Stockal Scam: Why SEBI May Not Protect Foreign Stock Investors

Retail investors WHO allegedly lost more than Rs 100 crore in unauthorised transactions linked to the Stockal investment platform may have limited options for regulatory relief in India. According to Sandeep Parekh, founder of Finsec Law Advisors, the Securities and Exchange Board of India (SEBI) does not have jurisdiction over foreign-listed equities, leaving affected investors to seek remedies primarily through criminal law and contractual proceedings.

Parekh made the remarks in response to a report detailing how nearly 30 Indian retail investors allegedly suffered substantial losses after unauthorised trades were carried out through Stockal Securities, a Bengaluru-headquartered Fintech platform that provides access to US stocks and other overseas investments.

Investors Reportedly Lost Over Rs 100 Crore

The affected investors have alleged that their accounts were accessed without authorisation on October 15. According to their claims, their holdings in US blue-chip stocks were liquidated in multiple unauthorised transactions, resulting in significant losses to their investment portfolios.

Stockal Securities provides Indian retail investors with access to US-listed shares, exchange-traded funds (ETFs) and other foreign securities. Its India-facing application allows users to fund accounts, place trades and monitor their investment portfolios.

The platform works with overseas financial intermediaries, including US-based clearing broker DriveWealth LLC, which facilitates trade execution and holds assets through the relevant foreign-market Infrastructure.

Why SEBI May Not Be Able to Intervene

Parekh said that SEBI’s regulatory authority does not automatically extend to every transaction involving financial securities. He explained that foreign-listed stocks do not fall within the definition of securities under the Securities Contracts (Regulation) Act (SCRA) and the SEBI Act in the context discussed.

As a result, SEBI’s Prohibition of Fraudulent and Unfair Trade Practices (FUTP) regulations may not be available to address unauthorised transactions involving foreign equities executed on overseas exchanges. This could also limit the regulator’s ability to penalise domestic technology platforms or direct compensation for losses arising from such trades.

“SEBI doesn’t come in every time securities are involved. Foreign securities are not securities under SCRA or SEBI, so it is not at all within SEBI’s jurisdiction,” Parekh said.

He added that the dispute falls outside SEBI’s regulatory perimeter and is governed largely by contractual obligations between the parties involved.

SEBI Registration Does Not Cover All Overseas Transactions

The Stockal case has raised questions about the regulatory protection available to Indian investors using domestic fintech applications to access international markets.

Platforms facilitating overseas investments may highlight their SEBI registrations, but experts caution that such registration does not necessarily mean that foreign equity transactions conducted through their services are regulated by SEBI.

The distinction is important because investors may assume that using an India-based application with a domestic regulatory registration provides the same safeguards available when trading securities on Indian exchanges.

However, when transactions are executed through overseas brokers and custodians, the legal responsibilities and available remedies can depend on the contractual arrangements and regulatory framework governing those foreign entities.

Stockal and DriveWealth Disagree Over the Security Breach

The alleged unauthorised transactions have also exposed a dispute between the overseas broker and the Indian platform over where the security failure may have occurred.

DriveWealth, a US Securities and Exchange Commission (SEC)-registered clearing broker, has reportedly maintained that the security compromise occurred at the user-interface level of its Indian fintech partner. It has also sought to limit its responsibility for third-party failures and corrective account adjustments.

Stockal, meanwhile, has maintained that its core platform infrastructure was not compromised. It has pointed towards possibilities such as external credential theft or Phishing attacks at the user level.

The disagreement highlights the difficulty investors may face when multiple service providers are involved in a single overseas investment transaction. Determining where unauthorised access occurred and which entity bears responsibility could become central to any legal claim.

Why Recovering Losses Could Be Complicated

Parekh also highlighted differences between the ownership and custody structures used in Indian and US equity markets. In India, investors generally hold listed shares in their own demat accounts through depositories and depository participants.

In the US market structure described by Parekh, foreign brokers or custodians may hold legal title to securities on behalf of clients. This arrangement can make it more complicated to trace unauthorised liquidations, establish responsibility and determine the appropriate route for seeking recovery.

When a transaction involves an Indian-facing fintech application, an overseas broker and foreign-market custody arrangements, investors may have to deal with multiple contractual relationships and legal jurisdictions.

Criminal Law and Contractual Remedies in Focus

With SEBI’s jurisdiction over the foreign equity transactions in question being disputed, affected investors may need to explore remedies under criminal law and applicable contractual provisions.

The legal route available to each investor could depend on the circumstances of the alleged account access, the transaction records, the agreements governing the investment account and the responsibilities accepted by the platform and its overseas partners.

The Stockal episode has therefore brought attention to a potential regulatory gap in cross-border retail investing. As more Indian investors use technology platforms to access international markets, clarity over the responsibilities of domestic intermediaries, foreign brokers and custodians remains important for Investor Protection.

For investors, the central issue is not only how the alleged unauthorised trades occurred, but also which entity is legally responsible and where an effective remedy can be pursued.

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