Minutes of one of the last FMC meetings note rampant client code modifications by NSEL brokers “who may have indulged in manipulation in order to evade taxes, which needs to be probed into”

 

Market regulator Securities and Exchange Board of India (SEBI), which merged the Forward Markets Commission (FMC) with itself, has reportedly told the Finance Ministry it will not do any new investigation into the National Spot Exchange (NSEL) scam. This stand by regulators may allow the brokers, alleged by NSEL to be involved in the Rs5,600 crore scam, to get away scot free.

 

A report from Business Standard , says, "Its (SEBI's) stand could dash NSEL investors’ hope that the merger would give a renewed push for a probe. FMC, due to lack of authority to inspect and investigate brokers, had sought reports from the Central Bureau of Investigation (CBI) and the Mumbai Police’s economic offences wing (EOW). It had been unable to procure these reports. SEBI has decided on a similar approach, that instead of conducting its own probe, it would seek reports from CBI and EOW."

 

However, there is no word on some other allegations noted by FMC in its meeting on 17 September 2015. The notes (seen by Moneylife) states: "...Since one of the allegations against those brokers of NSEL is rampant UCC modification and thus there is suspicion/ likelihood that the brokers of NSEL have indulged in manipulation in order to evade taxes, which needs to be probed into. Since NSEL has ceased to co-operate and comply with the directions of FMC, the Income Tax Department may be informed so that a probe/enquiry is conducted in to the matter and appraised to the Commission." UCC stands for unique client code.

 

FMC meeting notes on 31 July 2015 mention that NSEL had also issued a circular under the Bye Laws allowing client code modification for client trades within 10 minutes after trading hours mainly for correcting punching errors. "This facility was misused by certain members to indulge in large scale client code modifications for market capturing practice as found through the EOW Mumbai Police investigation. In addition, the NSEL became aware of several gross violations of its Rules and Bye-Laws by the members pertaining to their dealing with clients when the EOW Mumbai Police registered complaints against the brokers."

 

These notes also refers to a letter sent by NSEL to these members for conducting an inspection of their operations, books of account and records as per Bye Laws of the Exchange. However, the notes, say, "…as many of the members refused such inspection of their records, we could not make much progress. It may be noted that these members have not been co-operating with the Exchange in providing data information since December 2014."

 

Expressing surprises about NSEL's suggestion that the Exchange came to know about the wrongdoings of its members only when EOW registered complaints against the brokers, the FMC is it looks difficult to accept. "....the fact that there have been findings in the Grant Thornton Report that NSEL had colluded with its brokers to sell its structured contracts to increase volumes, besides NSEL being an unregulated entity, which had complete control over its members, it was its duty to inspect the trading transactions of its members to find out about the CCMs and other wrongdoings during the course of trading," the FMC noted.

 

NSEL had made allegations against five brokerages, Anand Rathi Commodities Ltd, Geofin Comtrade Ltd, India Infoline Commodities Ltd, Motilal Oswal Commodities Pvt Ltd and Philip Commodities India Pvt Ltd.

 

The EOW, which was conducting an investigation against all the brokers to identify the role played by broking houses in the NSEL settlement crisis, sent a letter on 14 April 2015 seeking help from FMC. The letter states, "... since it is only taking cognizance of criminality under the provisions of Indian Penal Code (IPC) in this matter, Commission's intervention is required as far as violation of Code of Conduct or licensing terms of the brokers are concerned."

 

In a separate note, the FMC has clarified that NSEL was never under its regulatory purview. "In view of the exemption granted to NSEL u/s 27 of Forward Contracts Regulation Act (FCRA), NSEL was operating outside the regulatory purview of FMC under its own Rules & Bye-laws and there is no code of conduct or licensing terms for members of Spot Exchanges issued by the Commission," it stated.

 

According to the news report, the Rs5,600 crore settlement crisis that started in 2013 has resulted in 13,000 investors struggling to get their dues and the Department of Economic Affairs had in a letter on 21 September 2015 asked SEBI to address the investors’ grievances.