NSEL case: Sebi likely to take action against brokers soon

Regulator has ruled out action against NSEL under CIS regulation

The Securities and Exchange Board of India (Sebi) will soon decide action against five brokerages, whose clients lost significant amounts of money in the Rs 5,574-crore National Spot Exchange Ltd (NSEL) scam.

The brokerages include Anand Rathi Commodities, Motilal Oswal Commodities, India Infoline Commodities, Geofin Comtrade and Phillip Commodities.

However, regulator has ruled out action against the NSEL under collective investment scheme (CIS) regulation. It said that spot exchange trading model should not be equated as any illegal ponzi or CIS scheme. Market regulator has apprised its board member of its stand in February 11 board meeting held in New Delhi.

According to Sebi, an internal committee has been constituted to examine the role of brokers in the matter. Subsequently, Sebi had appointed auditors to conduct audit of book of account brokers whose name have appeared in the interim report of Mumbai police's Economic Offence Wing (EOW).

Based on the report, Sebi had initiated enquiry proceedings against these brokers. "Although the audit of members of NSEL does not directly fall under the Sebi purview, the role of brokers who have traded on the spot exchange platform and who are also registered as commodity derivatives brokers is being examined on the basis of preliminary report of EOW which contained prima facie evidence of wrong doings by some of the brokers," the market regulator said in its board note.

Further, it has appointed a bench of designated authorities which have issued show cause notice to these brokers in October 28, 2016.

Sebi said to have shared the relevant findings of its investigation with the EOW, Enforcement Directorate (ED), respective departments of revenue and consumer affairs and also with the Reserve Bank of India (RBI) for necessary action at their end.

Regulator has also granted the concerned entities an opportunity of inspection of the relevant documents, after which they were asked to submit their replies to the show cause notice issued by Sebi. "Replies from all the five brokers have been received and they are currently being examined by Sebi," according to the Sebi board note.

The ministry of finance also asked Sebi to ensure its representation in the meetings held for reviewing the progress in NSEL issue. At the same time, the Ministry also clarified that since spot markets and ready delivery contracts were not being regulated by FMC, Sebi was also not expected to take upon itself any regulatory function with regard to such markets.

The NSEL scam came to light in July 2013, when the exchange was unable to repay 13,000 investors who were trading on the platform. The exchange did not have adequate goods in its warehouses to back trades. Nor did the settlement guarantee fund have enough money for repayment. The NSEL brokers have been charged by investors with giving away their clients' money without securing the title of the goods, warehouse receipts, resulting in criminal breach of trust.