ED's investigation against defaulters at halt

The Enforcement Directorate’s (ED’s) research of alleged National Spot Exchange Ltd (NSEL)  crisis has reportedly come to a twist because some suspects are no longer returning to the agency’s summons.

It is known that the agency’s summons are no longer backed by the threat of arrest after two judgments delivered by the Punjab and Haryana High Court on 22nd and 25th of July as per information from ED officials. In these rulings, the High Court has stated that if a person is not in detention or summoned during investigations that take place instantaneously after a case is filed, he or she cannot be arrested after a charge sheet has been filed in court.

In the bargain of these rulings, the accused in the NSEL crisis are now no longer cooperating with the investigations. Summons to defaulters and other accused to appear for questioning are not being honored as the ED may not be able to arrest them on charges of not cooperating with investigations, following the High Court orders. The agency is said to be planning to appeal against the court’s ruling in the Supreme Court and are currently taking legal counsel on the tenability of approaching the apex court, considering these are interim orders.

Rogue brokers carried out Money Laundering in NSEL case

Brokers have been in light in the NSEL case for their act of mis-selling. SEBI is investigating the work of brokers in NSEL crisis. There was 60 Days of time given to the brokerage firms to have their books of accounts vetted, by the Investigating agencies. In addition to that it is said that SEBI has came across fresh evidence against the top five brokerage firms involved in NSEL case. The evidence states that there is high possibility of brokers involved in using the ‘Exchange Mechanism’ for money laundering. SEBI had appointed a third party auditor, who has submitted an audit report and that report are reviewed by regulator. As a result ‘show cause’ notices would be sent to the brokers according to the evidence found.     

There are number of audit findings which require through explanations. Some of the disturbing audit findings which are evidence against brokers are given below:-

• According to the audit, it comes to knowledge that upto five brokers had sold products NSEL goods by giving out false promises of getting returns upto 16%
•  It was also found that some of the brokers had facilitated loans to investors through their non-banking financial companies despite being aware that there were no such goods with the borrowers/defaulters.
• Further facts state that the transactions that took place were very complicated in nature, and all the entities involved were used to trading on the NSEL platform with the intent to legitimize the funds.
• The audit report also include instances of mishandling or unofficial modification of unique client code. There were several instances of discrepancies and manipulation of books of accounts.

 The audit report clearly fulfilled that many spiteful activities including manipulation, mis-selling & deceit have been carried out by the brokers which possibly lead NSEL to the gigantic Rs. 5600 crore crisis. In the bargain of these fraudulent activities carried on by some spiteful brokers many entities connected to NSEL have been greatly affected. These malicious activities by brokers need to be verified further and strict action needs to be taken against these rouge brokers.

The Market Regulator - SEBI

In the NSEL crisis which came into light in 2013 there is latest development in terms of fraudulent behavior of Brokers. SEBI completed investigation against top 5 brokerage firms involved. According to Sebi official the delays by brokers occurred when Sebi was not their regulator. At the time when violations took place in NSEL contracts the Sebi or FMC were never under the ambit in the first place. 

It is stated that from a regulatory perspective if Sebi would have faced jurisdiction issues if it would have tried to act against the 24 NSEL Defaulters and Brokerage firms involved. In the NSEL crisis, since FMC itself had no regulatory jurisdiction over the commodity spot and ready-delivery contracts. Hence, Sebi may not assume jurisdiction which was originally never there mentioned by Tejesh Chitlangi, partner at law firm IC Legal. 

As the merger of FMC and Sebi took place brokers are abided by the Securities Act and have come under the purview of the Sebi broker regulations. In the current rules applied for brokers, Sebi evaluates brokers and intermediaries to make sure they meet its ‘fit and proper’ criteria. 

Sebi also has the rights to impose rules on brokers unlike FMC, where brokers were governed by exchange guidelines. The regulator can act against an intermediary for violation of FUTP and under Section 11B for protecting the rights of investors if it finds the conduct of a broker questionable. 

One of the official mentioned that code for brokers will be strict and very precise for do’s and don’ts. There will be eye on the broker who carry out misrepresentation, lack of due diligence, material un-disclosed conflicts and/or any other shortcomings on part of such brokers. Sebi would be well within its right to penalize them  in case of any faulty practices. Sebi, on its part, is going to refer the report to the department of economic affairs. They would apprise the ministry of their findings with respect to the NSEL brokers as they move towards finalizing a course of action.

Trading was stopped on NSEL in July 2013 after the payments crisis, which assumed the dimensions of a scam, surfaced at the supplies bourse, which is 99.99% owned by Financial Technologies India Ltd

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.

Real Face of NSEL Brokers

Since NSEL crisis came to light there has been series of events where, FTIL the parent company of NSEL is questioned. The defaulters and brokers are sidelined when the money trail of the defaulting amount of 5600 Cr. is traced to the defaulters. Since 2013 when the crisis came to knowledge there has been a needle of doubt on brokers as they fraudulently used details of investors for NSEL platform.

Securities and Exchange Board of India (SEBI) the market regulator has launched a probe against brokers for the act of selling goods with assured returns of 16% and misleading the investors. This is altogether new turn into the NSEL proceedings as this probe has fresh evidences against brokers. According to the sources there are six leading brokers involved.

Accounts of brokers that sold NSEL schemes are also being investigated. It is suspected that these brokers conducted selling of products of NSEL with promise of assured returns. There is also possibility of involment of black money diverted to sister concerns. Apart from SEBI, a high-level committee constituted by the Bombay High Court and other probe agencies are also investigating the matter. 

It is stated that the committee as also other regulators and investigative agencies have found major differences in the data and details submitted by various investors as part of their claims, as against the data submitted by NSEL. These discrepancies include submission of wrong PANs (Permanent Account Numbers), raising doubt about source of funds, while authorisation letters and trade execution documents submitted by brokers have also been questioned. There are also cases of some brokers that they created fake ledger accounts in the name of their clients without their knowledge, sources said. Complaints against brokers include false assurances, enticement and falsification by brokers, trading without right authority from clients, misuse or unauthorised modification of unique client code, funding by NBFCs related to the broker and non-receipt of payouts by clients. 

NSEL Defaulter: Metkore Steel and Alloys Limited

In the year 2013 when National Spot Exchange Limited crisis came into light the parent company FTIL is blamed. But the defaulters who are actually responsible for all the money laundering are roaming scot-free. Defaulter AasthaMinmet, Lotus Refineries, Metkore  Alloys are some of the defaulters who are investigated by investigating agencies.

Metkore  Alloys is Andhra Pradesh based company. It turned out to be one of the biggest defaulter. Metkore  Alloys owes Rs 94.83 crore  to National Spot Exchange. Metkore  Alloys led by Prashant Boorugu and Savitha Boorugu. Amongst them Prashant Boorugu was arrested on 11 Aug 2014 but released on 11 Sep 2014. Metkore Steel and Alloys Limited (MAIL) has declared lockout at its Ferro-chrome manufacturing plant located in the north coastal Andhra district of Srikakulam.

In 2014 the factory employees reportedly blocked the representatives of the public sector Steel Authority of India (SAIL) and NSEL from inspecting the Ferro-chrome stocks that were kept at the company's warehouses in Tekkali town. The inspection was planned after the Maharashtra Protection of Interest of Depositors (MPID) court allowed the auction of Metkore's Ferro-chrome stocks worth of Rs 91 crore under the supervision of the monitoring and auction committee appointed by the Forward Markets Commission. NSEL NSEL invites bids to sell ferrochrome stock of defaulter Metkore Alloys.

There are other defaulters like Metkore  Alloys who are spending their lives on the defaulted money of NSEL investors. Enforcement Directorate is considering freezing assets of some other defaulters for the recovery of NSEL money.

Lotus Refineries: One of the NSEL Defaulter

In the year 2013 when National Spot Exchange Limited crisis came into light the parent company FTIL is blamed. But the defaulters who are actually responsible for all the money laundering are roaming scot-free. Defaulter AasthaMinmet, Lotus Refineries, White Water are some of the defaulters who are investigated by investigating agencies.

Lotus Refineries is Maharashtra based company with assets situated in Punjab & Chandigarh. The Seventh-biggest defaulter Lotus Refineries owes Rs 252.48 crore to the National Spot Exchange. Lotus Refineries  led by Arun Kumar Sharma and Prashant Kumar Anand. Amongst them Arun Kumar Sharma was arrested on 11 Nov 2013 but released on 11 Feb 2014.

The Maharashtra Protection of Interest of Depositors (MPID) court has ordered transfer of Rs 12.74 crore from 27 bank accounts of Lotus Refineries Pvt Ltd to the account of the competent authority in the Rs 5,600 crore National Spot Exchange Ltd (NSEL) crisis case.

There are other defaulters like Lotus Refineries who are spending their lives on the defaulted money of NSEL investors. Enforcement Directorate is considering freezing assets of some other defaulters for the recovery of NSEL money.