SEBI board wants to make NSEL case watertight, seeks action against all brokers

The Securities and Exchanges Board of India's board has approved action against 147 broking firms which traded on the scam-tainted National Spot Exchange Limited (NSEL). These brokers have been accused of misselling the products on NSEL, to their clients, a source familiar with the development told Moneycontrol.

SEBI had recommended that action be taken against only 12-15 of them, as they accounted for around 80 percent of the trading volumes on NSEL. Commodity brokers which had traded heavily on the NSEL included Geofin Commodities, Philip Commodities, Anand Rathi, Motilal Oswal and India Infoline Commodities.

"The board clearly wants to make the case water-tight. If SEBI had taken action against some select brokers, then they could have found themselves in a tight corner in court. Even those brokers would have argued why the regulator was targeting only them,” another source told Moneycontrol.

The Rs 5,600 crore-scam at NSEL involved a little over dozen commodity firms borrowing money on the NSEL platform by depositing commodities as collateral. Later, the borrowers defaulted when asked to settle their contracts, and in many case, the collateral was inadequate or simply missing.

With SEBI approving unified broking licence, broking houses do not need a separate company to operate their commodities broking business; they can do so alongside their equities broking business. SEBI had not cleared the applications of commodity brokers which had applied for a renewal of their registration . Many of the commodity brokers are now withdrawing their application since it is no longer necessary. However, SEBI hasn’t allowed them to withdraw their applications.

SEBI will first initiate action against 12-15 brokers by issuing a show cause notice, while action against the remaining entities registered as stockbrokers with SEBI would be taken after receipt preliminary report from the Mumbai Police's Economic Offence Wing (EOW), which has been probing the NSEL case.

EOW arrested officials of three brokers but no chargesheet has been filed against them or other brokers. SEBI took note of an interim report of EOW wherein EOW had referred to its investigation of five brokers. SEBI started enquiry proceedings and issued SCN to the five brokers.

Violations of FCRA, if any, are to be dealt by SEBI alone after merger with FMC and there cannot be any interference from the Ministry of Finance. Section 132 of the Finance Act, 2015 states that, "a fresh proceedings related to an offence under the Forward Contract Act may be initiated by SEBI under the Act within a period of three years from the date on which the act is repealed (September 27, 2015) and be proceeded with as if that Act has not been repealed," a source told Moneycontrol.