Based on a complaint submitted by the Securities and Exchange Board of India (SEBI), the Economic Offences Wing (EOW) of the Mumbai Police has registered a case against 300 brokers trading on the now defunct spot exchange National Spot Exchange Limited (NSEL).
The case has been registered on Friday under sections 20 and 21 of the now repealed Forward Contracts Regulation Act (FCRA), 1952, which allowed the exchange to offer contracts of only one-day duration.
In its complaint, SEBI has accused Anand Rathi Commodities, Geofin Comtrade, Motilal Oswal and Philip Capital among others of indulging in illegal trading in commodities on the NSEL platform between 2008 and 2013. It had also recently showcaused these companies to explain how they were fit to be registered by the regulator post the merger for their alleged role in the scam. The EWO had arrested officials from three of the companies in the past. They are currently out on bail.
Forward trading is deemed when a spot trading exchange allows intra-day square off. In 2007, the ministry of consumer affairs, which through Forward Markets Commission (FMC) regulated trading in commodity futures, relaxed this rule for trades on NSEL, provided the contracts were of one-day duration and not short sold.
However, the probe by SEBI found that between 2008 and 2013, trading members had facilitated trading in paired contracts. The exchange allegedly permitted clients to enter into pair trades with 24 counterparties on NSEL through their brokers. A commodity contract from one of the 24 counterparties on a trade plus two day basis, could be purchased in the first leg by a client, through his broker. Subsequently, the client sold the contract back to the counterparty on a T+25 day basis at a higher price. However, this amounted to a futures trade and not a spot contract.
The SEBI approached the police after studying the records of the FMC regarding NSEL being available with the regulators and applications for registration received from the commodity derivatives brokers.
“The FMC was merged with SEBI in September 2015. After the merger, SEBI received applications from members of commodity exchanges for seeking registration with SEBI. NSEL is involved in organising trading of illegal paired contracts of commodities in violation of provisions of FCRA between 2008 to July 2013,” stated the statement given by Vinit Panchal, assistant manager with SEBI, on whose complaint the case has been registered.
“The complaint is being filed against 300 trading members of NSEL platform and applied to SEBI for registration as stock brokers and also against other members who have traded in illegal forward contracts organised by NSEL. These trading members are from different places from India. The details of other members are not available with SEBI,” the complaint added.
Source in the EOW said that based on the complaint, the brokers would be summoned. “We would be seeking details of the KYCs filed by brokers, details of their trading on NSEL between 2008 and 2013 and also any audit report prepared by SEBI on the same,” said a senior official.
“In many cases, FCRA contracts exceeded 11 days in violation of regulations. Brokers were also found misselling NSEL products by offering fixed returns which again was not permitted… the allegations are being probed,” the official added.