Market regulator Securities and Exchange Board of India (SEBI) has cancelled the certificate of registration of Arcadia Commodities and Trading and Modex Commodity Trades Pvt Ltd for their involvement in illegal paired contracts of the now-defunct National Spot Exchange Ltd (NSEL).
According to SEBI, these two brokers have been providing access to 'paired contracts', which has exposed its clients to the risk involved in trading in a product that did not have regulatory approval, therefore, raising doubts on the competence of the noticee to act as a registered securities market intermediary. The trading activities of the brokers in 'paired contracts' for its clients on the NSEL platform have serious ingredients jeopardizing the reputation, belief in competence, fairness, honesty, integrity and character of the noticees in the securities market.
As per the Grant Thornton report, SEBI mentioned that NSEL had a pay-out obligation of Rs8.74 lakh towards Arcadia Commodities. As per the interim economic offences wing (EOW) report, Arcadia Commodities had money exposure of Rs9.62 lakh. It is also observed from the enquiry report and the NSEL circular dated 10 March 2015 that the Exchange had made a special pay-out amounting to Rs4.72 lakh to the broker.
In the case of Modex Commodity, the designated authority (DA) of SEBI observed that, as per the EOW Report, the broker had outstanding obligations of Rs4.48 crore. On perusal of the Grant Thornton Report, it is observed that NSEL had a pay-out obligation of Rs3.85 crore towards Modex Commodity. It is also observed from the NSEL circular of 10 March 2015 that NSEL had made a special pay-out of Rs71.99 lakh to the broker, which had 29 clients. Modex Commodity was involved in facilitating the trading in the alleged 'paired contracts' on NSEL platform, the market regulator noted.
Further, SEBI says Arcadia Commodities and Modex Commodity also failed to prove 'fit and proper' person criteria and should not be allowed to continue acting as an intermediary until they regain 'fit and proper' status.
While cancelling the registration certificate of Arcadia Commodities and Modex Commodity, 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.
In September 2009, NSEL allowed buying and selling the same commodity through two different contracts at two different prices on the exchange platform wherein the investors could buy a short-duration contract and sell a long-duration contract and vice versa at the same time and at a predetermined price. The trades for the buy contract (T+2/ T+3) and the sell contract (T+25/ T+36) used to happen on the NSEL on the same day at the same time and at different prices involving the same counterparties. The transactions were structured so that buyers of the short-duration contact always made profits.
SEBI has said that the scheme of 'paired contracts' traded on NSEL ultimately has caused loss to the market to the extent of Rs5,500 crore and casts serious aspersion on the conduct, integrity and reputation of the broker who facilitated such 'paired contracts' and, therefore, its continuing role in the securities market cannot be viewed as good and congenial for the interest of the investors or of the securities market.
In 2007, the Union government had given an exemption to all forward contracts of one-day duration for the sale and purchase of commodities traded on NSEL from operations of the provisions of the Foreign Contribution Regulation Act (FCRA) subject to certain conditions including 'no short sale by the members of the exchange shall be allowed' and 'all outstanding positions of the trades at the end of the day shall result in delivery'.
SEBI also stated that the forward market commission (FMC) that looked into NSEL's functioning found that the Exchange had violated the no-short-sale clause and allowed contracts with settlement periods that extended beyond the set limit.