NSEL scam – Brokers CONUNDRUM

The National Spot Exchange Limited (NSEL) which was incorporated pursuant to the Government of India’s vision to create a single market across the country for both manufactured and agricultural produce, recently filed a criminal writ petition in the Hon’ble Bombay High Court, blaming the Government of Maharashtra for not taking action against the brokers and trading members in the NSEL scam amounting to Rs. 5,574 crore. The Hon’ble Court in this regard issued notice directing the State Government to attach the properties of the member-brokers. The Economic Offence Wing (EOW) of the Mumbai police had earlier arrested some officials of Anand Rathi Commodities Ltd, Geofin Comtrade Ltd and India Infoline Commodities Ltd on the charges of mis-selling, mis-representing and cheating investors. The Securities Exchange Board of India (SEBI) in this regard had issued show cause notices to 5 brokers for alleged violation of the code of conduct and mis-selling and cancelled their licenses to trade in the commodities. Subsequent to this, in the year 2018, SEBI issued notices to around 300 brokers for violating provisions of Forward Contracts Regulation Act (FCRA). However, the brokers still have permission to trade in the commodities but their licences can be revoked if the allegations of violations are proved. The non-defaulting members are the brokers who had acted as intermediaries between the investors and the exchange in the settlement crisis. The brokers involved in the said matter have been asked to contribute Rs. 5 lakh each by the Association of National Exchanges Members of India (ANMI) and BSE Brokers Forum (BBF) to intervene in these matters at various courts and fight the battle together. However, it is noteworthy that the amount of contribution could not be standardized as there were brokers who had large exposure to the shares and others had very small amounts. Further, it was established that the investors were defrauded by the defaulted borrowers of the NSEL and the money trail found in their books by the EOW which seized their assets valued more than Rs. 6,000 crores against the payable sum to investors of Rs. 5,500 crores. Thus the brokers could not be blamed for defrauding the investors. The brokers and the Associations in this regard are continuing to work for the recovery of the lost money to the investors. The Ministry of Corporate Affairs has not made any recommendation to the National Company Law Appellate Tribunal (NCLAT) for declaring the brokers involved in the payment crisis at NSEL as “not fit and proper”. However, recently Deven Choksey, MD of the broking house K R Choksey Shares & Securities in his letter to the Prime Minister, alleging that the investigating agencies and the Regulators have filed complaints against the brokers which were unjustifiable, as the dues can only be recovered by selling assets of the defaulting borrowers who were responsible for siphoning off the funds. This provides that even the investors are of the opinion that in order to recover the money, the investigating agencies have resorted to blame the brokers and not the defaulting borrowers who were the actual perpetrators. Further, it was rightly pointed out in the letter that if it comes to assigning the responsibility for the scam then all the five stakeholders should be hauled up including the Ministry of Corporate Affairs (MCA) which issued a license to NSEL to operate the exchange, the Forward Market Commission (FMC) which allowed the exchange to operate, the banks which acted as the clearing houses for the trades, the State Governments and the tax authorities which collected taxes on the NSEL trades.