Madras HC raises concern over inaction against errant brokers in NSEL Scam [Read Order]

The Madurai Bench of the Madras High Court has directed the Union Ministry for Corporate Affairs (MCA) to act on concerns raised over the apparent reluctance of the SEBI to proceed against delinquent brokers complicit in the 2013 National Spot Exchange Limited (NSEL) scam..The petitioner, Advocate T Palpandi approached the Court after a representation filed last February with the MCA, raising this concern, had failed to yield any response..Appearing for the petitioner, Senior Advocate P Wilson informed the Court that no significant action has been taken till date against the defaulting brokers who had benefited from the wrong doing in the NSEL scam..This is despite the express mention of their active role in the scam in the Grant Thornton (GT) audit report which had unearthed several violations in the activities of the NSEL in 2013. The loss estimated on account of activities by the defaulting brokers amounts to Rs 5,600 crores..Echoing the concerns raised by the petitioner, the Bench of Justices CT Selvam and AM Basheer Ahamad has ordered the MCA to consider the Palpandi’s February representation and take appropriate action on it within six weeks. As stated in the order,.“For the present, we consider it appropriate to place on record our concern given the magnitude of the wrong-doing detected to the tune of Rs. 5,600 crores and consider it appropriate to direct and accordingly, direct the respondents to consider the representation of the petitioner, date 21.02.2018, and pass appropriate orders, within a period of six weeks from the date of receipt of a copy of this order.”.The 2013 NSEL Scam is rooted in violations of the conditions that granted an exemption to NSEL for one-day duration contracts (spot contracts) under Section 27 of the Forward Contracts Regulation Act, 1952..This meant NSEL was allowed to offer one-day forward contracts provided that members would not resort to short sales and that outstanding positions at the end of the trading day would result in delivery. However, it was found that NSEL allowed trading on its platform without verifying whether the seller had stocks, in effect allowing short sales by members..The subsequent withdrawal of the exemption and the introduction of a notification restricting NSEL from making fresh contracts prompted nearly 13,000 investors to withdraw from the exchange. Inevitably, a bubble burst as NSEL was unable to raise funds to repay old investors, leading to an estimated default of Rs 5,600 crores..The scam had led then erstwhile regulator, Forwards Market Commission (FMC) to forcibly amalgamate NSEL with its parent company, 63 Moons Technologies Limited/ Financial Technologies (India) Limited (FTIL) under Section 396 of the Companies Act, 1956, on the recommendation of the MCA..In view of the same, the petitioner had questioned why the brokers of NSEL have not been proceeded against in the same manner and vigour as NSEL and its promoter 63 Moons. As noted in the petition,.“The GT report clearly gives enough leverage and power for the Government to proceed against the brokers of NSEL who have actively connived and conspired, misled, mis-sold and lured the traders....…In the present case, the money trail is fully established as the Government themselves have stated that the entire money trail is to the defaulting brokers. It is submitted that apart from the case of the merger of NSEL and FTIL, the action under section 396 of the Companies Act, 1956 has not been taken against any other private entity in the history of independent India. Thus, the time has come for the Government to take stern action against the brokers, defaulters of NSEL, who have been indicted by the GT report.“.After the merger of FMC with the Securities Exchange Board of India (SEBI) in 2015, it is the SEBI that is required to proceed against the delinquent action. However, the SEBI has not gone further beyond issuing show cause notices to some defaulting brokers in 2016. As noted in the petition,.“It is very strange that even after issuance of show cause notices to errant brokers in the year 2016, till date… no adjudication has been done by SEBI. Therefore, one would ask [the] question, what is the impediment for SEBI to initiate action against errant brokers who were responsible for NSEL payment default.”.The matter will be taken up next on August 13, on which date the respondent authorities may also file a status report on action taken..Read the order: