Sebi issues show-cause notices to 300 brokerages in NSEL case



The Securities and Exchange Board of India (Sebi) has issued a to 300 brokerages whose clients lost significant money in the infamous Rs 56-billion National Spot Exchange (NSEL) scam.


Sebi’s notice alleged that these brokerages no longer meet the “fit and proper person” criteria and hence should not be allowed to continue as intermediaries.



The regulator asked these brokerages to explain why the action recommended should not be taken against them under the prescribed provisions of (intermediaries) and (stock-brokers and sub-brokers) regulations.


Sebi’s fit and proper criteria define basic conditions that intermediaries need to fulfil in order to perform their duties and responsibilities. Among key conditions are integrity, absence of any conviction and not being a willful defaulter.


The regulator said that it has initiated adjudication proceeding and appointed designated authority on September 21 to inquire into the alleged violation of the fit and proper norms.


Business Standard reviewed the notice served to brokerages.


The notice explains how NSEL did not conduct its business in accordance with the condition set by the government by allowing trades in the paired contract.


In June 2007, the central government granted an exemption to NSEL for complying with provisions of (FCRA) subject to certain conditions.


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The regulator added exemption was only for all one-day forward contracts, including no short sale by the members of the exchange and outstanding positions of the trades would at the end of the day result in delivery.


It is observed that members of NSEL and registered trading members had facilitated trading in the paired contracts between September 2009 and August 2013.


“Being a member of NSEL and by participating and/or facilitating your clients in such paired contract, you have violated the intermediary’s regulations. It is alleged that continuance of your registration as market intermediary is detrimental to the interest of the securities market,” Sebi said in the notice.


The has asked these brokerages to file a reply, along with documentary evidence within 21 days of the notice.


Sebi issues show-cause notices to 300 brokerages in NSEL case


The move comes after the Sebi board, at its September 18 meeting, had decided to take action against 116 brokers involved in the Rs 40-billion investor default. Sources said 17 brokers account for 80 per cent of the total default amount. The action was based on the investigative report submitted by erstwhile Forward Commission (FMC) and economic offence wing of the Mumbai Police. This action is expected to put an end to the five-year-old matter involving some prominent brokers and 13,000 investors.


Interestingly, the show cause notices were served ahead of Sebi completing three years of its merger with the FMC on September 28. Sources said that the government had given the three years to conclude the matter. It is also learnt that 30 per cent of the brokerages that were being slapped with the notices were not aware of this move. They were never being examined or inspected in the NSEL matter.


The NSEL scam came to light in July 2013, when the exchange was unable to repay 13,000 investors who were trading on the platform. The exchange did not have adequate goods in its warehouses to back the trades, nor did the settlement guarantee fund have enough money for repayment. The NSEL brokers have been charged by investors with giving away their clients’ money without securing the title of the goods and warehouse receipts, resulting in criminal breach of trust.

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