In a rare instance, the Securities and Exchange Board of India (Sebi) has appointed a three-member adjudicating bench after its initial probe found that certain brokers involved in the 2013 payments crisis at the National Spot Exchange Ltd (NSEL) had mis-sold NSEL products, three persons with direct knowledge of the matter said.
“The investigation concluded last month and the matter has been referred to the adjudication department for inquiry and penal proceedings under section 11 (B) of Sebi Act and broker regulations’ clause pertaining to ‘fit and proper’ criteria,” said the first person on condition of anonymity. Section 11B of the act refers to Sebi’s powers to act to protect interest of the market.
Typically, the regulator appoints only one adjudicating officer after an initial investigation is complete. The officer then issues show-cause notices to the entity being investigated asking why action should not be initiated. Once hearings are complete, a final order is passed.
A bench has been appointed so that “the brokerages could be properly heard,” said the second person. “The action in this case could be monetary penalty or suspending the commodity broking licence.”
On 4 April, Sebi ordered the audit of the books of accounts of the five brokers (in terms of largest exposure to the NSEL crisis) against whom complaints are being investigated by the Economic Offences Wing (EOW). The audit was for 2011-12 and 2012-13 to investigate allegations of mis-selling, selling NSEL contracts as investment vehicles, giving false assurances, misrepresentation and discrepancy in client data.
The audit was performed on the books of accounts of Anand Rathi Financial Services Ltd (Rs629 crore), India Infoline Commodities Pvt. Ltd (Rs326 crore), Geofin Comtrade Ltd (Rs313.25 crore), Motilal Oswal Commodities (Rs263 crore) and Phillip Commodities (Rs140 crore).
The audit came after the markets watchdog formed an investigation team in March comprising three executive directors to look into the role of brokers in the Rs5,574-crore payments crisis at NSEL, which later evolved into a suspected fraud that resulted in losses to 13,000 investors.
“We’re not aware of any such adjudication proceedings initiated by SEBI nor have we received any show cause notice. We have complied with all relevant regulatory provisions at all times and while no report on the inspection has been shared with us, we are adequately prepared to present and defend our case in case SEBI seeks any explanations in this matter,” said a spokesperson for Anand Rathi in an emailed response.
IIFL said in an emailed response that it was not aware of any such proceedings.
“We have not received any notice from Sebi. Hence, unable to offer any comments pertaining to the conclusion of their investigation or the proceedings,” said a spokesperson for Geofin Comtrade Ltd in an emailed response.
A spokesperson for Motilal Oswal in an emailed response said that they haven’t received any such communication as of now.
Emails sent to Philip Commodities and Sebi on Friday were unanswered.
Mint had reported on 6 September (bit.ly/2cvh3su) that after the forensic audit found evidence of mis-selling, Sebi was in a fix to decide the next step. That was because neither the capital markets watchdog nor the previous commodities futures regulator, which has since merged with Sebi, were involved in oversight of NSEL.
Now, Sebi will try the brokers under broker regulations, the three people said. On 28 September, Sebi intimated this course of action to a panel headed by the department of economic affairs (DEA) which keeps track of the NSEL case, said the first person.
“Though the NSEL business does not come under Sebi’s jurisdiction directly, the conduct of market intermediaries does. Since these brokerage firms are involved in several businesses that are regulated by Sebi, it has decided to try them under broker regulations,” said the third person.
Under existing rules, Sebi assesses brokers and intermediaries to ensure they meet its “fit and proper” criteria such as integrity and model code of conduct. The regulator can also act against an intermediary for violation of Fraudulent and Unfair Trade Practices Regulations and under Section 11B for protecting the rights of investors.