Sebi begins action against NSEL brokers

Mumbai: Three years after the National Spot Exchange Ltd (NSEL) scam and eight months after the merger of the Forward Markets Commission (FMC) with the Securities and Exchange Board of India (Sebi), action against NSEL brokers is on the cards.

The capital market watchdog has formed an investigative team to look into their role, said two persons familiar with the development. “Sebi has formed an investigative team-cum-committee to look into the allegations against the brokers of NSEL,” said one of the persons quoted above.

The team includes the executive directors heading three of Sebi’s crucial divisions—surveillance, investigation and commodities, said the second person cited above. “The team will examine these brokers to establish whether they indulged in mis-selling and client code modification,” said the second person.

Both persons spoke on condition of anonymity.

An email to a Sebi spokesperson on Monday did not elicit a comment.

The move assumes importance as every party involved in the Rs.5,574.34-crore scam has faced regulatory or enforcement action, including spot exchange NSEL, its parent firm Financial Technologies of India Ltd (FTIL) and the 24 trading members who defaulted on their payments to NSEL.

However, the brokers’ role did not come under proper scrutiny in the absence of a decisive regulatory jurisdiction.

The erstwhile commodities regulator, FMC, did not have jurisdiction over the brokers as they were governed by exchange by-laws.

Unlike the FMC, which was merged with Sebi on 28 September 2015, the latter, under the existing rules for brokers and intermediaries, can assess the brokers and intermediaries to ensure they match the “fit and proper” criteria.

“FMC regulations did not have specific guidelines for brokers and were governed by by-laws. However, Sebi under Fraudulent and Unfair Trade Practices (FUTP) and broker regulations can take action,” said Parag Bhide, director, Advaya Legal, a commercial law firm that represented Lotus Refineries, named as a defaulting member of NSEL, in the past. It no longer represents any of the parties involved in the NSEL case.

Some 200 brokers are suspected to have sold NSEL contracts as investment vehicles by promising an assured return to investors.

Sebi, under the rules, could penalize or suspend the brokers if they are found violating norms.

Trading was halted on NSEL in July 2013 after the settlement scam surfaced at the commodities bourse, which is 99.99% owned by FTIL.

In February, the ministry of corporate affairs (MCA) ordered a merger between FTIL and NSEL.

The economic offences wing (EOW) of the Mumbai Police has been investigating the role of brokers in the NSEL scam ever since it came to light. In March 2015, three brokerage officials were arrested in connection with the scam and later released.

The executives were Amit Rathi, managing director of Anand Rathi Financial Services Ltd; C.P. Krishnan, whole-time director of Geofin Comtrade Ltd; and Chintan Modi, vice-president of India Infoline Commodities Ltd.

The three brokerage executives were arrested on charges of cheating, forgery, criminal conspiracy and misappropriation, Mint reported on 5 March. Soon after the arrests, the three brokerages issued statements saying they were cooperating with investigating agencies and would continue to do so.

To be sure, NSEL, on 26 March, wrote to FMC seeking action against the brokers. But, due to the lack of jurisdiction, FMC could not initiate action.

As per disclosures by NSEL, the Indian Bullion Markets Association (IBMA), a trading arm of NSEL, has the highest exposure at Rs.1,159 crore; Anand Rathi has an exposure to the tune of Rs.629 crore; India Infoline Commodities of Rs.326 crore; Geojit Comtrade of Rs.313.25 crore; Systematix Commodities of Rs.277 crore; Motilal Oswal Commodities of Rs.263 crore and Phillip Commodities of Rs.140 crore.

Emails sent to Phillip Commodities and Motilal Oswal Commodities sent on Monday remained unanswered.

Emails sent to Systematix Commodities and IBMA on Tuesday remained unanswered till press time.

Anand Rathi, India Infoline and Geojit Comtrade said they are not aware of such a development and have not received any communication from Sebi.