Sebi to conduct fit & proper test on commodity brokers

Brokers linked to the NSEL scam might find it tough to get registration under the merged regulator

With a merger nearing between the Securities and Exchange Board of India (Sebi) and the Forward Markets Commission (FMC), the two-year controversy at National Spot Exchange (NSEL) is gaining the spotlight once again.

“With the merger there would be amended regulations and commodity brokers would need to meet that ‘fit and proper’ criteria. If they don’t, Sebi would not be able to give them registration under our regulations,” said a senior official of the latter.

The matter is likely to be discussed at its board meeting on August 24. The market regulator is likely to finalise the bulk of the regulations concerning entities to come under its fold once the merger between the two regulatory entities is effected.

BUMPS AHEAD FOR COMMODITY BROKERS

• Sebi to issue fresh guidelines for empanelling commodity brokers
• Sebi board to finalise guidelines at its meeting on August 24
• Move ahead of the deadline for Sebi-FMC merger, set for September
• Brokers will have to meet fit & proper criteria under merged regulator
• Legal experts said currently FMC doesn’t have such requirements
• Move might impact brokers involved in the NSEL scam
• EOW in the process of investigating role of 200 brokers

By the Sebi regulations for brokers and intermediaries, it grants a certificate of registration once the entity fits the criteria for determining a ‘fit and proper person’. Its board may take into account any consideration it deems fit, including but not limited to integrity, reputation and character of the applicant. There should be an absence of convictions and restraint orders, and the intermediary should be competent on the financial solvency and net worth criteria.

The requirement is likely to act as a hurdle for registration for NSEL's brokers, especially those against whom there have been criminal complaints. The city police’s economic offences wing (EOW) is already investigating the role of nearly 200 brokerage firms for allegedly modifying client codes illegally. NSEL claims brokers modified 300,000 client codes in only four months before the scam was exposed in 2013.

NSEL investor groups have also approached a court against the NSEL brokers to direct EOW for investigating the role of brokers in the Rs 5,600-crore payments default.

In March, the EOW had also arrested three brokers in connection with their investigation. It is also supposed to have conducted a forensic audit on the role of brokers in the scam.

Parag Bhide, senior associate, Advaya Legal, brokers with serious charges against them will not be able to find place under the merged regulator.

“The FMC regulations did not have specific guidelines for brokers; their conduct was governed by exchange bye-laws. On the other hand, Sebi has stringent criteria for determining the ‘fit and proper’ status of intermediaries. However, we will have to wait for the final Sebi guidelines and circulars that will facilitate the merger, as there could be some amendments in the Sebi Act as well,” he said.