New Delhi: Though the Securities and Exchange Board of India (Sebi) has declared select broking entities as not ‘fit and proper’ for the commodity derivative business, the criteria, as per norms, apply to all the 300 brokers under the regulator’s lens, it is learnt.
This, legal and industry experts believe, could be in the nature of ‘in rem’, which means good against ‘all the world’, that is, on all the persons who may have or claim any right or interest in the subject matter of litigation, whether or not they were parties to or participants in the action constituting the subject matter of the action.
“This is in contrast to judgments made ‘in personam’, which are against specific persons. The Sebi’s invocation of ‘in rem’ principle will make final adjudication similar for all brokers,” a legal expert told Financial Chronicle on condition of anonymity.
Between February 22 and February 26, Sebi declared four commodity broking subsidiaries of leading NBFCs — India Infoline, Motilal Oswal, Anand Rathi and Geojit Financial Services as not ‘fit and proper’ for the commodity derivative business.
The market regulator in its order also stated, “In view of the seriousness of the matter, facts and circumstances of the case, the conduct of the noticee in its functioning as a commodity broker is questionable and has certainly eroded its general reputation, record of fairness, honesty and integrity and has therefore affected its status as a ‘fit and proper person’.”
In all the orders, Sebi had used observations of various authorities. Investigating agencies like both Economic Offences Wing (EOW) and Serious Fraud Investigation Office (SFIO) have observed that paired contracts were not in the nature of spot trades and were in violation of exemption conditions.
The recent Bombay High Court in Writ Petition No 2743 of 2014 also mentioned that contracts by NSEL’prima facie’ constituted breach of the condition that the exemption from applicability of FCRA was only in respect of contracts of one day’s duration. Sebi has inferred from these orders that observations about paired contracts are applicable to brokers as well. More than 90 per cent of contracts on NSEL were paired contracts. All 300 brokers who traded on NSEL issued paired contracts to their clients.
“Three hundred brokers have done the same thing as the four brokers did. Do you think more than 300 brokers will do something illegal together? No, the truth is someone has made a fool of all the brokers. It is the exchange,” said Rajesh Baheti, President, Association of National Exchanges Members.
The Sebi order, however, considers NSEL’s conduct so heinous that any association with it makes one not fit and proper.The order says "Since NSEL is observed to have misused the exchange platform for purposes other than for which permission was granted, these observations are seriously adverse in nature. In view of the gravity of the adverse nature of the observations, the same would be sufficient to determine the fit and proper status of these (brokers)."
