India – Orders Passed By The SEBI Declaring Commodity Brokers Involved In The NSEL Matter, To Be ‘Not Fit And Proper’ Persons To Hold A License Under The SEBI Act, 1992 And The Regulations Thereunder.

SEBI had initiated enquiry proceedings against various brokers under Chapter V of the SEBI (Intermediaries) Regulations, 2008 (“Intermediaries Regulations”) and appointed a designated authority to enquire whether the commodity brokers were ‘fit and proper’ to continue to hold the certificate of registration as Trading and Clearing Members in terms of Regulation 5 (e) read with Regulation 27 (iv) of the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992 (“Stock Broker Regulations”). Orders were passed against the 9 (nine) commodity brokers on 24 September 2021, 7 October 2021, 8 October 2021, 14 October 2021, 21 October 2021 and 29 October 2021.
 

The commodity brokers had traded in the ‘paired contracts’ on the NSEL, which were in violation of the conditions prescribed in the Government of India’s Notification dated 5 June 2007 (“2007 Exemption Notification”) and also the provisions of the Forward Contracts Regulation Act, 1952 (“FCRA”).
 

SEBI in its orders held that the brokers had by either trading in the paired contracts themselves, or by facilitating the trading in ‘paired contracts’ by its clients on the NSEL, had violated the provisions of the 2007 Exemption Notification as well as the applicable provisions of the FCRA. The execution of the paired contracts were in the nature of purely financial contracts that promised assured returns under the garb of spot trading in commodities. Accordingly, SEBI held that the conduct of the commodity brokers was detrimental to the interest of the securities market.
 

Further, to determine whether the commodity brokers were ‘fit and proper’ persons, SEBI took note of an earlier order of the Securities Appellate Tribunal (“SAT”) which had held that ‘good reputation and integrity’ of a person were critical facets of the ‘fit and proper’ criteria and that for determining whether an entity enjoyed a ‘good reputation’ prima facie observations in other judicial pronouncements or reports by regulatory authorities could be taken into consideration. Taking note of the observations made against the commodity brokers by the Bombay High Court, and the Supreme Court, in the matters of 63 Moons Technologies Private Limited, and the other reports prepared by the Economic Offences Wing, and the Department of Economic Affairs of the Government of India, SEBI arrived at the conclusion that the commodity brokers did not enjoy a good reputation, and accordingly were not ‘fit and proper’ persons for the purposes of holding a registration as a commodities broker.
 

The orders passed by SEBI against the commodity brokers were on similar lines. Please click here to read the most recent order dated 29 October 2021, passed by SEBI in this matter.
 

al@acuitylaw.co.in