The Surat-based proprietary trading scandal, once considered a small-scale incident, has spread far and wide, affecting traders across India, according to new investigative documents. The Moneycontrol report also found that some exchanges allowed individual traders to use prop trading accounts without applying any risk controls or identity verification.
Industry insiders are raising concerns about unusual business practices by some brokerage firms. These include the widespread use of fake NISM certifications and the fabrication of employee-dealer relationships, along with system-based pay.
The broker’s trick: When traders are disguised as employees
To circumvent the law, brokers treat traders as employees so that they can be issued IDs and paid by the exchange. Deposits are also made outside the official system: either by cash transfer or by depositing at an affiliate. This is a sophisticated process used to hide the true nature of individual trading activities.
According to SEBI, the act of accepting deposits from traders is an illegal money-making practice. Brokerage firms cover this up by paying salaries in the form of profit-sharing or cash. The purpose is so that when the exchange or SEBI inspects, traders executing orders through the terminal can easily be disguised as official employees.
Another common violation that has been revealed is the use of fake NISM certificates to circumvent the law. SEBI requires traders to have this certificate, but brokerage firms are using fake certificates on a large scale. The aim is to disguise individual traders as official employees, thereby artificially complying with legal requirements.
The law requires that all participants in equity derivatives trading (approved users and sales staff) must have a NISM Series VIII certification. Despite being fined by exchanges during the audit, violations continue to occur. Clearly, the current fines are not enough to deter brokers.
F&O nightmare: Nearly all retail traders ended up in losses
In many cities, traders work on strict schedules (9am-3:30pm) on proprietary accounts with brokerage firms. They use issued IDs and are disguised as employees. Worryingly, many of them are completely unaware that these arrangements are in serious violation of SEBI and exchange regulations.
In the absence of a formal contract, participants risk losing the protection of SEBI in the event of a breach. Payments are made periodically, but account details are sent via informal emails from employees, rather than a standard contract note. This lack of transparency leaves them without legal protection.
A Mumbai-based individual trader narrated his ordeal. He was trading from his premises at Ram Mandir, Goregaon, Mumbai, but through a broker headquartered in Delhi-NCR. The story highlights the issue of branch control.
“The wrong trades by senior staff caused losses, but the losses were passed on to our accounts,” the trader alleged. As a result, nearly 100 million rupees of margin was withheld. When they asked for a refund, the response was direct threats from company staff.
These traders mainly invested in index options in the equity derivatives segment. SEBI data (FY25) shows the extent of the risk: 91% of retail F&O traders lost money. Their total net loss was a staggering Rs 1.06 trillion, reflecting the extreme risk involved in derivatives speculation.
SEBI said the latest report was based on data collected from 13 leading brokerage firms in the equity derivatives segment, where discount brokers dominate. However, the statistics do not include individual traders who trade through their brokerages’ proprietary accounts. Such transactions are classified as proprietary trading and are not included in the official study.
These individual traders know that their funds can be locked up, as they do not have a legal agreement with the exchange. They accept the risk, as trading is their only job and the only way to support their families. This forces them to face the volatile market, accept the possibility of losing money, and continue to operate.
In recent years, SEBI has taken several measures to control excessive F&O trading to reduce risks from retail activities. However, this segment still has many challenges and potential risks, requiring continuous monitoring from the regulatory agency to protect investors.
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