Several brokers defraud investors in IPO applications

Several stockbrokers have defrauded investors, for years, by applying for initial public offerings (IPOs) against their accounts and using the investors' funds without permission. 

Others have played a worse trick with their clients. Investors normally deposit money in their Beneficiary Owner's (BO) accounts and ask their brokerage houses to apply for IPOs. 

Then the rogue brokers–instead of applying for IPOs as requested by their clients–just park the money in banks and enjoy a good amount of interest on the deposits for that time. When IPOs are over, they just deposit the money back in the clients' accounts. 

In such cases investors cannot understand that a trick was played by their brokers. 

Such fraudulent practices by brokers were unearthed during a recent enquiry on the IPO process by the stock market regulator. 

Professor Abu Ahmed, a capital market analyst, said, "It is like defrauding investors because investors are the owners of the funds in consolidated customers' accounts, not stockbrokers." 

However, the investors do not have any way to find out about such fraud, he said.  

"To reduce the practice of fraud, stock exchanges must collect information on consolidate customers' accounts on the last date of the IPO subscriptions. If a deficit is found in any of the accounts, they have to take legal action against the brokers," he added.  

The Bangladesh Securities and Exchange Commission (BSEC) will now impose regulatory action against these anomalies.

Sources said brokerage houses do not follow rules regarding IPO applications. Many houses apply for new IPOs by using money from consolidated customers' accounts without the permission of investors. 

When they get shares in the IPO lotteries, the houses also sell them without even informing the investors. This situation has been going on at least for the last two years. 

BSEC sources said the regulator will soon issue a directive, making it mandatory for brokerage houses to follow the conditions of IPO prospectuses regarding IPO applications properly.

In April 2015, the securities regulator decided that investors would apply for an IPO through brokerage houses, instead of scheduled banks.

During that time, investors opposed this regulatory decision and said corruption could happen in such systems.

Brokerage houses' clients think that, after the application of an investor, if the securities house invests the money in shares–without sending the code to the company–and deposits the money in the investor's account at the end of the draw, there is no scope of finding it out. 

As a result, the securities house benefits from this and investors suffer.

A brokerage house official denied the allegations. 

"Brokerage houses take permission from their clients while applying for new IPOs. Additionally, some clients allow this before applying for IPOs when a new company comes," he said on condition of anonymity. 

The commission had stopped the routine inspection activities of the brokerage houses for two years due to the downtrend market.

However, the commission's recent move came against the backdrop of misappropriation of investors' funds by a brokerage firm–Crest Securities Ltd.

BSEC and stock exchanges have increased monitoring on the activities of brokerage firms to ensure the protection of investors' funds. Further, the securities regulator has recently decided to start routine inspections of brokerage houses. 

The securities act has a provision for regular inspection of these institutions for verification of their transparency and compliance.

If the houses are not inspected regularly, there may be: weaknesses in the enforcement of laws, share manipulation, irregularities in the provision of margin loans, and major deviations in facilities to directors.

Moreover, there is a share deficit of the Central Depository Bangladesh Limited (CDBL) with the back office.