Lessons for Global Investors from the Reported Stockal Incident

In last few weeks, it emerged that scores of Indian investors, buying global stocks through Stockal Securities, had lost large sums of money to unauthorized trades. The size of the scam is pegged at $6.26 million or nearly ₹60 crore, but could get bigger.

What actually happened in the Stockal case?

It is quite common for Indian brokers to offer access to global markets through an arrangement with a global broker and custodian. The Indian company only has the license to pass on trades to a global broker who executes the trade on NYSE / NASDAQ and then keeps the shares in a custody account in the US. In this case, several Indian investors saw their blue-chip holdings in NVIDIA, Meta, and Amazon sold without their authorization. These monies were reinvested in a little-known Chinese company. The price of the Chinese company crashed shortly, leaving investors with huge losses.

Investors must understand custody issues

Most people using Indian brokers to buy US stocks do not understand the concept of custody. In India, if you buy shares and get into your demat account (NSDL or CDSL), then the shares are with you, even if the broker goes bankrupt. In the case of Stockal; a domestic broker places the order with Stockal, and they in turn place the order with a US broker. Once the trade is executed, a confirmation is sent, which is passed on to the client. However, the shares will be with the US-based custodian and the investor has little control or access to these shares. Also, the trade authorization is based on US rules and not on Indian rules, which is something most investors did not understand.

Regulation is another grey area

When you buy an Indian stock through the broker and hold it with the depository, you know for sure that all aspects of that trade are regulated by SEBI. That is because, brokers, custodians, depositories, DPs; all come under the ambit of SEBI regulation. However, in this case it is vary ambiguous where SEBI regulation ends and a new set of regulation begins. Most brokers offering this service of investing abroad have a lot of such grey areas hidden in the fine print. In this case, once Stockal placed the order with the US broker, SEBI regulations do not apply any longer. Even the domestic broker or Stockal will only take accountability to the extent the counterparty honours their commitments.

How can investors protect themselves?

Today, several fund managers are going around announcing that global investing is the best option. For investors, there are safer options like the global ETF approach via Indian mutual funds or through the IFSC. These are better regulated with clear accountability. Secondly, if you use the Stockal type of route, ensure to document all correspondence with the broker and all contract notes with time stamp. This is useful evidence. Thirdly, insist on two-factor authentication security for your account, and avoid accessing your trading account from any unsecured network. For now, Stockal is more of a blame game. Eventually justice may be done; but it is going to be a very long time!