Mumbai Police's Economic Offences Wing fresh notices to 300 NSEL brokers

Police have done forensic and digital forensic audits of brokers who defaulted in August 2013

The Economic Offences Wing (EOW) of the Mumbai police has issued fresh notices to 300 NSEL (National Spot Exchange) brokers, asking them to produce the details pertaining to their transactions on the exchange, the volumes, and even the brokerage earned.
 
The police have done a forensic audit as well as a digital forensic audit of the brokers who defaulted in August 2013.
 
The Serious Fraud Investigation Office (SFIO) recently furnished its findings on all entities including brokers, promoter firms and their officials, and defaulters.
 
The SFIO had submitted the findings related to 140 brokers to the police and also asked the Securities and Exchange Board of India (Sebi) to look into its findings.
 
The police have started a fresh round of arrests based on forensic audits and nabbed a former chief financial officer of the NSEL. It has also resumed interrogating other officials and directors of the defunct exchange.
 
Sebi issues supplementary notices
 
Sebi has issued show cause notices to 300 NSEL member brokers and filed FIRs against them with the EOW, Mumbai. After receiving the SFIO findings, Sebi issued supplementary notices to these brokers. In the case of top five brokers, it has completed a fresh hearing also and now decision is pending.
 
Sebi’s main contention against brokers is that the NSEL was offering paired contracts and they were forward contracts, which were “illegal”.
 
Brokers traded in those contracts on behalf of their clients and hence, they endorsed illegal contracts.
 
Sebi has also alleged brokers indulged in frequent changes in client code, misselling and assured fixed returns.
 
On the issue of the legality of their contracts, the NSEL spokesperson said “the contracts on the NSEL were traded in accordance with the government Gazette issued in 2007.
 
There has been no adjudication about their illegality. However, if the authorities take a contrary view then the then regulator, the Forward Markets Commission, the exchange, brokers, traders, etc … are in the same boat and should be treated equally in the eyes of the law ”.
 

However, the regulator seems to be in a dilemma before taking penal action. Sebi can declare intermediaries not ‘fit and proper’ if it is convinced about that or court declare adjudicate them guilty.
 
The NSEL spokesperson  said, “It is the brokers who actually have mis-sold the derivative contracts to clients in addition to doing huge money laundering.”
 
Brokers are together moving High Court to defend their side saying they have not received proceeds of crime nor colluded with anyone and all attempts to malign the non-defaulting brokers is merely an attempt to shift the focus from the main issue, according to brokers’ forum official.
 
Regulator’s dilemma
 
Sebi has considered market implication if ‘fit and proper action’. But the issue is there are 300 brokers who have traded in ‘illegal’ forward contracts on NSEL, and if it is criminal as the regulator and police are alleging, then the difference is only in magnitude of crime. And the  punishment has to be same for similar crime, irrespective of the size of the crime.
 
So, can the Sebi penalise 300 brokers, many of whom are dealing in several other regulated products and regulated by more than one regulators? The fear among brokers is that such an action will result in panic in market across segments as these brokers deal in various segments.
 
In 2010, several banks sold currency swaps, which are also similar to forward contracts to several businesses and units, and when the Reserve Bank of India ruled that they violated Foreign Exchange Management Act, it preferred to impose financial penalty on 19 banks.
 
Sebi, on its part, has to decide whether it wishes to impose a financial penalty or use the ‘fit and proper’ criteria against these errant brokers, as this is a violation of its regulations for intermediaries and Forward Contract Regulation Act, 1952.