Freak trade: Emkay gets Rs 95 lakh insurance

The insurance payout is just a little less than 2% of the Rs 51 crore it lost in an erroneous trade last year

Emkay Global Financial Services has received Rs 95 lakh as insurance for the losses the firm suffered in an erroneous trade last year. The payout is just a little less than two per cent of the Rs 51 crore it lost in the trade.  

The brokerage had an insurance cover of only Rs 1 crore to cover trading errors and the payout is the maximum under its policy, according to Emkay’s submissions mentioned in the report of a National Stock Exchange (NSE) committee looking into the trade.

The payout was made following an investigation by the insurance company involved, said to be a public sector undertaking, according to a person familiar with the matter, who did not want to be named.

According to the NSE report, reviewed by Business Standard, the brokerage had said the insurance company accepted its claim and paid Rs 95 lakh, though copies of documents related to such a payout were not provided to the committee.

An Emkay spokesperson declined to comment on the matter.

Brokers said few firms had insurance covers to protect themselves from losses incurred from erroneous trades, such as the one Emkay had to deal with.

R M C V Prasada Rao, president of the Association of National Exchange Members of India (ANMI), which has nearly 850 brokers as members, said costs made it difficult to provision for such extreme events. “Such events happen once in a while. To insure against this by taking a cover would require a greater premium as well.”   

In the case of Emkay, its dealer made a mistake while entering an order on October 5, 2012. Instead of an order worth Rs 17 lakh, he ended up selling in excess of Rs 650 crore before the mistake was spotted. This resulted in the Nifty dropping around 15 per cent and trading was halted for 15 minutes.  

Emkay then requested the exchange to annul the trades. NSE set up a committee to look into the matter. It decided against doing so. The brokerage has moved the Securities Appellate Tribunal against this decision. The tribunal has stayed the payout resulting out of the trade and is set to hear the matter next on June 19.

Rao stated ANMI makes an insurance cover available to brokers to meet a minimum Sebi requirement of having at least Rs 5 lakh as insurance cover. But the insurance cover does not cover errors and omissions (E&O), like the events at Emkay. It only covers events like loss of cash or fraud by employees.

The BSE Brokers' Forum, too, provides with a ‘comprehensive group insurance indemnity’ policy without the E&O clause as part of its services to the members, according to its website. Members typically take E&O cover separately according to their needs, Rao added.

The annual premium for such covers is based on the expected turnover or brokerage declared by the broker at inception of the policy and the indemnity limit selected, according to the terms and conditions of such a policy.

RUNNING FOR COVER
Emkay's insurance provided little cover for trade mishap

• Emkay lost Rs 51 crore on account of freak trade
• Brokers have to take insurance against such business-related risks through a cover created for the purpose
• Emkay had an insurance cover of only Rs 1 crore
• Insurance company has paid out Rs 95 lakh
• Premiums make it prohibitive to insure against such events, say experts