NSEL Paired-Contracts Probe: Registration of Yacoobali Venture Commodity Broker suspended for three months

The SEBI official noted that the broker, being an intermediary, was expected to do due diligence on the products which it offered for trading to its clients.

The market regulator has suspended the registration of Yacoobali Venture Commodity Broking for three months, subject to conditions, for facilitating the sale of paired contracts on the now-defunct National Spot Exchange (NSEL).

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.

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The order of the Securities and Exchange Board of India (Sebi), dated July 10, stated, “the Noticee by its conduct and as a member of NSEL has acted as an instrument in promoting and/or dealing in ‘paired contracts’ which were in the nature of financing transaction (as held by the Hon’ble Supreme Court of India referred supra). The Noticee, by trading and by providing access for taking exposure to ‘paired contracts’ has exposed its clients to the risk involved in trading in a product that did not have regulatory approval and thereby raises doubts on its competence to act as a registered securities market intermediary.”

In 2007, the central government had given an exemption to all forward contracts of one-day duration for the sale and purchase of commodities traded on NSEL from operations of the provisions of the Foreign Contribution Regulation Act (FCRA) subject to certain conditions including “no short sale by the members of the exchange shall be allowed” and “all outstanding positions of the trades at the end of the day shall result in delivery”. But the Forward Market Commission (FMC) that had looked into NSEL’s functioning found that the exchange had violated the no-short-sale clause and was allowing contracts that had settlement periods that extended beyond the set limit.

The Executive Director of SEBI, Babitha Rayudu, wrote in her order that she is of the view that “the trading activities of the Noticee in ‘paired contracts’ for its clients on the NSEL platform has seriously jeopardized its reputation, SEBI’s belief in its competence, fairness, honesty, integrity and character, which compelled SEBI to file the criminal complaint against such brokers including the Noticee”.

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The SEBI official noted that the broker, being an intermediary, was expected to do due diligence on the products which it offered for trading to its clients. By assuming that the ‘paired contract’ was legal, the broker failed to exercise adequate due diligence, the order added.