MC EXCLUSIVE Prop trading scam uncovered: Fake NISM certificates and masking of traders as employees

MC Exclusive: Prop Trading Scam Uncovered —Fake NISM Certificates and masking of traders as employees

Moneycontrol, in its previous reports, revealed how Surat-based prop trade scam, initially believed to be small, has impacted traders in multiple cities. And also, how the brokers are running business of allowing individual traders to trade through brokers’ proprietary trading account runs without any checks.

Now, industry insiders say there are some other innovative business models adopted by certain brokers, such as thousands of fake NISM certifications and showing traders as broking firms’ staff, paying them salaries on record. Moneycontrol brings you how prop trading business operate while violating securities laws in its third series on the issue.

Market insiders say that, in some cases, brokers show individual traders as employees, issue IDs after exchange approval, and pay them salaries as well. They also take deposit money in some other entity of the broking firm or fully in cash. However, taking such deposits is a violation of SEBI rules as it amounts to pooling of funds. The salary given is either adjusted in profit-sharing or settled in cash, so that during exchange or SEBI inspections it appears that the people trading through the terminals are the broker’s own staff.

Broking industry insiders say there is another rampant violation, the use of fake NISM certificates. One person aware of such activities told Moneycontrol on the condition of anonymity that there are thousands of fake NISM certificates being used by brokers. These certificates are used for individual traders who are shown as brokers’ staff and are required as per SEBI’s norms. Regulatory norms state that the NISM Series VIII certificate is mandatory for associated persons functioning as approved users and sales personnel of brokers dealing in equity derivatives. In exchange inspections they are penalised but it continues thereafter.

Insiders say that in many cities, there are regular traders who follow a proper 9 AM to 3:30 PM schedule, trading from brokers’ proprietary trading accounts using the IDs generated for them by brokers who mask them as staff. Sometimes, even these traders are unaware that such arrangements are in violation of SEBI and exchange regulations. In case of any default, the grievance redressal mechanism under SEBI regulations may not be available to them as there are no formal agreements. Settlements are done on a monthly basis, and brokers’ staff send them regular updates of account status using unofficial emails instead of any contract note.

One such Mumbai-based trader shared his ordeal with Moneycontrol. He and his friends were trading with a Delhi-NCR-based broker using its facility at Ram Mandir, Goregaon, in Mumbai. He said, “The broker’s senior staff did some wrong trades and made huge losses, but the losses were shifted to our accounts, and close to Rs 1 crore of deposit money has been withheld by the broking firm.” He alleged that the broker’s staff even threatened to harm them if they visited again seeking any kind of refund.

These individual traders primarily trade in equity derivatives, mainly index options. SEBI data suggests that in FY25, 91 percent of individual traders in the Futures & Options (F&O) segment lost money. The net losses incurred by such individual traders amounted to Rs 1.06 lakh crore. However, SEBI’s study is based on data from the top 13 brokers in the equity derivatives segment, where market leadership rests with discount brokers. The trades of such individual traders who operate through brokers’ proprietary accounts are not captured in these numbers, as such trades fall under the category of proprietary trades.

There are also individual traders who understand that their funds may get stuck as there is no formal arrangement with the broker. They say they have to take the risk as trading is the only skill they possess, and to run their families, they have no choice but to take such risks.

SEBI has taken various steps to curb excessive F&O trading in recent years, as concerns have grown about heightened retail activity in the segment. However, this is another area that may require regulatory attention.

Also read: ANMI urges SEBI to restore weekly Bank Nifty; seeks investor education, suitability norms