Almost 300 broker entities may face SEBI's 'not fit-and-proper' scrutiny

Almost all 300 broker entities may face the 'not fit and proper' scrutiny by the Securities and Exchange Board of India (SEBI) for allegedly following illegal practices while doing commodity derivative business.

The market regulator is said to have initiated an inquiry against these broker entities, said sources.

Four commodity broking entities of leading non-banking financial companies -- India Infoline, Motilal Oswal, Anand Rathi, and Geojit Financial Services -- were put in the 'not fit-and-proper' category between February 22 and 26 by the SEBI for commodities trading in breach of norms.

But market experts say many others may fall under this category.

A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset like a security, or set of assets like an index. The common underlying instruments include bonds, commodities, currencies, interest rates, market indexes and stocks.

 

Sources familiar with market norms say the SEBI's order against all the entities is in the nature of 'In Rem,' which means good against 'all the world.'

"That is on all the persons who may have or claim any right or interest in the subject matter of litigation, whether or not, they were parties to or participants in the action constituting the subject matter of the action. SEBI's invocation of 'In Rem' principle will make final adjudication similar for all brokers," they said.

The SEBI and many other agencies including the Economic Offence Wing (EOW) are already probing the Rs 5,600 crore National Spot Exchange Limited (NSEL) scam, which involves a number of defaulters and company officials.

The Bombay High Court in 2014 held that the contracts by NSEL prima facie constituted a breach of the condition that exemption from applicability of Foreign Contribution (Regulation) Act was only in respect of contracts of one day's duration.

Accordingly, the SEBI has inferred from these orders that observations about paired contracts are applicable to brokers as well. More than 90 per cent of contracts on NSEL were paired contracts. All 300 brokers who traded on NSEL issued paired contracts to their clients.

The SEBI order says: "Since NSEL is observed to have misused the exchange platform for purposes other than for which permission was granted, these observations are seriously adverse in nature. In view of the gravity of the adverse nature of the observations, the same would be sufficient to determine the fit and proper status of the brokers."

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