Stock markets regulator Securities and Exchange Board of India (Sebi) has banned commodity broking arms of two broking firms from trading and directed their clients to transfer their accounts to other brokers in 45 days, a media report says. Sebi censured commodity broking arms of Motilal Oswal and India Infoline (IIFL) as part of ongoing investigation into the National Spot Exchange Limited (NSEL) case of 2013, according to the report.
The Sebi order issued on Friday, February 22, found the two brokers not "fit and proper" to conduct commodities derivatives trading. Sebi's not "fit and proper" status applies to the commodity arms of both the brokers and not their unified broking businesses, according to the Business Standard website. "The noticee shall cease to act, directly or indirectly, as a commodity derivatives broker," the Sebi order said.
The market regulator is investigating a Rs 5,600-crore payment default at the spot commodity trading platform of Jignesh Shah-promoted NSEL that surfaced in 2013 in which some broking firms are alleged to have taken part in the fraudulent sale of NSEL derivative contracts without the underlying commodities in the warehouses.
Sebi found the close association of the two brokers with NSEL allowed them to "become a channel" for fraudulent transactions. "Thus... the noticee is not a fit and proper person to be granted registration/to operate as a commodity derivatives broker", the order said.
"I, in exercise of the powers conferred upon me under Regulation 28 of Securities and Exchange Board of India (Intermediaries) Regulations, 2008 read with regulation 7(1) of Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992, in the interest of investors and to protect the integrity of the securities market, declare that the noticee is not a fit and proper person to hold, directly or indirectly, the certificate of registration as commodity derivatives broker, and hereby, reject the applications dated December 11, 2015, and December 16, 2015, filed by Motilal Oswal Commodities Broker Private Limited for registration as commodity derivatives broker. The noticee shall cease to act, directly or indirectly, as a commodity derivatives broker." Sebi issued a similar order against IIFL also.
Sebi also directed the broking arms of these companies to allow transfer of accounts of the commodities derivatives clients to any other broker of their choice without any additional cost within the stipulated 45 days. In case of any commodities clients remained after 45 days, the broking firms were to transfer the accounts to another broking firm holding a valid certificate of registration to carry on such activity, within a further period of 30 days. "Such person should not be directly or indirectly related to the noticee. The order shall come into force with immediate effect," Sebi said.
The two brokerages are among more than 300 brokerage houses named by the Sebi in a first information report (FIR) pointing to the violation of rules in the NSEL scam. Sebi issued show-cause notices to five brokers earlier alleging illegal forward contract trade and failure to do proper diligence such as physical verification of warehouses, stocks and checking claims of exchange on guaranteed returns.