Sebi issues final show-cause notice in NSEL scam case to five big brokers

Charges include violation of 'fit and proper' norms; brokers given 21 days to reply to Sebi's notice

Market regulator Securities and Exchange Board of India (Sebi) has established lapses at five broking firms in the National Spot Exchange Limited (NSEL) scam. As per an audit finding, the brokers failed to meet the “fit and proper” criteria and also found to be in violation of certain securities regulations.

Based on the third-party audit report, the market regulator has issued final show-cause notice to five brokerages. These include- Anand Rathi Commodities, India Infoline Commodities (IIFL), Geofin Comtrade, Motilal Oswal Commodities, and Phillip Commodities. Sebi has given the brokers 21 days to submit their reply to the notice.

“Prima facie evidence shows that these brokers are guilty and also violate fit and proper criteria,” said a source. Before passing the final order in the case, the whole time member will give them a hearing in the matter, he added.

Sources said that regulator has completed its audit on the brokers in the matter and would accordingly take a final call on it. If brokers are found guilty, Sebi could impose penalty or declare them not fit and proper.

Fit and proper rules require market intermediary to have a code of conduct in place, should have sound reputation and financial integrity. 

In the NSEL case, brokers are facing allegation of mis-selling NSEL contracts by promising too high returns without ensuring delivery. They were also alleged to have modified client codes for doing multiple deals.

Chief compliance officer at IIFL said Sebi has issued a show cause notice and given us 21 days to reply. “In our written reply and later during personal hearing we will clarify to Sebi that the default is by NSEL and not brokers. IIFL has followed the best-practices and executed transactions with highest integrity. The default was by NSEL and it should be held responsible. The exchange was approved by the government and regulatory authorities; we just provided services as a broker,” he said.

While Geofin Comtrade said that it has not received any such notice and neither have any information in this regard. Motilal Oswal Commodities declined to comment on the matter. Anand Rathi and Philip Commodities could not be reached immediately.

On April 4, 2016, Sebi has directed third party auditor to conduct the audit of books of accounts of these brokers for 2011-12 and 2012-13 to probe the allegations based on Mumbai police’s economic offence wing (EOW) findings.

EOW interim report had found evidence of illegal and unauthorised changes at NSEL servers. The names of clients on NSEL servers were found to be different from those in brokers' records.

In terms of exposure, Anand Rathi has Rs 629 crore, IIFL has Rs 326 crore, Geofin Comtrade has Rs 313 crore, MOSL has Rs 263 crore and Philip Capital has Rs 140 crore.  

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.