SEBI in NSEL Illegal Paired Contracts Case: Cancels License of Joindre Commodities

SEBI in NSEL Illegal Paired Contracts Case: Cancels License of Joindre Commodities

The Securities and Exchange Board of India (SEBI), has cancelled the registration certificate of Joindre Commodities Ltd for their involvement in the trade of illegal ‘paired contracts’ on the National Stock Exchange Ltd (NSEL) platform.

In September 2009, NSEL had 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.

In the case of Joindre Commodities (Noticee), a show-cause notice (SCN) was issued. In a separate case related to the NSEL-related scam, the Securities Appellate Tribunal (SAT) had ruled that additional documents should be provided to the brokers who are respondents. SEBI then issued a supplementary SCN to the broker.

AP Shukla, president of the Joindre Commodities appeared in person and made oral submissions before the SEBI WTM. He submitted an affidavit that after proper investigation, the economic offences wing (EoW of Mumbai police) has filed the final charge sheet in the matter and Joindre Commodities has not been named in it. Rather, Mr Shukla says he has been named as a witness in the charge-sheet submitted.

However, the Executive Director (ED) Pramod Rao found Joindre Commodities violating the rules and regulations of SEBI.

The SEBI stated that as per decisions passed by Supreme Court, it has already commented on the nature of the ‘paired contracts’ offered on NSEL platform. In the merger petition- 63 Moons Technologies Ltd. vs. UOI, it was held that these contracts were in the nature of financing transactions in the Maharashtra Protection of Interest of Depositors Act (MPID).

Further in the case of State of Maharashtra vs. 63 Moons Technologies Ltd., the Hon’ble Supreme Court held that such transactions come within the definition of ‘deposits’ under the MPID Act.

The issue before SEBI was whether the Noticee satisfies the ‘fit and proper person’ criteria as laid down under Schedule II of the Intermediaries Regulations.

In this regard, the SEBI noted that, as per the admissions of the Noticee in its reply, it was clear that the Noticee had indulged into trading in ‘paired contracts’ on behalf of its clients.

The board noted that regulation 5(e) of the Stock Brokers Regulations provides that for the purpose of grant of Certificate of Registration, the applicant has to be a ‘fit and proper person’ in terms of Schedule II of the Intermediaries Regulations. It further noted that the ‘fit and proper person’ criteria specified in Schedule II of the SEBI (Intermediaries) Regulations, 2008, was amended vide SEBI(Intermediaries)(Third Amendment) Regulations, 2021 with effect from November 17, 2021.

The ED observed, “I note that the Noticee is holding a Certificate of Registration granted by SEBI on April 29, 2016. In order to continue to hold such Certificate of Registration from SEBI, the Noticee is also required to satisfy the conditions of eligibility, which inter alia include, continuance of its status as a ‘fit and proper person’. The above condition to be a fit and proper person is not a onetime condition applicable only at the time of seeking registration. Rather, the provisions governing the criteria show that this is a condition which each and every registered intermediary is required to fulfil on a continuous basis as long as the entity remains associated with the Securities Market as a registered intermediary.”

Therefore, even if the Noticee was found to have fulfilled the ‘fit and proper person’ criteria while granting the Certificate of Registration, in 2016, such an intermediary can still be assessed on being fit and proper at a later date, SEBI opined.

The Noticee, by providing access for taking exposure to ‘paired contracts’ had exposed its clients to the risk involved in trading in a product that did not have regulatory approval and also undertaking such exposure itself on account of its proprietary trades thereby raises doubts on the competence of the Noticee to act as a registered Securities Market intermediary.

Thus, SEBI was of the view that the trading activities of the Noticee in ‘paired contracts’ for its clients on NSEL platform had serious ingredients amounting jeopardizing the reputation, belief in competence, fairness, honesty, integrity and character of the Noticee in the Securities Market.

Therefore, SEBI held that the conduct of the Noticee was detrimental to the Securities Market being not in conformity with the applicable code of conduct.

The SEBI observed, “the involvement of the Noticee in trading/facilitation of trading in ‘paired contracts’ on NSEL is certainly a conduct which was not permitted by the 2007 Exemption Notification nor by any of the applicable provisions of the FCRA and therefore, such a conduct as has been displayed by the Noticee in its trading on NSEL platform is detrimental to the interest of the Securities Market.”

“I am constrained to conclude that the Joindre Commodities, presumably driven by its desire to earn brokerage and/or profit, provided access to its clients to participate in a product which raises serious questions on the ability of Joindre Commodities to conduct proper and effective due diligence regarding the product itself,” the ED stated in his order.

While cancelling the registration certificate of Joindre Commodities, the market regulator asked the brokerage to allow its existing clients to withdraw or transfer securities or funds held in its custody within 15 days.