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Mumbai: The Gujarat high court on Tuesday issued a notice to the Reserve Bank of India (RBI), asking why the National Spot Exchange Ltd was allowed to run a payment and settlement system without authorization. The court has also asked RBI to initiate action in the matter.

The notice follows a public interest litigation (PIL) filed by the investor association, NSEL Aggrieved And Recovery Association (NAARA), which said that RBI was aware that NSEL was operating without an authorization under the Payment and Settlement Services (PSS) Act, 2007. The central bank knew about this as far back as 2011, the petition alleged.

An email sent to RBI on Tuesday evening remained unanswered.

NSEL, in an emailed response, refuted the allegations of the petitioners and said that it was authorized to provide the settlements. “This case is filed with mala fide intentions and based on factually incorrect premises. Suffice to say that it was FMC (Forward Markets Commission) in its capacity as a regulator which recommended to DCA (the department of consumer affairs) which in turn recommended to DEA (department of economic affairs) and RBI that NSEL should continue running the clearing and settlement process," an NSEL spokesperson said.

“The notice by Gujarat high court has sought that RBI takes action against NSEL for operating payment and settlement of contracts without authorization from the central bank. The court has also taken note of the fact that RBI was aware back in 2011 that the spot exchange was operating in a regulatory vacuum," said Arjun Sheth of Arjun Sheth & Associates, Advocates & Solicitors. Sheth is the advocate on record for NAARA.

With a notice being sent to RBI, it becomes the third regulator to become a party to the numerous cases pertaining to NSEL pending before the high courts of Bombay, Madras, Delhi and Gujarat. So far, the erstwhile FMC and the markets regulator Securities and Exchange Board of India (Sebi) have been made a party to the various pleas pertaining to NSEL.

The NSEL scam, or settlement crisis, came to the fore in July 2013 when trading was halted after a settlement crisis on the commodities bourse, 99.99% of which is owned by Jignesh Shah-led Financial Technologies (India) Ltd (FTIL). The exchange failed to meet payout obligations to 13,000 investors, adding up to 5,574.35 crore.

In the PIL, a copy of which has been reviewed by Mint, the petitioners make a reference to minutes of a Financial Stability and Development Council (FSDC) meeting in 2011 where it was highlighted that NSEL was providing settlements without RBI authorization.

“It is submitted that the members of the petitioner were shocked to learn that RBI was, as early as 2011, very much aware of the non-application by NSEL of the authorization to operate the said payment system of NSEL under the Act and the necessity to do so," said the PIL.

Under the PSS Act, no person can operate a payment system without RBI authorization. Only the stock exchanges are exempt from obtaining such authorization from RBI.

“From a caution perspective the RBI should have looked at the payment and settlement of contracts at NSEL. However, in this case the PSS Act technically may not apply. The PSS Act strictly applies to payment and settlement services provided by banks and online payment portals," said Parag Bhide, senior associate, Advaya Legal.

“This could rather be a case of a regulatory vacuum where the pertinent regulations cannot be or may not be strictly applicable," Bhide added.

The petitioner further alleged that not just RBI but other regulatory authorities were also aware of the regulatory vacuum within which NSEL was functioning. “Since in their (regulatory bodies) opinion it did not fall within the purview of FMC and Sebi, it (RBI) acknowledged the growing volumes and increasing retail participation on the exchange," the PIL said.

“In spite of the aforesaid being to its knowledge, it failed to take any action (save aside quick action) against NSEL and its officers as per and in accordance with the provisions of the Act for operating payment system without authorization under the Act," the PIL said.

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