Brokers saddled with huge NPAs, post-crash
MUMBAI: Till three weeks ago, retail brokerages were chasing customers with all kinds of offers, in a bid to goad them churn their portfolios more actively. And after last week’s sensational crash in stock prices, brokers are still running after their clients. But this time, armed with legal notices to recover their dues, known in broking parlance as ‘uncovered debits’.
The term is used to denote outstandings on which brokers do not have any collateral that they can seize or liquidate to recover the dues from clients. The legal departments of these brokerages are said to be working overtime since last week as they figure out ways to retrieve the outstanding amount from clients. These disputes could force many high net worth individuals (HNIs) to shift their loyalties. “Clients who have defaulted at one place will go to another broker, and chances are that they will be greeted with open arms there,” said an official at a domestic brokerage.
According to industry sources, the really active HNIs — also known as super HNIs —who gross an average daily turnover of Rs 100 crore on a daily basis are a handful, perhaps just about 50-odd and they tend to be wooed by every retail brokerage. Many clients — mostly HNIs — are refusing to pay up saying their positions were squared up, even though they had agreed to replenish the margin money by the end of the day.
But the fall — both on Monday and Tuesday — was so swift that brokerages were forced to liquidate many positions on fear that prices could collapse further. Worst hit were investors with exposure to derivatives segments, where prices of stock futures fell as high as 50% in two sessions.
Trading terminals at many brokerages were shut on Wednesday as the firms were unable to meet margin requirements to exchanges, even after having liquidated a sizeable chunk of their clients’ outstanding positions. As a result, many clients were unable to trade when the markets rebounded on Wednesday.
These clients are citing this as a reason to not pay up their obligations, as they claim to have been denied a chance to recover some of their losses. Industry sources expect many brokerages to report significant writeoffs during the current quarter, but broking firms claim the problem is bing blown out of proportion by rumour mongers. Officials at Sharekhan were unavailable for comment. A Kotak Securities official said they did not wish to comment on the development.
“There have been a few cases, but not big enough to have any impact,” said Gagan Banga, CEO, Indiabulls Financial Services. Harshad Apte, vice-president, strategy and planning, India Infoline, said there a few cases of bad debts, but they did not amount to much. “We are very comfortably placed and continue to invest in liquid funds, as a part of our treasury management, even today on a regular basis, which would have been impossible had we been facing huge bad debts,” he told ET.
“There are a few instances of bad debt, but the number is insignificant compared to our overall size of operations,” said Motilal Oswal, chairman, Motilal Oswal Securities. “I would put the number between Rs 1 crore and Rs 1.5 crore,” he said, adding that efforts were on to recover the money from errant clients. However, persons close to the developments insist the actual delinquencies are likely to be significantly higher than what brokerages officially claim.
One positive outcome from last week’s developments could that brokerages are likely to be stricter when it comes to enforcing margin requirements. In the meantime, trading volumes at exchanges continue to suffer as both investors and brokers have become suspicious of each other.
“BSE and NSE’s arbitration committees are likely to see a flood of complaints in the coming days,” says Vipul Modi, president, Investor Grievance Forum, adding that in some cases, clients were trying to dodge their liabilities various pretexts while in other, brokers had brought the trouble upon themselves by not being strict with margins.
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