Mumbai: The Securities and Exchange Board of India (Sebi) has decided that two of its whole-time members would look into the regulatory aspects relating to five brokers being probed for allegedly misselling products of the National Spot Exchange Ltd (NSEL), two people aware of the matter said.
One of the members will be in charge of the probe against these brokers while the other will look into administrative aspects such as whether it is fit and proper for them to hold commodity broking licences.
In April 2017, the regulator had issued show-cause notices to five broking firms—Anand Rathi Financial Services Ltd, India Infoline Commodities Pvt. Ltd, Geofin Comtrade Ltd, Motilal Oswal Commodities and Phillip Commodities—asking them to explain why their applications for commodity trading licences should be considered.
Sebi had in March 2016 started investigating the role of the brokers in a Rs5,548 crore suspected fraud at NSEL in 2013.
“Sebi is looking for quick resolution of cases that have been under probe for more than a year and the probe against the five brokerage firms in the NSEL matter is one of them. The case has been going on for two years. Sebi is taking all steps necessary such as splitting the market regulation department to avoid conflict of interest (one would look at quasi judicial proceedings and the other would look at whether brokers should be granted commodity broking license or not), giving the firms a chance to examine documents," said the first of the two people cited above, on condition of anonymity.
Last week, Sebi agreed to the demand of the five brokers that they be allowed to examine the documents and be given a personal hearing before the regulator passes any further orders, the people said. A Sebi spokesperson did not answer an email seeking comment. Geofin declined to comment.
“Sebi has provided us some of the documents last week and the rest they will give this week. With document examination we are trying to determine on what basis we were chosen for the investigation. Like us, there were many other brokers who had traded on the government-recognised NSEL platform," said Chintan Modi, executive vice-president at IIFL.
Anand Rathi, Phillip Capital and Motilal Oswal did not respond to emails seeking comment.
In the April 2017 show-cause notice, Sebi’s three-member adjudicating officer team had recommended that the five brokerages should not be granted commodity broking licences.
The brokers have not replied to the show-cause notice as they were awaiting document examination, according to the finance ministry’s response to a query from member of Parliament Arvind Sawant on 29 December.
“The brokers have requested for an inspection of the documents and the same is still in progress. The response to the SCN (show-cause notices) has not yet been submitted by any of these brokers," said the finance ministry’s letter, a copy of which has been reviewed by Mint.
“The firms will need to respond in the coming 21 days, after which the whole time member will pass an order against the firms," said the second of the two people cited earlier, also on condition on anonymity.
While Sebi is looking for a quick resolution of the case, it may not be easy as firms and investor associations such as the Indian Council of Investors have written to the regulator over its decision to go after “only five firms".
“Not only we, as per market estimate, there were around 600 similarly placed commodity brokers who were trading in the contracts on NSEL who also did not suspect that the contracts permitted by NSEL were not in consonance with the exemption. Strangely, Sebi has arbitrarily cherry picked us for inquiry proceedings out of pool of similarly placed 600 brokers who were trading on NSEL platform in the similar manner without disclosing any basis for such selection," the Sebi show-cause notice quoted the firms as saying in reply to its initial letters asking for clarifications.
Sebi has received at least five complaints from NSEL investors on its decision to go after a few firms. In a letter as recent as 29 January, investors questioned the granting of commodity trading registrations to other firms. This complaint has been marked to the department of economic affairs (DEA) and the chief vigilance commission (CVC).