NSEL Defaulters and Defaulting Brokers

On July 31^st, 2013 the Rs.5600crore National Spot Exchange Ltd. (NSEL) crisis surfaced. The matter came under scanner of multiple agencies since then. Exchange was forced to shut down and suspend all its trading contracts.  After the payment crisis Regulatory Body, Investigating Agencies and NSEL had declared 24 members as NSEL Defaulters.

Brokerage firms involved in the NSEL crisis were also under the observation due to their fraudulent behavior. It came into light that some of the brokers gave promise of assured returns to the trading clients, which turned out to be wrong resulting into crisis. Corporate Affairs Ministry and other agencies including Enforcement Directorate (ED) have been investigating the defaulting brokers in the Rs.5600crore NSEL crisis case. SEBI was also been asked by government to take necessary action against these defaulting brokers.

Mr.Arun Jaitely the Finance Minister had told Lok Sabha that other than Corporate affairs Ministry Economic Offences Wing (EOW) and ED are also investigating the NSEL matter. EOW had attached properties of the accused worth Rs5757crore (approx.) and Rs.1222.89crore, 32 common properties had been attached by ED of Rs.740crore (approx.). Arun Jaitely in a written reply to Lok Sabha had said that SEBI is directed to examine and take necessary actions against defaulting brokers.

 In case of brokers various agencies are investigating into their role. It is proven in the audit report that defaulting brokerage firms named Anand Rathi Commodities, Geofin Comtrade, Motilal Oswal Commodities, India Infoline Commodities and Philip Commodities are guilty. SEBI with EOW and ED is investigating the role if these brokers in NSEL crisis Case.

SEBI the hope for NSEL crisis

SEBI the market regulator will be pursuing the guilty parties in the NSEL crisis with more determination, as the securities market regulator’s merger with the commodities market regulator was getting closer to completion, as decided by Government. It was said that SEBI was looking to begin enforcement measures against entities involved in the case. They would also initiate adjudication & disgorgement proceedings against guilty entities in the crisis if necessary.  SEBI was then likely to play a bigger role after completion of FMC integration. Legal matters related to NSEL too would be handled by SEBI’s legal department. Latest action was expected soon.

It was said that SEBI has sought a report on the entire NSEL crisis from the regulator. A popular question that was floating at the time was as to why was SEBI now been given charge of the guilty in the NSEL crisis? Was FMC not able to take a call on the crisis even though they had the powers to do so? It’s had been a substantially long time since FMC has been sitting on the NSEL matter. The guilty are still at liberty with all their assets still not discharged. It has also come to light after a fresh probe that commodities law violation would continue to be tried under the Forwards Act, however SEBI would have to enforcement powers over them.

This had come as a major relief to FMC, as sources say they were facing difficulties in the NSEL cases due to personnel issues.  For example, they were facing problems to defend the challenge of ‘fit & proper’ against FTIL due to lack of in-house legal department. FMC on many occasions had to rely on outside help on the legal matters. But, unfortunately did not have the provisions to get legal consultants on board.

Hopefully now since SEBI is going after the guilty in the crisis hit NSEL, we can hope this matter will take a worthy turn, relieving the innocent and taking appropriate actions against the guilty.

NSEL Brokers investigated by SEBI

SEBI ordered an audit report of brokerage firms involved in the NSEL crisis which came into light in 2013. It was due to the suspicion of these top brokerage firms being involved in the mis-selling of NSEL goods, according to the sources. However SEBI is facing difficulty in finalizing regulatory action in opposition to the brokers. It is because neither SEBI nor the previous commodities futures regulator, which has since merged with SEBI, were involved in oversight of NSEL, the three persons said on condition of anonymity. Investigation of brokers is probably completed and SEBI is lettering to the department of economic affairs in the finance ministry.

 Audit of brokers’ books was carried out by a third party, found that brokers mis-sold NSEL contracts by assuring high returns without ensuring delivery, said the second person. Mis-selling is one of the explanation areas that Sebi is considering while analyzing whether brokers complied with the ‘fit and proper’ criteria.

In case of NSEL brokers SEBI ordered audit books of top five brokers for the year of 2011, 2012 & 2013. These brokers involve Anand Rathi Financial Services Ltd (Rs.629 crore), India Infoline Commodities Pvt. Ltd (Rs.326 crore), Geojit Comtrade Ltd (Rs.313.25 crore), Motilal Oswal Commodities (Rs.263 crore) and Phillip Commodities (Rs.140 crore). 

A team was formed after the Ministry of finance asked SEBI to look into defaulting NSEL members. The team included executive directors heading three crucial Sebi divisions: surveillance, investigation and commodities. 

Around 200 brokers are alleged to have sold NSEL products by promising an assured return to investors to be sure. But there have been no specific complaints against them. When contacted the brokerage firms, their spokesperson had no idea or denied to comment on the same.

Even though the audit report is ready, Sebi is finding it difficult to finalize regulatory action as it is facing jurisdiction issues. SEBI was merged with the Forward Markets Commission (FMC), the commodities futures market regulator last year. FMC is one regulator which did not oversee NSEL, a commodities spot exchange.