SEBI has been advised to ‘tie the loose ends’ by the Securities and Appellate Tribunal (SAT) in the matter related to the involvement of the big five commodity brokers in the NSEL spot exchange fiasco. SAT observed that SEBI wanted the tribunal to rely or take support of the documents and evidence that it had ‘not presented’ to the court. SAT also noted that NSEL was an aggrieved person in the matter and had a right to intervene in the appeals filed by the brokers and also had an individual right to file separate appeals. 

SAT has given six months’ time to SEBI to take a fresh look at the evidence that it said existed against the commodity arms of Motilal Oswal, IIFL, Philip Capital, Anand Rathi and Geojit and then decide the matter. Madhabi Puri Buch, the incumbent SEBI chief, was the then whole-time member (WTM) who had issued these orders against the brokers declaring them as not fit and proper entities in February and March 2019 for their involvement in the NSEL spot exchange fiasco that came to light in 2013.

Documents lacking 

When the matter reached SAT, SEBI told the tribunal that “it can consider the observations, findings given in the EOW (Economic Offence Wing of Mumbai Police) report, EOW charge-sheet, the complaint letters given by NSEL and the observations against the brokers in the SFIO (serious fraud investigation office) report.” Consequently, SEBI contended that based on these observations, SEBI’s order against the brokers can be sustained.

But SAT was surprised by SEBI’s arguments since the regulator had not presented any of these documents to the tribunal or attached them as evidence.

“Additional documents can be considered by the court provided they are filed and admitted as additional evidence and an opportunity is given to the respondent to rebut these documents, which in the instant case is lacking. In any case, in our opinion, the WTM (Whole-Time Member, SEBI) is required to consider these documents and arrive at its own opinion as to whether these documents are germane to the issue or not and whether the observations, finding could bring any conclusion on the reputation, integrity and character of the appellant,” the SAT said.

The report and charge-sheet of the Mumbai police and SFIO against the brokers have revealed how they lured clients to trade on NSEL with false promises and incomplete documents.

SAT said that, on the one hand, SEBI WTM had given its finding that brokers were closely associated with NSEL, but on the other, the regulator was relying upon the complaint letters filed by NSEL in the connected appeals. “If the NSEL has filed the complaints, then the respondent (SEBI) has a lot to explain as to how NSEL is closely connected to the broker and vice versa,” the SAT observed.

SAT order noted that NSEL’s complaints against the brokers were serious. NSEL has alleged that the five brokers indulged in illegal activities such as funding of clients by way of PAN lending, name lending through their NBFC and other related entities and that funding was totally disproportionate to the net-worth and income level of these clients. Brokers channelised funds for trading without the knowledge and permission of those clients and were engaged in market-capturing practices by large-scale unique client code modifications.

NSEL, an aggrieved person

As per section 15T of SEBI Act, ‘any person’ aggrieved by an order can file an appeal before this Tribunal. ‘Any person’ can include even a person who is not a party to the proceedings but was aggrieved. SAT observed that NSEL was an aggrieved person and had a right to intervene in the appeals since SEBI observations, finding were made in the orders touching upon the reputation, integrity and character of NSEL. Further, such findings against NSEL were used for judging the character and reputation of the brokers.

SAT expunged SEBI’s observations against NSEL in the order.

“Findings made by the WTM in the orders have directly affected the reputation, character and integrity of the appellant and such observations and findings which have been passed ex-parte without giving notice to the appellant would adversely affect other proceedings against NSEL pending before various courts of law/authorities. The details of the adverse observations and findings have been culled out in the appeals filed by NSEL. These adverse observations have been made against NSEL in which it is not a not a party to these proceedings. Culling out adverse observations ex-parte against NSEL is unwarranted and violative of the principles of natural justice,” SAT said.

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