Sebi cancels broking registration of Emkay Commotrade for facilitating NSEL's 'paired contracts'

The market regulator said that there were enough red flags that should have alerted the broker.

The market regulator has cancelled the Certification of Registration of the commodity broker Emkay Commotrade, for facilitating the illegal paired-contracts transactions in the National Spot Exchange.

Operations of the National Spot Exchange (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 Securities and Exchange Board of India (Sebi) order stated that “the trading activities of the Noticee (Emkay Commotrade) in ‘paired contracts’ for its clients on NSEL platform have serious ingredients amounting jeopardizing the reputation, belief in competence, fairness, honesty, integrity and character of the Noticee in the Securities Market”.

It added that “the conduct of the Noticee is detrimental to the Securities Market being not in conformity with the applicable code of conduct.”

According to the order, “by virtue of the Noticee’s participation/ facilitating in the trading in ‘paired contracts’ on NSEL platform during the relevant period as a Trading Member/Clearing Member, the Noticee has violated the conditions of the 2007 Exemption Notification and also the provisions of the FCRA.”

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 order on Emkay Commotrade added that “the act of Noticee in offering access to ‘paired contracts’… seriously calls into question the integrity, honesty and lack of ethical behaviour on its part. These contracts, as stated earlier, were ex facie offered in violation of the 2007 Exemption Notification issued by MCA and far removed from the spot contracts in commodities”.

The market regulator said that there were enough red flags that should have alerted the broker.

The order has asked Emkay Commotrade to allow existing clients, if any, to withdraw or transfer their securities or funds held in its custody, within 15 days from the date of the order. The order added, “In case of failure of any clients to withdraw or transfer their securities or funds within the said 15 days, the Noticee shall transfer the funds and securities of such clients to another broker within a period of next 15 days thereon, under advise to the said clients.”