Are brokers hiding something big?

It is not often one gets to see soft-spoken and suave brokers roll up their sleeves, wag their fingers and take to the street, literally that is. Last week, all this happened on live national TV

It is not often one gets to see soft-spoken, suited, booted and extremely suave brokers roll up their sleeves, wag their fingers and take to the street, literally that is. Last week, all this happened on live national television. And, they did all this for the money of their poor clients.

Or so we think!

Brokers grow up watching their clients’ money go up in smoke every second day. They egged on clients to invest in the Reliance Power initial public offering. They wrote ‘buy’ reports on Satyam Computers when Ramalinga Raju was sitting on that famous tiger. Their clients put money in companies whose buildings were “robbed”.

At that time, these brokers didn’t hit the streets; they didn’t roll up their sleeves. That is because brokers make money both ways. They made money if you bought, they made money if you sold. And, they always “educated” you on how “investments are subject to market risks” and how you should never go to the brokers’ doorstep if you lost your hard-earned money.

Which is why there is a lingering doubt that there is something more than what meets the eye; there is something more than just clients’ money. By publicly making a scene of the whole thing and calling names, are brokers trying to hide the level of their involvement in the mess?

One explanation is brokers have their own exposure in the form of proprietary trades and margin funding. The argument margin funding was involved seems a bit weak. When the exchange itself asked for a margin of up to 10 per cent, why would the client need margin funding?

An SMS suggested brokers could be using the money raised by processors/farmers/traders from the investors to fund other investment and speculative activities. If your head started spinning after reading this, don’t worry. Mine did too.

Establishing this through a money trail may not be a very difficult task for investigative and regulatory agencies. But at the moment, they are hell-bent on passing the buck.

Let us build a hypothesis based on information already available in the public domain and see whether this is theoretically possible.

Say the client was able to create a position for Rs 100 with an investment of Rs 10. A warehouse receipt for stock worth Rs 100 has been created. Let us keep out of whether or not the stock existed. Now, can this warehouse receipt be pledged with bank to raise money? It is possible some banks even had pledge financing agreements with the exchange. So, what happens to the money. The money thus generated is deployed back to the market---spot, futures, equities, pick what you like.

To add credence to this theory, the names of the employees of a sub-broker being directors in a borrower company have surfaced. Though the broker tried to establish remoteness of the relationship, it could not completely wash off the connection.

But a couple of top brokers have behaved differently. Though they have clients who lost money, they pretend as if nothing happened. They are busy talking about banking licences they have applied for. Maybe, that is why they are behaving differently.