Regulations
NSEL Scam: Amit Rathi among three brokers arrested by EOW
According to reports, those arrested by the EOW, include, Amit Rathi, Chintan Modi of IIFL and CP Krishnan from Geojit Comtrade
 
The Economic Offences Wing (EOW) of Mumbai police, which is probing the Rs5,600 crore National Spot Exchange Ltd (NSEL) scam, has reportedly arrested some brokers. According to reports, those arrested by the EOW, include, Amit Rathi, managing director of Anand Rathi Financial Services Ltd, Chintan Modi, vice president of India Infoline (IIFL) and CP Krishnan from Geofin Comtrade (formerly known as Geojit Comtrade).
 
Police sources said some other executives of Anand Rathi, Motilal Oswal, Geojit Comtrade and IIFL were already questioned by the EOW.

According to NSEL data, brokers were manipulating client codes to the tune of 3,00,000 times, after the trade was carried out on the exchange and then they transferred the same to other names.

It may be noted that in equities and commodities, changes in client codes are allowed only in a genuine case. But in this case, changes in client code were effected to transfer profit and loss to launder money.

According to market sources, as many as 200 brokers are alleged to have sold NSEL products as investment vehicles by promising an assured return.

After the exchange was shut down and the agencies began to probe the roles of the management and the brokers, the then newly formed NSEL Investors Forum had been demanding an investigation into the role of the brokers.
 
According to police, broking houses charged 0.2% as warehousing charges, but never gave investors any warehousing receipts (WRs). "Nobody verified the warehouse receipt or whether goods were actually at the warehouse. Some warehouse receipts are said to be authentic as some genuine producers wanted to finance their working capital till their goods were sold. But as nobody verified the warehouse receipts. More commodity traders started producing warehouse receipts against which they received easy funding. Some may have used this money for financing their business, but the rest is anybody's guess," another report from the newspaper had said.
 
Around 200 brokers are said to be involved in the scam. Major brokerages, which are under the scanner are Anand Rathi, Motilal Oswal, India Infoline and Geofin Comtrade, the reports said.
 
Last month, according to reports, the Maharashtra government was planning to liquidate properties worth Rs6,500 crore belonging to defaulters in the NSEL case to settle claims of the investors.
 
Ranjeet Patil, minister of home (urban), told DNA, "Until now, all such defaulters used to regain the hold of the assets. But we will ensure that property worth Rs6,500 crore, which was already attached from the defaulters, is liquidated. The auction on the property would be initiated soon to settle the claims of the investors."
 
The EOW had attached assets of the defaulting members, including MCX promoter Jignesh Shah and other NSEL officials under the Maharashtra Protection of Interests of Depositors (MPID) Act.
 
Last year in August, the EOW had filed a charge sheet against Jignesh Shah, promoter of Financial Technologies India Ltd, in connection with the NSEL scam.
 

 

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RBI not sharing bank inspection reports with intelligence agencies

In the Economic Intelligence Council meeting, the chief of CEIB reportedly said that RBI had initially agreed to share extracts of the inspection reports on banks but later on, had changed its stand

 

The Reserve Bank of India (RBI) has refused to share its reports on banks’ inspection on alleged money laundering laws and other violations with the Central Economic Intelligence Bureau (CEIB), citing legal hurdles.
 
The RBI was required to share relevant extracts of inspection reports with law enforcement agencies and CEIB, an apex intelligence agency under the Finance Ministry, to check black money and other financial crimes where gross violations of know your customer (KYC) guidelines and Prevention of Money Laundering Act (PMLA) are noticed, official sources said.
 
It had earlier given an assurance about sharing information relating to the Foreign Exchange Management Act (FEMA) violations with CEIB, which they share with the Enforcement Directorate (ED), they said.
 
But the central bank has not been sharing such information, the sources said.
 
The matter of non-sharing of inspection reports by RBI with CEIB was discussed during a recent meeting of the Economic Intelligence Council (EIC) headed by Finance Minister Arun Jaitley.
 
At the meeting, it was highlighted by the CEIB chief that while RBI had initially agreed to share the extracts of inspection reports with it, later on, they changed their stand.
 
RBI has cited “legal impediments” in sharing the reports with CEIB as it is not a statutory body; the sources said quoting the minutes of the meeting. 
 

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SEBI’s Safety Net Idea is Full of Holes
More silly tinkering with IPO rules
 
Every time the capital market regulator is under pressure to explain why retail investors shun the market, it fishes out the absurd idea of a ‘safety net’ for equity investors. Each time, the safety net has a new name. This time, The Economic Times tells us that its primary market advisory committee (PMAC) will discuss the idea of allowing investors to buy optionally fully convertible debentures (OFCDs) instead of plain vanilla equity. 
 
SEBI (Securities & Exchange Board of India), which celebrated 25 years of its existence with much fanfare in 2014, still does not seem to understand that equity, by its very nature, has to carry a price risk and cannot be converted into a debt-like instrument. Will OFCDs really work? The newspaper reports that OFCDs will have an 18-month tenure and carry bank interest rate (taxable); the money will be kept in an escrow account to meet redemption requirements should they arise. It is not clear if the conversion to equity will be in six months or at the end of 18 months. 
 
If the conversion to equity has to be in six months, who is to say that truly unscrupulous management will not keep the price high for that period? Many companies have managed to do it for significantly longer periods. A recent example would be Helios & Matheson, whose stock price continued to remain high even when it wasn’t able to pay salaries or interest on fixed deposits. 
 
Moreover, what happens if the price falls precipitously after the OFCDs are converted? Will SEBI act against the promoters or will they get away? Surely, the regulator realises that there must be a reason why various kinds of  ‘safety nets’ for equity investors have been discussed for over two decades and why they have never worked.
 
It is worth pondering what kind of companies would need to raise money under such conditions, while running the risk of numerous factors and circumstances that could impact stock price and corporate performance.
 
SEBI forgets that its job is to ensure that corporate fundamentals are in order, that facts stated in the IPO document are correct and accounts are not doctored. We, investor activists, pushed for an IPO rating on a scale of 1 to 5 to give investors a snapshot of the fundamentals. All they needed to do was to take a call on the price. But SEBI, under pressure from corporate lobbyists, ensured that IPO ratings were scrapped. What helped the case was that SEBI had deliberately weakened the effectiveness of ratings by allowing companies to choose their rating agency, instead using investor protection funds to pay for them and ensure independence.
 
Remember, it is SEBI that damaged the primary market permanently in the mid-1990s by allowing hundreds of fraudulent, fly-by-night companies to tap the capital market without any checks. A significant number of these companies vanished with investors’ money and there has been no serious effort to track them and recover funds. Many investors who suffered massive losses in the first flush of capital market liberalisation have never come back. India’s investor population has halved and this is affecting the government’s plan to disinvest shares of public sector undertakings (PSUs).
 
The answer to this situation is not an absurd safety net, but to rebuild investor confidence through sensible pricing of IPOs and more responsible investment banking. PSUs are unlikely to attract investors unless one of two things happen—the offer is at a significant discount to market price, or the government initiates steps to ensure operational autonomy of management with proper accountability and puts in place professional management selected on merit. 

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