'NSEL brokers have no legal, monetary liability'

Market players said the brokers were prompted to blame the exchange for the NSEL crisis due to rising insecurity about repayments

Sharad Saraf, convenor of the National Spot Exchange Ltd (NSEL) Investors' Forum, who has invested through NSEL, is clear about who is responsible for the payment crisis. "We entered into a contract which was facilitated by the broker but whose counter-party was the exchange. The liability is that of the exchange, not of the broker," he says.

Many agree brokers don't have any monetary liability. They term meaningless the debate on whether brokers are trying to escape legal hassles by their public outbursts against the exchange.

Jehangir Gai, consumer lawyer, said, "The liability lies with the exchange to repay the investor."

Market players said what prompted the brokers to blame the exchange for the NSEL crisis on Tuesday was rising insecurity about repayments. The brokers are under pressure from clients to ensure repayment. Though they aren't responsible legally or monetarily for NSEL's inability to repay, they fear there would be unnecessary legal hassles with clients.

Also, though NSEL has come up with a 30-week repayment plan, many brokers are stuck with clients because there is pressure to repay immediately. "There is no personal liability on the broker or the firm, as we acted as pass-through vehicles," said the head of a broking firm whose clients' funds were stuck in NSEL contracts.

Lack of information has also led to uncertainty. "Till there is a third-party audit of stocks, there would be doubts about it. Obviously, brokers are trying to do their own research, but it is not comprehensive enough," said the brokerage chief, adding, "The goods, once verified, can be pledged with banks and borrowers can repay the creditors immediately. If that happens, everyone will be happy."

In the case of payment disputes between brokers and investors in the past, arbitrators were appointed by both the sides. If the case is ruled in the favour of the investor, the exchange pays the investor from the settlement guarantee fund. However, now, the payment crisis is at the exchange level, and the exchange doesn't have enough money. According to reports, the settlement guarantee fund is only Rs 65 crore. NSEL has claimed it has goods worth Rs 6,500 crore, but this, too, is being disputed by brokers.

There are reports that SGS India, part of Switzerland's SGS Group Management, has been mandated to audit 21 commodities across 89 NSEL warehouses. That neither the brokers nor investors would want a million tonnes of paddy or wheat or castor seed is a different matter. They would want cash, and cash is what the buyers don't have.