US shock for four brokerages

Four of India's best known brokerages ' Motilal Oswal Securities Ltd, Ambit Capital Pvt Ltd, JM Financial Institutional Securities Pvt Ltd and Edelweiss Financial Services Ltd ' have been busted by the US securities watchdog for offering services to American investors without first registering with the Securities and Exchange Commission (SEC).

The four firms didn't contest the charge that they had violated US federal securities laws and quickly paid up a combined sum of $1.86 million (roughly Rs 10 crore) without demur.

The SEC indictment says employees from the four firms travelled regularly to the US to meet investors, sponsored conferences in the US and "traded securities of India-based issuers on behalf of US investors".

The four firms agreed to be censured but chose not to either admit or deny the SEC's charges.

Motilal Oswal was forced to pay $821,594, the highest penalty. Edelweiss forked out $568,347, JM Financial paid $443,545 and Ambit agreed to pay disgorgement and pre-judgment interest totalling $30,910.

"The firms' co-operation with the SEC staff and their prompt remedial measures, including entering into… chaperoning agreements with US registered broker-dealers and initiating registration with the Commission as broker-dealers were important factors in accepting the firms' settlement offers," said Scott W. Friestad, associate director of the SEC's division of enforcement.

The SEC said it was continuing to look for potential violations at other firms but didn't name them.

"The broker-dealer registration provisions are critical safeguards for the integrity of our securities market," Friestad said.

Four-year scan

The chargesheets indicate that Motilal Oswal, JM Financial Securities and Edelweiss have been soliciting and providing brokerage services to US investors from at least 2007 till the middle of 2011. Ambit Capital was a late entrant and has been indicted for providing brokerage services to US institutional investors from "January 2011 through at least April 2011."

Motilal Oswal was charged with organising annual conferences in the US, getting its employees to travel to the US to meet investors and "presenting and discussing Motilal's analysts' research reports on Indian issuers". They also attended corporate roadshows with the representatives of Indian issuers.

It was also charged with buying and selling securities of Indian issuers in Indian bourses on behalf of US investors "in exchange for commissions and soft dollar payments". During the period, the brokerage received transaction-based compensation worth at least $13.7 million from 42 US institutional investors. The brokerage services were provided by means of telephone, fax, mail or e-mail.

Motilal was ordered to pay disgorgement of $780,000 and pre-judgment interest of $41,594 within 30 days of the SEC order.

Edelweiss was charged with buying and selling securities of Indian issuers on the Indian stock exchange on behalf of US investors. Between 2007 and July 2011, it received transaction-based compensation worth $9.4 million.

It also participated as a lead or co-lead manager in the initial public offering or follow-on flotations of seven Indian issuers and sold or marketed these shares to US investors in violation of US federal laws.

Edelweiss employees contacted US investors via electronic mail and over telephone and catalysed meetings between US representatives of the Indian issuers with potential investors. It received approximately $3.1 million in transaction-based compensation based upon a percentage of the value of the offerings. A portion of this amount was attributable to US investors, the SEC said.

In addition, Edelweiss participated in four private placements ' structured as qualified institutional placements (QIPs) in Indian law ' that were marketed to US investors. It also solicited investment in five alternative asset funds, the notice said.

Payment for services

JM Financial bought and sold securities of Indian investors on behalf of at least 91 US investors, It received transaction-based compensation worth $2.3 million as a result.

It also provided brokerage services to US investors through certain commission sharing agreements with US registered broker-dealers. It provided research to US investors with the understanding that the US investors would pay for it through commission income directed to JM Financial. It received $552,000 in transaction-based compensation under this head.

In March 2011, it sponsored a conference in New York that brought Indian issuers and US investors together.

It also participated as one of the several broker-dealers in 28 initial public offerings, follow-on offerings or private resale of securities of Indian issuers. JM Financial received approximately $24 million in transaction-based compensation, a part of which was attributable to purchases by US investors.

JM Financial has been ordered to pay disgorgement of $425,000 and pre-judgment interest of $18,545 to the US treasury.

Ambit employees travelled on multiple occasions to meet at least 19 US investors since January 2011. When SEC staff contacted the firm in May 2011, Ambit's solicitation had not resulted in significant brokerage business. However, it had received some transaction-based compensation for buying and selling Indian securities on behalf of US investors.

The SEC has not imposed a civil penalty on any of the four firms. However, if the regulator obtains any information that any of the firms provide false or misleading information, it will reopen the cases and seek an order directing the guilty firm to pay civil penalties.