SAT directs SEBI to conduct an inquiry against brokers

SAT directs SEBI to conduct an inquiry against brokers

The probe relates to a payment evasion of Rs. 5,600 crores

The Securities Appellate Tribunal (SAT) recently directed the Securities and Exchange Board of India (SEBI) to conduct an independent inquiry against five brokers and persons associated with the brokers. The probe to be conducted within six months is about their role in the National Spot Exchange Limited (NSEL) payment default case.

SAT noted serious allegations against five brokers - Motilal Oswal Commodities Broker Pvt Ltd, Anand Rathi Commodities Ltd, IIFL Commodities Ltd, Philip Commodities India Pvt Ltd, and Geofin Comtrade Ltd.

They were accused of indulging in illegal activities, including funding clients by way of Permanent Account Number (PAN) lending, name lending through their Non-Banking Financial Company (NBFC), and other related entities. The funding was disproportionate to the net-worth and income level of the clients.

The tribunal also observed that the brokers had misused their in-house NBFC and funded clients who had no capacity to take such exposure. The brokers channelled funds for trading without the permission and knowledge of the clients. They were also engaged in market capturing practices by large-scale unique client code modifications.

SAT pointed out that the allegations were of a very serious nature. It stated, "The impugned orders passed by the SEBI Whole Time Member (WTM) against the brokers cannot be sustained and are quashed. The appeals of the brokers are allowed. The matters are remitted to the WTM to decide the matter afresh in light of the observations in accordance with the law after giving an opportunity of hearing to the brokers."

The tribunal added, "It will be open to the WTM to rely upon other material such as the complaint letters of NSEL, EOW report, EOW charge-sheet, etc. if such copies are provided to the brokers, and the opportunity is given to rebut the allegations."

The 44-page order also noted, "Such additional documents relied upon by the respondent should form a part of the show-cause notice for which purpose, it will be open to the WTM to issue a supplementary show cause notice. It will also be open to the SEBI if it considers necessary, to conduct an independent inquiry proceeding against the connected entities and persons associated with the brokers against whom evidence is available. SEBI will decide the matter afresh within six months."

The entities to now remain under the SEBI lens this time would be the directors of brokerages, associate bodies, group entities, and bodies coming under the 'Fit and Proper' criteria of the market regulator.

The tribunal noted that two show-cause notices had been sent to the brokers. While the first contained incriminating materials and other details unearthed during agency probes, the second was on their alleged association with NSEL. It said that the order passed by the SEBI WTM was based entirely on the second show-cause notice, which was totally unwarranted.

The tribunal also observed that WTMs allegations against NSEL had directly affected the reputation, character, and integrity of the exchange. Thus, the observations and findings that were passed ex-parte without giving notice to the NSEL would adversely affect other proceedings against the NSEL pending before various courts of law/authorities.

It ruled that the observations and findings given by the WTM, which were averse to the NSEL, could not be sustained, especially when no notice or opportunity of hearing was provided. It was violative of the principles of natural justice.

SAT held, "The adverse observations/findings against NSEL in the SEBI orders be expunged and shall not be utilized against the NSEL in any court of law or before any authority."