The Serious Fraud Investigation Office (SFIO) has recommended to the government to initiate the process of winding up 148 brokerages in India for conducting business in a “fraudulent manner” while dealing with investors who were cheated in the Rs 5,600-crore payment scam at the National Spot Exchange Ltd (NSEL).
The SFIO recommendation follows an investigation into the NSEL payment fraud that came to light on July 31, 2013. The Ministry of Corporate Affairs (MCA) is considering the recommendation of the SFIO on brokerages and is expected to take a decision soon on the winding-up process, sources told The Indian Express.
NSEL’s payment troubles started after it was ordered by regulator Forward Markets Commission (FMC) in July 2013 to suspend spot trade in most of its contracts due to suspected trading violations. The exchange was not able to settle outstanding trades. This sparked investigations by police and regulators to find out whether the exchange defrauded traders by not enforcing rules that require sufficient collateral to be set aside. The promoter of NSEL, Financial Technologies India (now 63 Moons Technologies Ltd), has blamed NSEL executives and trading parties for the default. There are 24 members who have defaulted on payment of Rs 5,600 crore to about 13,000 investors.
“…it is established beyond doubt that the business of the brokers was conducted in a fraudulent manner and therefore the SFIO investigation team recommends central government to take action under section 243 (c) of the Companies Act against these 148 brokers,” said a SFIO probe report on the NSEL payment crisis.
The report has listed some of the top brokerages of the country for alleged violation of norms. Section 243 (c) of the Companies Act, allows central government to initiate an application or a petition in court for winding up a company or corporate body if it feels it is just and equitable to do so. According to the SFIO probe report, these 148 brokerages “allured” their clients with substantial returns to trade at NSEL, guaranteed assured returns, foreign travels and in some cases even funded clients up to 90 per cent through their subsidiary NBFCs for trading at NSEL.
“Investigations revealed that some of the brokers allured their clients for taking funds from the brokers or their subsidiary NBFC… The inducement was so high that the clients were informed that if the clients opted for funding (given by broker or NBFC), the returns would be in the range of 20-22 per cent as against 14 to 16 per cent , if they trade with their own funds,” the SFIO report said.
The SFIO probe has also found that the brokers failed in their duty to inform their clients on the risk in trading at NSEL and did not carry out due diligence to verify the availability of the traded commodities at the warehouses of NSEL. “…they (brokers) induced their clients claiming that NSEL trading is the best way to earn risk-free fixed returns which are much more in comparison to available financial products… Thus the brokers were involved in mis-representation and mis-selling of the product,” the SFIO report said.