Sebi likely to order forensic audit of brokers linked to NSEL scam

The Securities and Exchange Board of India (Sebi) is likely to order a forensic audit of brokers linked to the National Spot Exchange Ltd (NSEL) scam even though an initial probe into the role of these brokers did not spot too many violations, two people familiar with the developments said.

In April, Sebi had ordered an audit of top six brokers that sold products of NSEL.

“The audit report submitted by the lead auditor Borkar and Majumdar on Monday is understood to have been convinced by the explanations given by the brokers for certain instances of inaccuracies,” said the first of the two persons quoted above, requesting anonymity as the report is confidential.

A second person confirmed this but said some instances of client code modification and trading without clients’ authority were detected. “However, these instances were not malicious in nature,” the second person added on condition of anonymity.

While the audit failed to establish a concrete violation of the Sebi Act, the regulator is still probing the brokers and is considering a forensic audit.

“Sebi wants to determine whether there was any misselling of NSEL products with the promise of assured returns, and if the brokers failed in their fiduciary responsibility while selling the NSEL products. The regulator may go for a forensic audit to establish that,” said the first person quoted above.

An email sent to a Sebi spokesperson on Thursday was not answered.

The audit of the brokers, ordered on 6 April, came after the capital markets watchdog formed an investigation team to look into the role of brokers in the Rs.5,574 crore NSEL scam. The NSEL scam came to light on 31 July 2013 when the exchange suspended settlements, eventually leading to a loss to 13,000 investors. The exchange is 99.99% owned by Financial Technologies (India) Ltd (FTIL).

On Tuesday, the Enforcement Directorate arrested Jignesh Shah, founder and former chairman of 63 Moons Ltd (formerly FTIL) on charges of money laundering in connection with the NSEL scam.

The role of brokers in the NSEL scam has been questioned by the courts as well. Earlier this year, a committee set up by the Bombay High Court to refund investors in NSEL had called for an audit of the records of the exchange, its investors and trading members, after it came across discrepancies in the figures submitted by them. The court also asked that brokers who sold NSEL products should be audited.

According to disclosures made by NSEL, at the time the exchange halted settlements, the exposure of Anand Rathi Financial Services Ltd was at Rs.629 crore; India Infoline Commodities Pvt. Ltd was at Rs.326 crore; Geojit Comtrade Ltd at Rs.313.25 crore; Systematix Commodities Services Pvt Ltd at Rs.277 crore; Motilal Oswal Commodities at Rs.263 crore and Phillip Commodities at Rs.140 crore.

“We have submitted all the required information and have co-operated with the auditor. We are not privy to the auditor’s report hence we are unable to comment,” said Ajay Menon, director, Motilal Oswal Commodities in an emailed response.

A spokesperson for IIFL declined to comment. Emails sent to Phillip Capital, Anand Rathi and Geojit Comtrade on Thursday went unanswered.

According to Ananth Subramanian, practising company secretary and council member, Institute of Company Secretaries of India (ICSI), any audit is to ascertain that the culture of compliance is maintained and sustained.

“An audit is an examination of documents, books of accounts, (and) minutes of the meetings to ascertain that they confirm to the statutory requirements,” said Subramanian.

“However, a forensic audit goes back to the audit trail to establish how the transactions happened and also links to the original transactions to detect a fraud or whether the outcome of the transactions is the same as what was stated originally,” added Subramanian.

Sebi will club together the audit report and the forensic audit that was done by the economic offences wing in 2015 to take the investigations forward, said the first person quoted above.

Shriram Subramanian, founder and managing director, InGovern Research Services Pvt. Ltd said that on occasions, an audit is not sufficient to establish whether any rules were broken.

“Sebi regularly conducts audit of brokers, but when there are questions on conduct of the broker, a mere audit may not be enough. The regulator can also go in for the examination of emails, phone records and client communication,” he said.

Commodity brokers, after the merger of erstwhile commodity markets regulator Forward Markets Commission (FMC) with Sebi in September 2015, were registered under the Securities Act, thereby bringing them under the purview of the Sebi’s broker regulations. These allow the regulator to take action against them if needed for violation of the Fraud and Unfair Trade Practices Regulations (FUTP).