The Securities and Exchange Board of India (SEBI) will launch a special audit of four brokers over alleged irregularities conducted in commodity derivatives contracts.
The market regulator has ordered a special audit of these so-called market makers of the Indian Commodity Exchange (ICEX) Ltd, two persons aware of the matter told Moneycontrol.
The four broking firms have been identified as Gogia Capital Services limited, MSB e-trade Securities, Mauzampuria Securities Broking and Findoc Commodities.
Satish Gogia of Gogia Securities confirmed that SEBI has sought bank details. "We have submitted to the regulator and are ready to support in any investigation by any agency and we obey all the rules and regulations of LES,” he said.
One of the persons cited above said SEBI wants to do a special audit to investigate the money paid that it discovered was paid by the ICEX management to these four brokers under the Liquidity Enhancement Scheme (LES) for steel, diamond, Isabgol, rubber, pepper and PB1121. SEBI introduced LES primarily to develop greater liquidity in new and unique contracts, aware that it is a challenging task to achieve without the support of any market intervention.
SEBI is following the money trail, according to a second person. "For checking the end use of the amount paid for market making and if it was routed back to the exchange, the regulator wants to do a special audit of these brokers”.
Both persons did not want to be identified.
Findoc denied the charges. “We wish to confirm that there is no official communication by SEBI for any special audit being initiated on our company. We wish to confirm to you that we were appointed as official market maker along with few others by ICEX for doing market making in steel. We wish to confirm that we do official market making for almost all exchanges as and where there is any opportunity, as a business activity,” it said in a statement.
“We also confirm that all our dealings are as per the requirements of the exchange and are done purely for liquidity enhancement within the framework defined by the exchange,” the firm added.
MSB e-trade and Mazumpuria have not responded to repeated calls and messages so far.
SEBI, too, did not respond to Moneycontrol’s queries.
The four firms are involved in market making (market makers are individual market participants or member firms such as brokerages of an exchange that doubles up buying and selling securities on their own) in steel, diamond, rubber, pepper, Isabgol and PB1121 commodity derivative contracts.
In May 2020, the board of ICEX had appointed Choksi and Choksi LLP for conducting a forensic audit of ICEX. SEBI ordered the audit after a whistleblower took the lid off the irregularities in the LES. In the same month, the ICEX board sent its Managing Director (MD) and Chief Finance Officer (CFO) on compulsory leave till the investigation is over. It has not reinstated the MD till date.
In the forensic report, the auditor recommended further investigation of these brokers. It found that these brokers had incurred heavy expenses on their books during the period of market making.
“Mauzampuria Securities Broking and Findoc did not have experience of market making, but they were passed off as technically qualified in the LES committee,” observed the audit report.