Mumbai: The Securities and Exchange Board of India (Sebi) has started an audit of the brokers that sold products of National Spot Exchange Ltd (NSEL), two people directly familiar with the matter said.
“Books of accounts of the top brokers that sold NSEL schemes for 2011-12 and 2012-13 are being audited,” said the first person cited above, requesting anonymity.
“The audit is to ascertain any instances of unexplained write-offs between commodities and securities segment,” said the second person, also declining to be named.
The probe is currently underway against the top six brokers which have the highest exposure to NSEL.
According to disclosures made by NSEL, Indian Bullion Markets Association (IBMA), a trading arm of the NSEL, has the highest exposure at Rs.1,159 crore; Anand Rathi Rs.629 crore; India Infoline Commodities Pvt.Ltd Rs.326 crore; Geojit Comtrade Ltd Rs.313.25 crore; systematix commodities services Pvt Ltd Rs.277 crore; Motilal Oswal Commodities Rs.263 crore and Phillip Commodities Rs.140 crore.
The audit of the brokers comes after the capital markets watchdog formed an investigation team to look into the role of brokers and allegations against them.
The team includes the executive directors heading three of Sebi’s crucial divisions: surveillance, investigation and commodities.
The scope of the audit is also to establish whether there was mis-selling of the NSEL product with promise of assured returns, said the second person. An email sent to a Sebi spokesperson on 6 April and a reminder on Thursday went unanswered.
The audit is being done for the two years preceding July 2013, when trading on NSEL was halted after a settlement scam surfaced at the commodities bourse, which is 99.99% owned by Financial Technologies (India) Ltd (FTIL).
Ajay Menon, director at Motilal Oswal Commodities Broker Pvt. Ltd (MOCBPL) in an emailed statement said, “Since MOCBPL has not received any intimation from Sebi, we have no comments on this matter. Anyway, we are fully cooperating with various authorities to expedite delivery of justice to all the victims, including ourselves. We shall continue to do so in future as well.”
A spokesperson for Systematix Commodities said, “We have not received any such communique from Sebi. Systematix is a very reputed financial service firm with highly satisfied and contended customers and unparalleled compliance track record.”
A spokesperson for IIFL in an email declined to comment.
Emails sent to Phillip Commodities, Geojit Comtrade and Anand Rathi sent on 6 April and subsequent reminders on Thursday remained unanswered.
To be sure, Sebi is auditing all brokers who functioned under the erstwhile commodities regulator, Forward Markets Commission (FMC). These brokers, after the merger of FMC with Sebi in September 2015, took registration under the Securities Act, thereby bringing them under the purview of the Sebi broker regulations.
Sebi broker regulations have the power of enforceability, as against the FMC regime where the brokers were governed by exchange by-laws.
The role of the brokers has come to the fore once again in the Rs.5,574.34-crore NSEL scam.
Recently, a committee set up by the Bombay high court to refund investors in NSEL called for an audit of the records of the exchange, its investors and trading members,after it came across discrepancies in the figures submitted by them.
The committee directed auditing the books of accounts, bank accounts and income tax returns of investors, besides documents of the exchange.
Brokers who sold NSEL products will also be audited.
The committee will soon send its report and the audit recommendations to the high court for approval.
Allegations against the brokers include giving false assurances, misrepresentation, trading without clients’ authority, modification of the client code and selling NSEL contracts as investment vehicles.
“Sebi can set a benchmark by getting a proper audit done of the brokers. However, tracing the money trail to the last penny would need coordination with other agencies, namely the Economic Offenses Wing (EOW) and the Enforcement Directorate,” said Ganesh Iyer partner at Iyer Chambers, Advocates and Consultants. “Generally, a broker reserves a fraction of the client money as his commission; it is unheard that brokers taking principal loss on their books, which has happened in the case of some brokers. This aspect needs to be looked into.”