Mumbai: After nearly three years of investigations, the Securities and Exchange Board of India (Sebi) on Saturday declared Motilal Oswal Commodities Broker Pvt Ltd (MOCB) and India Infoline Commodities Ltd as ‘not fit and proper’ to conduct commodities business due to their role in the National Spot Exchange Ltd (NSEL) settlement crisis of 2013.

‘The firms are not ‘fit and proper’ to hold, directly or indirectly, registrations as commodities brokers and they shall cease to act directly or indirectly as commodity derivatives brokers’ said Madhabi Buri Buch, whole time member, Sebi, in the two orders.

The two firms were directed to allow existing customers to shift their businesses of commodity trading to other unrelated firms within 45 days.

"We would like to clarify that MOCB and the group has its own group investment of 58.7 crores due from NSEL on the date of default. MOCB itself is the victim of scam like thousands of investors. MOCB is aggrieved by this order and it is in consultation with its lawyers to explore legal options. We assure our esteemed stakeholders, including investors, that the said order against MOCB will have no impact on overall business activities of companies of Motilal Oswal group in any segment. The interests of our valued investors is paramount to us," Motilal Oswal said in a statement. "We would also like to add that around 300 brokers have been issued show cause notices by the regulator and in all around 600 brokers had been doing business in NSEL on the date when it suddenly stopped business in 2013."

In another statement, IICL said: IICL (India Infoline Commodities Ltd) does not have any outstanding dues. IICL also does not have any proprietary position. The order mentions that Sebi has initiated similar enquiry proceedings against approximately 300 brokers and there will be no discrimination. However, IICL is seeking legal advice as regards to going for an appeal, in this matter. We would like to clarify to all our stakeholders and clients that this order has no impact on businesses of other companies of IIFL Group." 

According to officials of the two firms, both companies are likely to appeal the directions in the Securities Appellate Tribunal (SAT).

Sebi held this view as the two brokerage firms indulged in the so-called illegal paired contracts on the NSEL trading platform, which violated the norms of the Forward Contract Regulation Act (FCRA) and the Maharashtra Public Interest Depositor (MPID) Act. That caused a serious ‘reputational’ risk for the firms, Sebi said.

NSEL was, in July 2013, NSEL was barred from launching any fresh contracts after it was found that it allowed paired contact on its platform, which were violating FCRA and the terms on which NSEL was granted registration as a spot exchange. As a result, the exchange was unable to meet its settlement obligations of around 5,548 crore to nearly 13,000 investors .

Sebi, in the order, also held that brokers had a close association with NSEL and allowed themselves to “become a channel" and an instrument for the exchange to promote paired contracts.

Given the close association of the firms to NSEL and the paired contracts, and the relatability of the same to the noticee, the serious adverse observations of the various courts and authorities seriously eroded the reputation and belief in competence, fairness, honesty, integrity and character of the firms, Buch said in the order.

The other allegations against these firms were false representations to the clients that there was ‘risk free returns’ in these products, client code modifications and failure to report suspicious transactions.

The two firms do not have a commodity broker licence yet pending Sebi investigations, which started in March 2016. They had applied for a licence in 2015.

IIFL, which had a 326-crore exposure to NSEL, has merely 0.06% of its total business in commodity trading and Motilal Oswal, which had 263-crore exposure to NSEL, has negligible business in commodity trading.

The implication of the order on Motilal and IIFL will also fall on 300 more brokerage firms, showcaused by Sebi in September last year for allegedly trading in ‘paired contracts’. 

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