NSEL Paired Contracts: Sebi cancels registration of Pulin Comtrade, MK Commodity Brokers

The two brokerages were found to have acted in a manner contrary to the "fit and proper" condition in the intermediary regulation.

The market regulator has cancelled the certificates of registration of two brokerages, Pulin Comtrade and MK Commodity Brokers, for facilitating trading in 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 brokerages’ registrations were cancelled through two separate orders issued by the Securities and Exchange Board of India (Sebi) through two separate orders on September 6.

In the order on Pulin Comtrade, earlier known as SMC Comtrade, the regulator stated that the brokerage “does not satisfy the ‘fit and proper person’ criteria specified in Schedule II of the Intermediaries Regulations and therefore, the continuance of the noticee as a broker will be detrimental to the interest of the securities market”.

Elaborating on the role of the intermediary, the Sebi ED Anand R Baiwar stated, “The role of a registered intermediary including a broker demands from it honesty, transparency, fairness and integrity as has been laid down in Clause 3(a) of Schedule II of the Intermediaries Regulations… a broker is bound to act in an honest and ethical manner and comply with all applicable regulatory requirements which would be in the best interests of investors. In view of the foregoing, I am of the view that the noticee was under statutory obligation to act with due skill, care and diligence in conduct of all its business and thus, it cannot be absolved of its duty to act with such care and skill in the garb of legitimate expectation.”

In the order on MK Commodity Brokers, the Sebi ED S Murali Dhar Rao wrote, “I am constrained to conclude that the act of the Noticee providing access to its clients to participate in a product, which was in violation of the 2007 Exemption Notification, raises serious questions on the ability of the Noticee to conduct proper and effective due diligence regarding the said product itself presumably, driven by its desire to earn brokerage.”

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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.