The regulator had issued showcause notices to the brokers asking why should not they be declared "not fit and proper", given their involvement in the NSEL case
After barring Motilal Oswal Commodities Broker Pvt Ltd and India Infoline Commodities Ltd last week from commodity trading, markets regulator Securities and Exchange Board of India (Sebi) has declared Anand Rathi Commodities Ltd (ARCL) and Geofin Comtrade Ltd (GCL) as "not fit and proper" to carry out commodities business on account of their role in the National Spot Exchange Ltd (NSEL) case.
However, the impact of the Sebi order may not be material because most of the commodity broking arms of these companies are either defunct or merged with the parent entity.
In two separate orders, Madhabi Puri Buch, wholetime member, Sebi, said, "In the interest of investors and to protect the 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".
"Reputation is an important factor for consideration of fit and proper critera and the reputation (of these firms) has been seriously eroded," Buch said.
After the merger of the commodity markets regulator Forward Markets Commission (FMC) with Sebi in September 2015, the regulator had issued showcause notices to the brokers asking why should not they be declared "not fit and proper", given their involvement in the NSEL case.
Anand Rathi Commodities in a statement said it is examining the order and will take necessary legal steps to file an appeal against the order.
"ARCL and its clients and employees are in fact victims of this fraud perpetrated by NSEL," it said, adding that the Sebi order has no impact on other businesses of the group.
According to a company spokesperson, ARCL is a separate legal entity and the impact of the Sebi order would not be material.
On the other hand, Geojit Financial Services Ltd in a BSE disclosure said Geofin Comtrade Ltd (earlier known as Geojit Comtrade Ltd) was not a subsidiary or associate or group company.
Both firms 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.
In its order, Sebi said even though these observations are yet to be established in a court of law, the regulator is justified in considering them when assessing the reputation of the parties concerned for the purpose of determining their fit and proper status since it is mandated with investor protection, and in that context it is justified in keeping a person with a doubtful reputation out of the market rather than running the risk of allowing the market to be affected.
The order also noted that the firms had made false/misleading 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, making statements that goods in warehouse are backed by insurance cover; which are in violation of provisions of various circulars, rules and byelaws of NSEL and of the Forward Contracts Regulation Act (FCRA).
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. The nature of financing transactions was violative of the Maharashtra Protection of Interest of Depositors (MPID) Act.
NSEL failed to maintain sufficient underlying stock to support the trades it allowed on its platform, while brokers sold contracts to investors.
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 a 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".
Around 300 brokerages are expected to face action by Sebi for trading in paired contracts. In September last year, the regulator issued show cause notices to these broking firms.
However, according to industry sources, the orders passed by Sebi are against entities which are either defunct or have been merged with the parent company. Though many of them have applied for registrations of commodity broking with Sebi, later they expressed their intent to withdraw such applications. Hence, the Sebi order may not have any material impact on the functioning of these brokerages.
IN THE DOCK
- The regulator had issued showcause notices to the brokers asking why should not they be declared "not fit and proper", given their involvement in the NSEL case
- The impact of the Sebi order may not be material because most of the commodity broking arms of these companies are either defunct or merged with the parent entity
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