NSEL Paired Contracts: Sebi cancels registration of two brokerages

The order also took into consideration the complaint filed by Sebi and the FIR that was registered by the Economic Offences Wing.

The market regulator has cancelled the certificate of registration of Arcadia Commodities and Trading and Modex Commodity Trades, for facilitating the trade of paired contracts on the now-defunct National Spot Exchange (NSEL).

The exchange, which had been given exemptions from the Foreign Contribution Regulation Act (FCRA), subject to certain conditions, was found to have violated the conditions. It was also found to have advertised the contracts as an alternative to fixed-income instruments even though there was considerable risk involved.

The order issued by the Securities and Exchange Board of India (Sebi) on Arcadia and dated October 23 read, “The execution of such paired contracts shows participation of the Noticee in the said scam which raises questions regarding the integrity, honesty, ethical behaviour, reputation, fairness and character of the Noticee.”

The order on Modex, issued on October 23, stated, "the scheme of ‘paired contracts’ traded on the NSEL ultimately has caused loss to the market which itself casts serious aspersion on the conduct, integrity and reputation of, inter alia, the Noticee who facilitated such ‘paired contracts’ and therefore, its continuing role in the Securities Market cannot be viewed as good and congenial for the interest of the investors or of the Securities Market."

Also read: Sebi bans individual from securities markets for 5 years

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 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.

Therefore, all brokerages that facilitated the trade of these contracts have been under the scanner.

The orders also took into consideration the complaints filed by Sebi and the FIRs that were registered by the Economic Offences Wing (EOW). With the criminal complaints pending resolution, they can be taken into consideration by the market regulator to determine if an intermediary is “fit and proper”.

In the order on Arcadia, Sebi’s Whole-time Member Ananth Narayan G stated, “The facts and circumstances along with other material available on record clearly leads me to the conclusion that the Noticee has not satisfied the “fit and proper person” criteria specified in Schedule II of the Intermediaries Regulations.”

A similar sentiment was echoed in the order on Modex.