumes and declining investor interest, are now trying to generate income by offering high assured returns to investors, but, in turn, are asking clients for a percentage of those returns. Such deals, though not legal, are mostly struck in cash and typically with high net worth clients interested in day trading or in derivatives.

A retail investor who has been trading in the market for over 20 years said the broker's share is often in the range of 25-30%, depending on the size of trades and the risk appetite of the investor. The trades are mostly settled at the end of each trading session in cash, he added.

The dealer asks the client to commit a certain amount of money for the trade. He is then told to place a buy order at a certain level. The cut for the dealer is usually 25-30% if the client makes profits from the trade. Most of these clients are investors that operate from the brokers office and are willing to share a part of their profits to the dealers at the end of the day in cash, said the investor on condition of anonymity.

Another retail investor who mostly trades in the derivative segment said that she was asked by her dealer to take highly risky bets and was assured of profits in lieu of a 10% cut. When the investor complained to senior officials of the brokerage, the investor was told to trade through a different dealer.

Industry watchers believe that both brokers and clients are to be blamed for the malpractice. It is mostly HNIs that enter into such agreements with the dealers for quick returns. Such investors are ready to allocate a portion of their trading corpus to risky bets, said an analyst with a Mumbai-based brokerage. Added Arun Kejriwal, founder of Kejriwal Research and Investment Services, an advisory firm: Clients are also to be blamed as it is their greed that leads to such practices.

Stock exchanges have been seeing a steady flow of complaints from clients against malpractices by brokers. In the current calendar year, the BSE received 377 complaints against brokerages for carrying out unauthorised trades and misappropriation of funds on the behalf of their respective clients. NSE has received 1,294 such complaints.

However, market players believe that such 'dealer-client' arrangements are on a decline owing to the increase in the number of complaints from clients and the underperformance of equities as an asset class in the past few years. These cases take place, but they are rare as dealers are aware that they can lose their jobs with one complaint, said Kejriwal. A senior official with a domestic brokerage firm said it has become difficult to make profits through such arrangements amid todays uncertain market environment: Dealers who now take calls for the clients end up making losses more often than not. However, these practices have not completely stopped.