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BSE not to compensate vyaj badla investors

Rakesh P Sharma

The Bombay Stock Exchange has decided against compensating investors losing out in the vyaj badla finance from its investor protection fund and trade guarantee fund. The total loss for the investors is pegged at around Rs 8 billion.

An informal decision against the compensation was taken last week at the BSE's default committee meeting. "The BSE cannot afford to take such a huge financial burden," said a source familiar with the development.

A number of brokers had not routed their clients' money through the official system but used the private badla route and it would be extremely difficult for the exchange to differentiate between genuine and bogus trade certificates, sources said.

When contacted, the BSE officials said: "The question of compensating the investor would arise only when the exchange declares a particular broker a defaulter. Till now no broker has been officially declared defaulter."

The National Stock Exchange officials refused to comment.

The BSE and the NSE have altogether received over 400 complaints for non-refund of funds invested under the BSE's borrowing and lending of securities scheme and the NSE's automatic lending and borrowing mechanism. The amount involved may be around Rs 8 billion.

Member of Parliament Kirit Somaiya's Investors Grievance Forum has already taken up the issue with market regulator Securities and Exchange Board of India.

According to the existing guidelines, the BSE compensates investors up to Rs 1 million while the NSE compensates up to Rs 500,000 from the investors' protection fund.

The BSE officials point out that the exchange authorities are examining the books of the brokers concerned and possible diversion of funds to verify the authenticity of such complaints. They are probing whether the brokers actually invested the funds in badla.

The BSE is also probing whether the brokers removed any securities from the clearing house to meet their other obligations.

It may be recalled that certain brokers withdrew securities from the clearing house, earmarked for badla finance investors, by paying nominal margins allowed till early February. These brokers are alleged to have misappropriated investors' funds to offset the losses suffered in the recent bear hammering during February-March 2001.

The Investors' Grievance Forum officials have said there will be further defaults in the first week of July when many other broker defaults are expected to come out.

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