The Securities and Exchange Board of India (SEBI) in an order on Friday declared that the commodity broking arms of Motilal Oswal and India Infoline (IIFL) are not ‘fit and proper’to undertake commodities derivative trading, as part of an ongoing investigation into the NSEL case.
Sebi's not ‘fit and proper’ status applies to the commodity arms of both the brokers and not their unified broking businesses."The Noticeeshall cease to act, directly or indirectly, as a commodity derivatives broker," said the order.
The market regulator is probing a Rs 5600 crore payment default which broke out at the spot commodity trading platform NSEL in 2013 in which broking firms like Motilal Oswal Commodities Broker are alleged to have involved in misselling of NSEL contracts without having underlying commodities in the warehouses.
Sebi maintained that the two brokers had a close association with NSEL and allowed themselves to “become a channel”.“Thus… the noticee is not a fit and proper person to be granted registration/to operate as a commodity derivatives broker”, the order read.
Reputation is an important factor for consideration of ‘Fit and Proper Criterion’ and the reputation of the noticee has been seriously eroded, the market regulator said in the order.
Sebi also asked all clients of the commodity broking firms to withdraw or transfer their securities held with the brokers within 45 days.
Here is what the order against Motilal Oswal Commodities Broker said:
"I, in exercise of the powers conferred upon me under Regulation 28 of Securities and Exchange Board of India (Intermediaries) Regulations, 2008 read with regulation 7(1) of Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992, in the interest of investors and to protect the integrity of the securities market, declare that the Noticee is not a fit and proper personto hold, directly or indirectly, the certificate of registration as commodity derivatives broker, and hereby, reject the applicationsdated December 11, 2015 and December 16, 2015 filed by Motilal Oswal Commodities Broker Private Limitedfor registration as commodity derivatives broker. The Noticeeshall cease to act, directly or indirectly, as a commodity derivatives broker.
In case of any existing clients of the Noticee as Commodity Derivatives Broker, the Noticee shall allow such clients to withdraw or transfer their securities or funds held in its custody or withdraw any assignment given to it, without any additional cost to such clients within 45 days from the date of this order. In case of failure of any clients to withdraw or transfer their securities or funds within 45 days from the date of this order, the Noticee shall transfer its balance clients with their corresponding securities and funds to another person, holding a valid certificate of registration to carry on such activity, within a further period of 30 days. Such person should not be directly or indirectly related to the Noticee. Theorder shall come into force with immediate effect," said the order. ( Read the entire order here)
You can read the entire order against India Infoline here.
In both cases, Sebi has this to say:
"In view of the seriousness of the matter, facts and circumstances of the case, the conduct of the Noticee in its functioning as a commodity broker is questionable and has certainly eroded its general reputation, record of fairness, honesty and integrity and has therefore affected its status as a ‘fit and proper person’ to be an intermediary in the securities market…”.
The regulator has rejected the applications dated December 11 and December 16, 2015, filed by Motilal Oswal for registration as commodity derivatives broker. In the case of India Infoline Commodities, its application dated December 23, 2015 has been rejected.
Both entities would cease to "act, directly or indirectly, as commodity derivatives brokers", as per the orders.
According to Sebi, the allegations against the Motilal Oswal and India Infoline that they are not fit and proper rests on twin basis.
One is the alleged violation of various laws and circulars with respect to the NSEL matter, and the second is the existence of various adverse observations by various courts/ authorities regarding the transactions in paired contracts on NSEL and the association of the two entities with such transactions and with the spot exchange, it noted.
"Both sets of allegation lead to serious questions about the reputation, integrity, character and competence" of the two entities, Sebi said in the orders.
The regulator noted that the paired contracts could not have been executed in such large volumes, across the large number of clients without the actions and facilitation of the two brokers. This facilitation is sufficient to establish their close association with the NSEL and paired contracts. The two entities themselves to become the channel or instrument of NSEL in promotion of paired contracts amongst its clients, it added.
The two brokerages are among more than 300 brokerage houses named by the Securities and Exchange Board of India (SEBI) in a first information report (FIR) pointing to the violation of rules in the National Spot Exchange Limited (NSEL) scam.
SEBI had issued show cause notices to five brokers earlier which charged them with illegal forward contracts and failure to do proper diligence such as physical verification of warehouses, stocks and checking claims of exchange on guaranteed returns.
In July 2013, Jignesh Shah-promoted NSEL had defaulted in payment of Rs 5,600 crore. Several investigative authorities have traced the money trail to NSEL and its 22 defaulting brokers who were commodity producers or suppliers.