Anmi raises concerns on orders issued by Sebi to brokers declaring ‘not fit and proper person’

By: |
October 27, 2021 5:00 PM

Based on the report submitted by the FMC to the MCA in April 2012, the ministry asked the NSEL to explain as to why action should not be initiated against them for violation of the conditions of the notification.

It further said the Ministry of Consumer Affairs (MCA) has not taken timely action on the NSEL which was granted exemption by them, and shifting the blame on the broker entity requires to be re-looked.It further said the Ministry of Consumer Affairs (MCA) has not taken timely action on the NSEL which was granted exemption by them, and shifting the blame on the broker entity requires to be re-looked.

Stock brokers’ association Anmi has flagged off concerns on action being initiated by market regulator Sebi against few broker entities for trading on paired contracts on the National Spot Exchange Ltd (NSEL) platform and classifying them as “not fit and proper person”.

These brothers were members of the now-defunct NSEL.

This comes after Sebi has cancelled the registration of few brokers, including government enterprise PEC Ltd, for allegedly allowing their clients to trade in illegal paired contracts NSEL and failing to fulfil the “fit and proper” criteria.

In a letter to PMO and the finance ministry on October 14, the Association of National Exchanges Members of India (Anmi) said, “If the contracts traded were illegal then the Ministry of Consumer Affairs should has immediately stopped trading in the contract.” “This action would have saved a lot of investors and members from the timely action of the MCA and, they would not have suffered losses as business in the paired contracts had only started picking up and only comprised 30 per cent of the exchange volume in the FY 2011-12,” it added.

It further said the Ministry of Consumer Affairs (MCA) has not taken timely action on the NSEL which was granted exemption by them, and shifting the blame on the broker entity requires to be re-looked.

“Orders being issued will erode not only the credibility of Sebi but also hugely damage the reputation of India’s commodity markets,” it added.

From September 2009, the NSEL started trading operations in paired contracts wherein members could buy (T+2/ T+3) contracts and sell (T+25/ T+36) contract, and the transactions were done on the same day and as per NSEL, the trades done in paired contract were in compliance with exemption received from the Ministry of Consumer Affairs.

The Ministry of Consumer Affairs, through a notification in June 2007, exempted all forward contracts of a one-day duration from the sale and purchase of commodities traded on the NSEL from the operation of the provisions of FC(R) Act.

This was subject to certain conditions including that no short sale by members of the exchange will be allowed, and all outstanding positions of the trade at the end of the day will result in delivery.

In February 2012, MCA-appointed Forward Markets Commission (FMC) is a designated authority to check any possible violation by NSEL.

FMC observed that the NSEL had not made it mandatory for the seller to actually deposit goods in the warehouse before he takes a short position through a member of the exchange. In addition, 55 contracts offered for trade by the NSEL had settlement period exceeding 11 days.

Based on the report submitted by the FMC to the MCA in April 2012, the ministry asked the NSEL to explain as to why action should not be initiated against them for violation of the conditions of the notification.

The stock brokers’ association, however, noted that “neither the permission nor exemption granted by MCA was withdrawn and paired contracts continued to be traded which suggests that MCA was satisfied from the reply received from NSEL and trading was continuing”.

The trading was continued on the NSEL till such time trading on the NSEL came to a halt on account of default on the exchange to the extent of Rs 5,600 crore as on July 2013, where it was observed that the 24 buyers who were on the purchase side and who had to pay money to the exchange defaulted.

According to Anmi, which is a grouping of over 900 stockbrokers across the country, more than eight years have passed since the default has taken place on the exchange and not even 10 per cent of the defaulted amount could be recovered from the buyers.

This suggested that the settlement system and payout done by the exchange was only being done with the brokers other than the 24 buyer brokers and upon their default, the exchange has come to a grinding halt.

“It is the exchange which is to be blamed for default which has resulted in brokers and thousands of clients losing money in this Ponzi scheme run by the exchange,” Anmi noted.

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