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The SEBI order barring four leading broking firms from dealing in commodities and ongoing investigation against another 296 firms on similar charges in the NSEL case has dented brokers’ image.
A similar order is expected on the remaining brokers under investigation and would have a major impact on their equity trading operations also as some of the brokers have merged their equity and commodity business after SEBI offered a unified licence for both businesses. Rajesh Baheti, President, Association of National Exchanges Members of India, said the remaining 296 brokers under investigation have followed the same business model of the four debarred brokers and it is unimaginable to think that 300 brokers have indulged in something illegal together.
Drawing an analogy, he said, most of the mutual funds have invested in IL&FS, and now after the trouble in IL&FS should all the mutual funds be declared not ‘fit and proper’ for their investments?
More than 90 per cent of contracts on the NSEL were paired contracts and all 300 brokers traded on NSEL-issued paired contracts to their clients.
Legal experts believe that use of the legal term ‘ in rem ’ by SEBI in its observations will make the final adjudication similar for all brokers as the legal term means that the observation applies to all people being investigated.
80% likely to be hit
Baheti said some of the broking firms that have merged their commodity and equity businesses will be affected if their commodity business is debarred in the NSEL case.
Almost 80 per cent of the broking business will be affected if all the 300 brokers are debarred, he added.
Justifying the funding made by brokers through their NBFC arms, he said, it is just a carry-trade offered to enhance the rate of return to investors, but after the incident everybody is blaming the brokers.
A carry-trade is a strategy in which an investor borrows money at a low interest rate to invest in an asset that is likely to provide a higher return.
In the last four days, SEBI had declared four commodity broking entities of India Infoline, Motilal Oswal, Anand Rathi and Geojit as not ‘fit and proper’ for commodity derivatives business.
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