NSEL case: Sebi disposes of notices against Sharekhan Commodities without directions

The brokerage had raised the question of estoppel, a legal principle that stops someone from asserting something that contradicts their earlier statement

The market regulator has disposed of the two showcause notices issued against former broker Sharekhan Commodities Private Limited without any directions, following investigation into whether the entity was “fit and proper person” to continue to hold a brokerage registration.

The Securities and Exchange Board of India (Sebi) had started enquiry proceedings against the broker, after the latter was found to have facilitated the trading of the now banned ‘paired contracts’ as a member of National Spot Exchange Limited (NSEL).

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Operations of NSEL were suspended on August 6, 2013, after investigations found that there were physical commodities not available for delivery, that the exchange had permitted short-sale in commodities and the paired contracts were being offered as an alternative to fixed deposits with assured returns, among other things.

Since Sharekhan Commodities had already surrendered its certificate of registration and the market regulator had accepted it, “the present proceedings for determination of whether the Noticee is a FPP are rendered infructuous”, stated the order.

“Hence, I am not inclined to pass any directions against the Noticee,” added Sebi’s Chief General Manager (CGM), in the order.

In the order, the CGM commented on two points raised by the brokerage.

The brokerage had raised the question of estoppel, a legal principle that stops someone from asserting something that contradicts their earlier statement. The brokerage had stated that the registration was granted after considering all the aspects of fit-and-proper-person (FPP) and therefor Sebi is estopped from re-examination. “In my opinion, the statutory mandate of FPP contained in the Intermediaries Regulations will override the administrative act of registration,” noted the CGM in the order. That is, the mandate the broker must follow is more important than registration.

The brokerage had also stated that the second showcause notice issued by Sebi had completely bypassed the two-step procedure under the Intermediaries Regulations.

“However,” the CGM noted, “the SCN 2 was issued in line with directions of the Hon’ble SAT in the order dated June 9, 2022 as referred to in paragraph 15 above”.

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According to the order, the brokerage had surrendered its registration and the surrender had been accepted by Sebi before action against it was approved and a designated authority (DA) had been appointed. “The action against the Noticee and appointment of the DA was approved on September 21, 2018, by when the registration had already been surrendered,” the order stated.

“I also note that SEBI had subsequently filed a complaint to EOW (Economic Offences Wing) dated September 24, 2018 and an FIR was filed by SEBI on September 28, 2018, and the same includes the name of the Noticee,” the order added.