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Top commodity brokerage houses may soon face increased regulatory heat with the Serious Fraud Investigation Office (SFIO) concluding that 148 broker-companies made “unlawful gains” in the ₹5,600-crore NSEL payment scam that came to light in 2013.
SFIO, a multi-disciplinary organisation involved in detecting white-collar crimes/frauds, now wants SEBI to put the commodity brokerage houses, including the nine major ones, through the market regulator’s “fit and proper” test.
SEBI must examine if these commodity broker-companies or their promoters or directors need to be declared as ‘not fit and proper’, the SFIO has said.
The Corporate Affairs Ministry had in November 2016 ordered an SFIO probe into the alleged irregularities in the National Spot Exchange Ltd (NSEL) scam. In its report, which was submitted to the government recently, the SFIO has concluded that all the 148 member-brokers of NSEL had made “unlawful gains” while their clients suffered from “illegal losses”.
‘Start winding-up process’
Also, prima fac ie, it appears that the NBFC companies of the major brokers, who traded on the NSEL, might have laundered large amounts of money of questionable colour and source, said the SFIO report seen by BusinessLine .
The SFIO has also suggested to the government to initiate the process of winding up the 148 brokerage houses for conducting business in a “fraudulent manner”.
The SFIO report noted that the brokers indulged in rampant client code modifications and presented the pair contracts to their clients as a lucrative investment opportunity. They did not inform their clients about the nitty-grity of the commodities market, the SFIO report noted.
The major brokers found to have made unlawful gains include Anand Rathi Commodities Ltd, Geofin Comtrade Ltd, India Infoline Commodities Ltd, Motilal Oswal Commodities Broker Pvt Ltd, Phillip Commodities India Pvt Ltd., India Nivesh Commodities Pvt Ltd, Integrated Commodity Traders Pvt Ltd, JM Financial Comtrade Ltd and Nirmal Bang Commodities Ltd.
Unethical practices
While concluding that these commodity brokerage houses made unlawful gains, the SFIO noted that they were found acting in concert with the NSEL in misselling their fraudulent financial products.
These brokerage houses were involved in unethical as well as illegal practices of inducement, misrepresentation, making false assurances, alluring clients to earn brokerage and commission income, the SFIO has said.
It may be recalled that SEBI had, in April 2017, issued a show- cause notice to India Infoline Commodities Ltd, Anand Rathi Commodities Ltd, Geofin Comtrade Ltd, Motilal Oswal Commodities Broker Private Ltd and Phillip Commodities India Pvt Ltd for declaring them ‘not fit and proper’ for their alleged role in the NSEL crisis.
The SFIO investigation team contacted 13,000 clients registered with 148 brokers and received responses from 7,217 clients.
The findings divulged that for 55 per cent of the clients, the primary source of information about NSEL and NSEL trading was the brokers and the employees of the broking firms. They also confirmed that the brokers gave wide publicity to the NSEL and the arbitrage benefits on the exchange.
What is more surprising is the fact that around 83 per cent of the total clientèle was not aware of the nuances of commodity trading and the risk involved.
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