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People's Democracy(Weekly Organ of the Communist Party of India (Marxist)

Vol. XXVI

No. 19

May 19,2002

Behind The Home Trade Scam

C P Chandrasekhar

IN the era of liberalised financial markets in India, it appears that even before the dust settles on one

financial "scam" there is a new one in the making. We need only recall the engineered boom in stock

markets in the early 1990s which involved all major Indian and foreign banks and the "big bull"

Harshad Mehta, the subsequent periodic instances of alleged insider trading and price rigging by

corporations and broking firms, and, more recently, the infamous Ketan Parekh episode involving

among others the Madhavpura Mercantile Cooperative Bank. In all cases, investigations, while focusing

attention on the ease with which one or more high profile brokers or firms could access huge sums of

money to play the market, have not yielded adequate "regulatory measures" to prevent another scam.

HOME TRADE LAUNCH

Not surprisingly, therefore, the media is agog with another financial scam, involving a set of cooperative

banks and a high profile broker, Home Trade, which has once again seen a few hundred crores of

rupees disappear into thin air. What is surprising was that this was a scam which was obviously in the

making before the very eyes of the regulators. Home Trade was an unusual venture inasmuch as, at the

time of its launch around two years back, it combined activity in two areas which were both at a low, if

not in a state of collapse. The first was an internet venture, in the form of a portal that provided

information and entertainment to satisfy visitors interested in its principal activity. And second, its

principal activity, which was to encourage internet trading of stocks and shares. This dotcom brokerage,

ostensibly aiming to attract small investors who had fled markets after burning their fingers, was

launched with a high profile advertising campaign that roped in celebrities like Hrithik Roshan, Sachin

Tendulkar and Shah Rukh Khan. The campaign, estimated by one source to have cost as much as Rs 65

crore, was mysterious, since it long remained silent on the product being sold, and was geared at

establishing the "Home Trade" brand and win customer confidence in the name. What it did not fail to

do was to attract public attention, leading to much media discussion on the campaign itself.

A DESERVING CASE FOR SCRUTINY

The experience with dotcom failures, abroad and in India, that spent huge sums of money even before

earning a single unit of currency, should itself have alerted the authorities into scrutinising the venture.

More so because, unlike conventional dotcom firms, this one had a revenue model that made it even

more risky and suspect: to earn money through brokerage fees from small investors at a time when the

market was by no means booming. The case for suspicion and a modicum of scrutiny would have been

strengthened if the regulatory authorities had examined the antecedents of the promoters and its chief


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executive, Sanjay Agarwal.

Agarwal came to Home Trade with a reputation, built during his days with Lloyds Brokerage set up by

Lloyds Finance, one more Mumbai-based finance company that had picked up the name of an

internationally known finance company. Set up in 1994, with a paid-up capital of Rs 2.2 crore, Lloyds

Brokerage soon acquired the reputation in market circles of being a "dynamic", market-mover.

However, when the BSE Sensex fell by 367 points on a single day in mid-January 1997, the Securities

and Exchange Board of India (SEBI) launched an investigation that came to the conclusion that there

was prima-facie evidence that Lloyds Brokerage, was responsible for the unusual volatility. By then the

firm had changed its name to Euro Asian Securities (EAS), consequent to a sale of 75 per cent of its

stake to Mauritius-based S N Investments. Speculative transactions, it appeared, were key to the

strategy of EAS, as it has been known to be of most financial entities. However, whether for lack of

adequate evidence or other reasons, in October 1999, EAS was let of with an admonition by SEBI,

which even permitted the promoters to offload 25 per cent of their stake through a public issue valued at

Rs 32.94 crore.

Armed with those funds EAS transformed itself into the internet-based brokerage Home Trade, that

was soon favoured with venture funding from two new sources, Euro Discover Technology Ventures

and Euro Discover, which also established a second company called Ways India Ltd that functioned as

part of the Home Trade group.

COMPLAINTS FILED

Given this rather labyrinthine evolution of Home Trade from sources that had been investigated for

possible market manipulation and given its seemingly irrational choice of area of operation and timing,

the company was seen by many, barring the regulators, as being an operation that was suspect from the

point of view of market prudence. Yet investigations into Home Trades activities had to wait for a

NABARD report filed on April 19 to the RBI, on the Nagpur District Central Cooperative Bank

(NDCCB), which had made huge investments in government securities, but was not in possession of the

certificates for the same. Home Trade, it transpires, had obtained Rs 124 crore from NDCCB forinvestment in government securities, but had not delivered the certificates. Caught out by the NABARD

team, the chairman of NDCCB, Sunil Kedar, was the first to file a complaint against Home Trade on

grounds of cheating.

Once the NDCCB complaint had been filed, the floodgates were opened. Thus far at least eight

cooperative banks in Maharashtra, some banks from Gujarat and, in an unusual turn, the Seamens

Provident Fund, have reported having invested in government securities through Home Trade and

another brokerage Gilt Edge but have yet to receive the relevant certificates. The sums involved could

be in excess of Rs 300 crore. What is more, some of the banks had reportedly provided Home Trade

with loans to pursue its undefined activities, serving virtually as venture capitalists.

The revelations have resulted in investigations into investments in government securities by cooperative

banks and provident fund organisations. It has also increased coverage of the Home Trade scam by

sections of the media, which normally tend to celebrate high profile financial players and present their

views as disinterested assessments of market movements and government policies. But now that Home

Trade, which had access to crores, of which a significant chunk was handed over as advertisement

revenue to the very same media, is now reportedly left with just Rs 22,000 in its bank account, the

tendency is to dismiss the firm as just a scam and a few individuals in Home Trade and the cooperative

banks as aberrations.


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REGULATORS & MEDIA REMAINED UNCONCERNED

The route to discovering that Home Trade was a fragile venture that was bound to collapse from losses

suffered by investors who, not to legitimately, had handed over large sums of money to the company, is

indeed circuitous. After all by March the financial press was reporting that both Home Trade and its

sister company Ways India were downsizing operations and retrenching staff, many of whom had not

been paid for some time. But neither the regulators nor the media found reason to investigate a

company that had burnt up crores in a few months.

Sanjay Agarwal, who has since been arrested, is reportedly himself unapologetic. While admitting to

some "mismanagement" in his debt servicing division, Agarwal is reported to have claimed that Home

Trade has a "great financial model." At one level he is perhaps right. His was a model of changing form

to pursue every option of speculative return that existed. When the project of earning huge commissions

through internet broking was found to be not working, he expected to make large sums by trading in

government securities in the expectation that their prices would rise since the government was keen on

driving down interest rates. To find investors who would make their purchases through him Agarwal

offered an extra two per cent return on investments made through him, and targeted cash rich but

poorly regulated sectors like the cooperative banks and small provident funds. His gamble did not work,

leading to his being unable to deliver on his trades, but in keeping with what is the true business offinance he at least gambled.

DIVERTING ATTENTION FROM REAL ISSUES

The difficulty about dropping Agarwal like a brick when he is already well on the way down is that the

exercise only serves to divert attention from larger issues. These are that financial markets, where

information available to some is not available to others, are prone to speculation and failure. They therefore

need to be tightly controlled or regulated. But Indias economic reform programme has not only liberalised

these markets substantially and devalued regulation, it has made the garnering of large profits by financial

entities a sign of "efficiency". This legitimises speculation, so long as you are not caught out because offailure.

One result is that when failures do occur it is not the system put in place by reform that is blamed, but

the individuals who have been caught out because of failure. Liberalisation is persisted with and

financial failure recurs. The problem is that failures affect not just the speculators or those involved in

the bank-broker speculative nexus. It also threatens to wipe out a part or the whole of the savings of

individuals, which have been invested in entities they do not control, but which they believe the

government regulates. It is this trust in government rather than the confidence bought by huge publicity

campaigns that finally explain the willingness of small investors to hand money over to entities that are

similar to those who have known to have misused them in the past. Given that, it is not enough if the

government wakes up each time it is faced with what it dismisses as a scam. It must undo the regime and

the structures that render the system fragile.

When failures do occur it is not the system put in place by reform that is blamed, but the individuals who

have been caught out because of failure. Liberalisation is persisted with and financial failure recurs.


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