Market regulator Securities and Exchange Board of India (SEBI) has suspended the certificate of registration (CoR) of R Wadiwala Commodities Pvt Ltd for three months. While rejecting the registration application of RVI Commodity Services Pvt Ltd, SEBI debarred the firm for three months from filing a fresh application. These brokers have been penalised for facilitating the sale of paired contracts on the now-defunct National Spot Exchange (NSEL).
In two separate orders, GP Garg, executive director (ED) of SEBI, observed that R Wadiwala Commodities and RVI Commodity Services have been providing access to 'paired contracts' that exposed their clients to the risk of trading in a product that did not have regulatory approval. The trading activities of these brokers in 'paired contracts' for its clients on the NSEL platform have serious ingredients jeopardising the honesty, transparency, fairness and integrity of the noticees in the securities market, he says.
Mr Garg also mentioned that there were enough red flags for a reasonable person to come to the conclusion that what was being offered as 'paired contracts' on NSEL were not spot contracts in commodities.
The market regulator mentioned that R Wadiwala Commodities had facilitated trading on the NSEL platform on behalf of its clients. The broker has stated that out of its 13,882 registered clients, it executed trades only for 27 clients who had approached it at their own instance. While facilitating transactions in paired contracts for its clients, the broker was under the bonafide belief that such transactions were spot contracts in commodities.
In a separate order, the economic office wing (EOW) forwarded the trade details of the RVI Commodity Services on NSEL during the referred period. It was noted that the broker had carried out trades in the contracts of e-gold and e-silver. The broker, in its reply on 26 April 2023, submitted that it has traded in gold and silver. It says it was a member of Multi-Commodity Exchange of India Ltd (MCX) and, on 2 July 2018 applied to surrender its membership, which was deactivated on 5 July 2018.
Further, SEBI says R Wadiwala Commodities and RVI Commodity Services also failed to prove 'fit and proper' person criteria and should not be allowed to continue acting as an intermediary until they regain 'fit and proper' status.
In September 2009, NSEL allegedly introduced the concept of 'paired contracts', i.e., buying and selling the same commodity through two different contracts at two different prices on its platform wherein investors could buy a short-duration settlement contract and sell a long-duration settlement contract and vice versa at the same time. It entailed the occurrence of buy trades (trading plus two (T+2) / T+3) and sell trades (T+25 / T+36) on the same day at different prices on the platform of NSEL. The transactions were structured so that buyers of the short-duration contract always made profits.
SEBI has said that the scheme of 'paired contracts' traded on NSEL ultimately has caused loss to the market to the extent of Rs5,500 crore itself casts serious aspersion on the conduct, integrity and reputation of, the broker who facilitated such 'paired contracts' and therefore, its continuing role in the securities market cannot be viewed as good and congenial for the interest of the investors or of the securities market.
In 2007, the Union government had given an exemption to all forward contracts of one-day duration for the sale and purchase of commodities traded on NSEL from operations of the provisions of the foreign contribution regulation act (FCRA) subject to certain conditions including 'no short sale by the members of the exchange shall be allowed' and 'all outstanding positions of the trades at the end of the day shall result in delivery'.
But, the Forward Market Commission (FMC) that looked into NSEL's functioning found that the exchange had violated the no-short-sale clause and allowed contracts with settlement periods that extended beyond the set limit.