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Law starts catching up with influential Mumbai brokers

NewsLaw starts catching up with influential Mumbai brokers

SEBI has issued notices to top brokerage firms allegedly involved in NSEL scam.


NEW DELHI: Gloom hangs over the Mumbai homes of several well-connected stockbrokers. After years of looking the other way, market regulator Securities and Exchange Board of India (SEBI), has rattled some of India’s top brokerage firms by issuing two notices for their alleged involvement in the Rs 5,600 crore NSEL scam. The notices may mean that the brokerages aren’t “fit and proper” to run their operations and should therefore shut shop and exit from the exchanges. The move has surprised many who were aware of the political and official clout of the brokers, connections clear from their cell phone call details.

If the SEBI threat is seriously meant, no one knows what will happen next. For the brokers, it is like the proverbial sword of Damocles where the king did not know when the sword would fall and kill. What is also interesting is that the second supplementary notice from SEBI has a lethal attachment: An investigation report from the Economic Offences Wing of Mumbai Police, which makes their involvement in the multi-crore scam crystal clear and exposes the excuses they have made in the past to avoid just such a step from the regulator.

The EOW report, filed by Rajyavardhan Sinha, is now triggering breaking-headlines across television studios in India. Financial circles across India are justifiably asking how come the Forward Markets Commission (FMC), the 60-year-old regulatory body (then headed by the Harvard educated Ramesh Abhishek, who was among the favourite bureaucrats of then Finance Minister P. Chidambaram) allowed such activities by brokers to go on not just unchecked but almost totally unpunished.

Sinha, then heading the EOW as Additional Commissioner of Police, had submitted a detailed report revealing these criminalities in 2013.

A close scrutiny of the report showed that among multiple bureaucrats exchanging notes on the report, there is one comment made by Abhishek that the matter needs to be “discussed”. Thereafter, the report was pushed into cold storage because of the influence of top politicians across the party spectrum and their favoured bureaucrats, several of whom still remain in high positions.

Repeated attempts to reach Abhishek failed. Worse, the FMC now stands merged with SEBI. It is highly unlikely that anyone will answer why no action was taken by him against the brokers. And it is also highly unlikely that anyone will answer why the FMC was in a tearing hurry to dismantle Financial Technologies—now 63 Moons—and declare its directors “not fit and proper”. The FMC asked 63 Moons to divest its anchor investor’s stake from India’s leading commodity futures exchange, the Multi Commodity Exchange of India (MCX) and exit from all technology support and exchange businesses. But it did nothing to bring the actual users of the platform, the brokers, to book. Everyone is now asking: why such a lapse?

Once the supplementary notice from SEBI reached the offices of the brokers, pandemonium prevailed. The brokers had, some days ago, sent out a letter asking everyone named in the scam by SEBI to each donate Rs 100,000 and above to create a war chest. Strangely, the letter was supported by the Association of National Exchanges Members of India and the Bombay Stock Exchanges Brokers Forum. The brokers are—it is evident—uneasy at the increased regulatory pressure from both SEBI and SFIO. A war chest to fund litigation would help them for what could be a protracted, legal battle.

The brokers, it is reliably learnt, are spending lots of time to chart a new course of action. In a letter to the Prime Minister’s Office, Deven Choksy, MD of broking house K.R. Choksi Shares & Securities, said the investigating agencies were on a “witch hunt” and said he knew “dues of those who lost cash must be paid by selling assets of defaulted borrowers but accusing brokers and asking them to pay for it must be stopped”. NSEL MD Prakash Chaturvedi countered Choksi, saying attempts of the brokers were misleading and that the investigation must take its course.

Corporate cognoscenti wondered what prompted Choksi to write to the PM, especially when Choksi and his friends were silent when the Exchange was targeted by powerful UPA-era bureaucrats and an influential UPA minister. Why did Choksi then not say cash must be recovered from the defaulters? Why not let the law take its own course and finally ensure the guilty be punished? Why should they (through their official and political contacts) continue to be immune from action despite clear wrongdoing?

It is expected that the SFIO, the multi disciplinary organisation detecting white collar crimes, would want SEBI to put the commodity brokerage houses, including the nine major ones, through the market regulator’s “fit and proper” test. The SFIO has concluded that all the 148 member-brokers of NSEL made unlawful gains and laundered large amounts of cash even while their clients suffered from illegal losses. The SFIO has asked the government to initiate the process of winding up the 148 brokerage houses for conducting business in a “fraudulent manner”. Will their influential backers permit this, is the question being asked by market observers.

The 148 firms include as many as nine top brokerage firms in India—including Motilal Oswal Financial Services, Anand Rathi Shares and Stockbrokers Ltd. and India Infoline—and some of them have asked for meetings with SEBI to explain their point of view. What is both intriguing and surprising is the fact that while the SFIO started the probe in 2016 and finished it a year later, the report was out in public within hours, the EOW report remained buried till SEBI finally decided to move in the matter against the influential brokerage firms and add it to its supplementary notice to the brokers.

But some of the events relating to the case are worth revisiting, especially in the light of the EOW probe, meticulously done by officers of Mumbai Police and submitted in 2013. No one yet knows why the report did not see the light of the day. No one yet knows why only FTIL promoter Jignesh Shah was hauled over the coals and pushed into judicial custody three times despite the EOW and ED making it clear that they found no trace of the missing cash to Shah. All this while those having a clear money trail to the funds lost remained untouched by the police. And no one yet knows if the SFIO and SEBI will now take some retrospective action on the bureaucrats responsible for the many lapses in the NSEL matter as the courts did in 2G scam and the Coal scam. And more importantly, no one will answer as to what or who was behind the FMC suspending spot trading in July 2013, thereby triggering an unprecedented crisis that led to NSEL unable to settle outstanding trades. Who benefited from the regulator-created destruction of the exchange? What was the role of former Finance Minister P. Chidambaram in the matter, given close personal ties to those running a rival exchange, one that thus far has had its own serious lapses (as well as those responsible) escape practically unscathed?

With the debate rising in both Mumbai and the Indian capital, it would be worthwhile to take a relook at some of the crucial points raised by the EOW, and also by SFIO. The SFIO probe indicates criminal culpability of the brokerages. It would be interesting to recount that a similar point was raised in 2011-12 by NSEL to the market regulators, who inexplicably chose not to answer. The regulators of that period did not respond even when the NSEL warned that certain brokers had helped investors trade in paired contracts, thereby guaranteeing clients with huge returns stretching up to 22% as against 14% market rates. They had bankrolled foreign visits and even funded clients through their NBFCS for trading at NSEL. Worse, the brokers did not even verify availability of commodities at NSEL. The regulators were told by NSEL that the exchange had warned member-brokers from issuing false advertisements. But the FMC just did not react. Why did Ramesh Abhishek (who still enjoys a powerful official position) look the other way despite repeated warnings, finally taking action only against those who gave the warnings?

The SFIO report and the EOW report of the Mumbai Police have very stark similarities about the way the brokers minted cash. The SFIO report says everything in 2018 what the EOW report said in 2015. Some of the key issues revolve around the fact that almost 83% clients lacked knowledge of commodity trading but were still lured into the trade by the brokers who indulged in rampant Client Code modifications. “We have received the notice and will respond in due course,” said Ajay Menon, CEO, Broking and Distribution, Motilal Oswal Financial Services. A senior official of Anand Rathi Shares & Stockbrokers confirmed receipt of the SEBI notice. “In continuation of its earlier SCN, Sebi has issued the present notice seeking certain further clarifications from IIFL Commodities Ltd. The notice is being examined and a detailed response will be submitted shortly and within timelines,” remarked a spokesperson for IIFL Commodities.

NSEL, meanwhile, alleged negligence in action taken on brokers on FMC.

“The probes conducted by various investigating agencies and market regulator, namely EOW-Mumbai, SFIO and SEBI, reveals (sic) that top five leading broking firms were involved in mis-selling of NSEL product, Know Your Customer manipulation, Client Code Modification and infusion of black money through their NBFCs,” NSEL said.

The complicity of some senior government officers in the Rs 90,000 crore IL&FS scandal has shaken up many, including the market regulator. Was this the reason for SEBI to sit up and take notice of the SFIO report? And then, almost instantly, attach the EOW investigation report without even asking why it had for so long gathered dust? SEBI needs to answer for FMC.

On 6 March 2018, Dr Subramanian Swamy, arguably the most deadly infighter in Indian politics, said at a book launch he would now take Chidambaram to court, blaming the former FM for triggering the Rs 6,000 crore plus payment crisis that rattled NSEL. Dr Swamy said he has enough evidence to prove “NSEL was killed so that NSE could survive and it was a one man operation”, the one man being the then FM.

The fatal blow committed by the UPA government was to direct NSEL to stop launching any fresh contracts, leading to an abrupt closure of the Exchange in July 2013. “Do you close down an exchange if there is a crisis, did the government close down PNB?” asked Dr Swamy.

Everyone is waiting for the answers, even while influential politicians and officials scurry to rescue their ever generous patrons.

Wharton-trained Shantanu Guha Ray is Special Editor, Investigations, at BTVI, a top business channel. An award winning author, he penned Target, which takes a look at the NSEL payment crisis.

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