Investors who lost money in the NSEL fiasco and were waiting for justice for five years, heaved a sigh of relief with SEBI holding four of the top commodity brokers — Motilal Oswal Commodities Broker, Indian Infoline Commodities, Geofin Comtrade and Anand Rathi Commodities, not ‘fit and proper’ to continue as commodity derivatives broker.

In the normal course, this order should have created chaos and rattled the commodity derivatives market.

But no. It has been business as usual for all these brokers, and the commodity exchanges, MCX and NCDEX, continue to witness normal turnover. SEBI, which took over the regulation of the commodity market from the Forwards Market Commission (FMC) after the scam in NSEL came to light, allowed broking activities in equity and commodity derivatives to be integrated into one entity in 2017 by amending the Securities Contract Regulation Rules. Soon after this, many of the commodity brokers applied for membership for dealing in commodity derivatives at MCX and NCDEX through their parent arm dealing in equity and equity derivatives.

Motilal Oswal, for instance, got a membership in NCDEX in February 2018, for Motilal Oswal Securities. It had around the same time, got a membership in MCX too. Similarly, the other three brokers too today do business in commodity derivatives through their parent arm — Geofin Comtrade through Geojit Financial Services, Anand Rathi Commodities through Anand Rathi Share & Stock Brokers, and India Infoline Commodities through IIFL Securities and IIFL Wealth Management.

So, no impact of the SEBI order on the commodity derivative broking business of the entities.

‘No impact’

Motilal Oswal Financial Services and IIFL Holdings, the two listed companies, reported to the exchanges that the order will have no impact on their businesses.

All the four brokers have a total of about 77,000 active clients.

While SEBI’s next move is not known, it may not be easy for brokers to escape.

The order passed by Madhabi Puri Buch, Whole-Time Member, SEBI, holds the brokers guilty of violating provisions of the erstwhile FCRA and of having made false/misleading presentation to investors and having done client code modifications with ‘manipulative artifice’.

The parties concerned have lost reputation, added the order.

With the adverse observations made by various courts and authorities in the case, it (SEBI) deems it right to keep the entities with doubtful reputation out of the market, said the order.

Going by the order, the entity carrying out the commodity trading business, either in the old name or in a new name, has no reputation now. So ideally, the commodity derivative business in the new name should also be disallowed from carrying on business, said a market expert from one of the commodity exchanges.

Promoter-driven companies

Following the NSEL scam, when the then commodity market regulator issued a not ‘fit and proper’ order, it was on Jignesh Shah, the promoter of NSEL, as also FTIL, the company which owned the exchange. But this time, the order from SEBI has specifically barred only the commodity broking entities that traded on NSEL and has not touched their promoter/parent companies.

Market veterans question how one can see the company and the promoter separately. Motilal Oswal Financial Services, the parent company of Motilal Securities as also Motilal Oswal Commodity Brokers has promoter and promoter group holding of 70 per cent of the share capital.

In Geojit Financial Services, promoter holding is 62 per cent. In IIFL Holdings, the promoter Nirmal Jain and his family hold 28.95 per cent stake.

While one is not sure if SEBI’s axe will also fall on the other business of the parent company of the commodity brokers, NSEL’s aggrieved investors are waiting for SEBI to ensure that its order is implemented in true sense.

Clarification

Geojit Financial Services Limited (GFSL) has clarified that Geofin Comtrade Limited (formerly known as Geojit Comtrade) is/was not its subsidiary or associate or group company. It also however has added that in 2018, the company entered into an agreement with Geofin Comtrade Limited to acquire its client base on an arm’s length basis.

 

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