NSEL case: the SAT finds serious accusations against brokers

Mumbai: The Securities Appeals Tribunal (SAT) has ordered SEBI to carry out an independent investigation against five brokers and persons associated with the brokers, and to re-investigate their role in the Rs 5 default case. 600 crore NSEL within six months.

These additional documents relied on by the defendant should form part of the show cause notice.

In its recent order, the SAT noted serious allegations against five brokers – Motilal Oswal Commodities Broker Pvt Ltd, Anand Rathi Commodities Ltd, IIFL Commodities Ltd, Philip Commodities India Pvt Ltd and Geofin Comtrade Ltd – of engaging in illegal activities such that the funding of clients through PAN loans, name loans through their NBFCs and other related entities, and that the funding was grossly disproportionate to the net worth and income level of these clients.

The SAT also observed that brokers abused their internal NBFC and funded clients who lacked the capacity to take on such exposure. These brokers channeled funds for trading without authorization or knowledge of the clients and engaged in market capture practices through large-scale changes to the unique client code.

Emphasizing that these allegations are of a very serious nature, in its June 9 order, the SAT said: “The contested orders made by the SEBI Whole Time Member (WTM) against the brokers cannot stand and are set aside. Calls from brokers are allowed. The cases are sent back to the WTM to decide again in the light of the observations made above in accordance with the law after giving the opportunity to hear the brokers. WTM will be free to rely on other documents such as NSEL Complaint Letters, EOW Report, EOW Charge Sheet, etc. if such copies are provided to brokers, and opportunity is given to refute the allegations.

“These additional documents relied upon by the defendant shall form part of the show cause notice, for this purpose it shall be open to the WTM to issue an additional show cause notice. It will also be open to SEBI, if it deems it necessary, to carry out an independent investigation against related entities and persons associated with the brokers against whom evidence is available. SEBI will decide the matter again within six months from today,” the 44-page SAT order added.

The entities that will be under the prism of SEBI this time will be directors of brokerage houses, associated organizations, group entities and organizations that fall under the “Fit and Proper” criteria of the market regulator.

The SAT order noted that there were two show cause notices sent to the brokers, the first contained incriminating material and other details uncovered during the agency’s investigations, while the second concerned their alleged association with the NSEL. The order placed by the SEBI WTM was entirely based on the second show cause notice, which is totally unwarranted.

The court also observed that SEBI WTM’s allegations against NSEL had directly affected the reputation, character and integrity of the exchange, and that such observations and conclusions which were adopted ex parte without informing NSEL would have a negative impact on other proceedings against the NSEL pending before various courts/authorities.

The SAT said the submissions and conclusions given by the WTM, which opposes the NSEL, cannot be sustained, particularly where no notice or opportunity for a hearing has been provided, which is contrary to the principles of natural justice.

“Adverse submissions/findings against NSEL in SEBI orders should be removed and not be used against NSEL in any court or authority,” SAT noted.