About 300 NSEL brokers face commex trade ban

The markets regulator's decision to bar the broking arms of Motilal Oswal Financial Services Ltd and India Infoline Financial Ltd will also see a similar implication on 300 other brokers if they are found guilty in the NSEL case. The brokers were issued show-cause notices last year.

On Friday, the Securities and Exchange Board of India (Sebi) has declared Motilal Oswal Commodities Broker Pvt Ltd (MOCBPL) and India Infoline Commodities Ltd (IICL) as "not fit and proper" to carry out commodities business on account of their role in the National Spot Exchange Ltd (NSEL) case.

In two separate orders, Madhabi Puri Buch, wholetime member, Sebi said, "In the interest of investors and to protect integrity of the securities market" the firms are declared as "not fit and proper ... to hold, directly or indirectly, the registrations as commodity derivative brokers".

The order also said that Sebi has initiated proceedings against approximately 300 brokers in September 2018 and "the question of perceived discrimination in this context does not survive".

Both MOCBPL and IICL were asked to allow their existing clients to withdraw or transfer their securities or funds held in its custody or withdraw any assignment given to it, without any additional cost to such clients within 45 days from the date of the order. The order comes into force from immediate effect.

SEBI is investigating the Rs 5,600 crore NSEL fraud where around 300 brokers were charged of defrauding around 13,000 investors. In July 2013, NSEL was found to have allowed paired contracts on its platform, violative of the Forward Contracts (Regulation) Act. Paired contracts means buying and selling the same commodity through two different contracts at two different prices on the exchange platform and investors could buy a short duration settlement contract and sell a long duration settlement contract and vice-versa at the same time.

The nature of financing transactions was violative of the Maharashtra Protection of Interest of Depositors (MPID) Act.

The Sebi order said that the brokers, by their own admissions, have facilitated transaction in the said paired contracts for its client on the NSEL platform.

"This itself establishes close association between brokers on one hand and paired contracts and NSEL on the other", the order said, adding that the firms allowed themselves to "become a channel and instrument for NSEL to promote paired contracts amongst its clients".

According to a legal expert, the law should be same for everyone and the judgement has to be similar to everyone involved in the NSEL case.

"It would also be a prominent message for those indulging in malpractices," the expert said.

Apart from MOCBPL and India Infoline, other leading brokers which were investigated in the NSEL case include Anand Rathi, Phillip Capital, and Geofin Comtrade.

Motilal Oswal in its statement said that MOCB and the group have its own group investment of Rs 58.7 crore due from NSEL on the date of default.

MOCBPL itself is the victim of a scam like thousands of investors. The firm said it is aggrieved by this order and is in consultation with its lawyers to explore legal options, according to the statement from the MOFSL. MOCBPL has been merged recently to its parent MOFSL, according to a company spokesperson. However, the spokesperson did not offer a comment on the adverse impact of the Sebi order on Motilal Oswal's business.

"We assure our esteemed stakeholders, including investors, that the said order against MOCBPL will have no impact on overall business activities of companies of Motilal Oswal group in any segment. The interests of our valued investors are paramount to us," the statement further read, adding that around 300 brokers have been issued show-cause notices on by the regulator and in all around 600 brokers had been doing business in NSEL on the date when it suddenly stopped business in 2013.

IIFL in a disclosure on the stock exchanges said IICL does not have any outstanding dues to any clients. IICL also does not have any proprietary position. It is seeking legal advice as regards to going for an appeal, in this matter".

It clarified to all its stakeholders and clients that this order has no impact on businesses of other companies of IIFL Group.

Both firms applied for registration as commodity derivatives brokers in 2015 but failed to receive approvals from Sebi.

The Sebi order also said that the firms made a false representation in respect of assured/ risk-free return, arbitrage opportunity in spot market by way of pair contracts, making assurances that pair trades are backed by collateral in the form of stock/ sufficiency of commodities in warehouses and making statements that goods in warehouse are backed by insurance cover.

NSEL failed to maintain sufficient underlying stock to support the trades it allowed on its platform, while brokers sold contracts to investors.

Uttam Bagri, chairman, Bombay Stock Exchange Brokers Forum has recently told DNA Money that any across the board action on hundreds of intermediaries will affect the entire financial ecosystem.

"The masterminds of the scam are attempting to divert the regulatory attention from them by targeting brokers who are victims themselves," he has said.

A senior official of an international broking firm said if proven that the 300 brokers were involved in the malpractices, they would face a similar implication. He, however, said there will be no significant impact on commodity trading as MCX, the largest commodity exchange, is largely into bullion, crude oil, and base metals. BSE and NSE are also focused on non-agri commodities, hence will not see any impact, the official said.

"MCX is hardly into agricultural commodities, while the spot exchange was focused around that. People who may suffer are those on NCDEX, since they are into agri and have some common brokers," he said.