Market regulator Securities and Exchange Board of India (SEBI) has cancelled registrations of Rudra Comventures Pvt Ltd (formerly known as Gigantic Commodities Pvt Ltd) for dealing in or facilitating paired contracts on the National Spot Exchange Ltd (NSEL) platform.
In an order, Anand R Baiwar, executive director (ED) of SEBI, observed that Rudra Comventures has been providing access to 'paired contracts', which has exposed its clients to the risk involved in trading in a product that did not have regulatory approval. The trading activities of the 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.
Further, SEBI says Rudra Comventures 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.
The enquiry report of SEBI noted factors such as Rs2.11 crore payout obligation of NSEL towards Rudra Comventures and Rs2.16 crore exposure as observed in the interim report of the economic offence wing (EOW). Further, the implicit admission of trades executed by the Rudra Comventures, as observed by SEBI's designated authority (DA), provide a clear picture that the broker was involved in facilitating or participating in trading in 'paired contracts' on the NSEL Platform. The broker failed to respond or, in fact, disputed the observations of the DA, regarding dealing in the NSEL paired contracts.
In September 2009, NSEL allowed buy and sell in same commodity through two different contracts at two different prices on the exchange platform wherein the investors could buy a short-duration contract and sell a long-duration contract and vice versa at the same time and at a predetermined price. The trades for the Buy contract (T+2/ T+3) and the Sell contract (T+25/ T+36) used to happen on the NSEL on the same day at same time and at different prices, involving the same counterparties. The transactions were structured in a manner that buyer of the short duration contact always ended up making 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'.
SEBI also stated that the forward market commission (FMC) that had looked into NSEL's functioning found that the Exchange had violated the no-short-sale clause and was allowing contracts that had settlement periods that extended beyond the set limit.