Mumbai: India’s markets regulator has sent show-cause notices to five securities houses, asking them to explain why their applications for commodities trading licences should be considered, given the allegations that they had mis-sold National Spot Exchange of India Ltd (NSEL) products.

The Securities and Exchange Board of India (Sebi) acted on the recommendation of a panel of three adjudicating officers, which suggested the applications be rejected, two people with direct knowledge of the matter said.

“Sebi has sent notices to five broker firms, saying that they are not satisfied with the explanation offered by them on allegations of mis-selling. The Sebi officers have formed an opinion that the brokers should not be granted licences for commodity business," said one of the two persons, both of whom spoke on condition of anonymity. 

The second person said the brokerages had been given 21 days to explain why their licence applications should be considered, given the allegations that they had mis-sold NSEL contracts as investment vehicles and that they do not meet the so-called ‘'fit and proper’ criteria to be granted the licences. 

“The adjudicating officers in notices said that they will be making this recommendation to the Whole-Time Member (WTM), after which a final order will be passed. The order may also impose a monetary penalty," said the second person. 

Mint reported on 3 March that Sebi intends to conclude the case by May and was considering imposing a monetary penalty.

In March last year, Sebi started investigating the role of brokerages in the Rs5,548 crore suspected fraud at NSEL that broke out in 2013.

Pending completion of the investigation, it kept the commodity broking registration of the five firms in abeyance. They had to seek re-registration with the markets regulator after the merger of the erstwhile Forward Markets Commission (FMC) with Sebi.  

Subsequently, Sebi appointed a bench of three adjudicating officers in October last year. These officers—Suresh Menon, D Sura Reddy and Rachna Anand—issued show-cause notices to the brokerage firms on 28 October to which the brokerages submitted their replies in November and December.

The brokers in their replies said they were being singled out when there were 800 other brokers who were offering NSEL contracts. 

Sebi’s proceedings are against Anand Rathi Financial Services Ltd, with an exposure of 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), based on a Sebi audit of their books of accounts.

In an emailed response, a spokesperson for Anand Rathi Financial said the firm will respond to any notices received.

“We haven’t mis-sold NSEL product and the auditors appointed by Sebi have confirmed it. We will suitably respond to any notice received from Sebi after examining it in detail. We are professionally managed integrated financial services group and we maintain highest standard of transparency and integrity in all our businesses," said a spokesperson for Anand Rathi.

A spokesperson for Motilal Oswal declined to comment. An email sent to Phillip Commodities was not answered. “It is a show cause notice. We will reply and clarify further," said an IIFL spokesperson.

A spokesperson for Geofin Comtrade said the firm hadn't received the Sebi notice yet.  An email sent to a Sebi spokesperson did not immediately result in a response. 

Sebi in April last year ordered the audit of the books of accounts of the five brokerages against whom complaints were being investigated by the Economic Offences Wing (EOW) of Mumbai police.

The audit was for 2011-12 and 2012-13 to probe allegations of mis-selling NSEL contracts as investment vehicles, selling illegal paired contracts, giving false assurances, misrepresentation and discrepancy in client data, and for failing to ensure that there was adequate stock in warehouses.

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