NSEL Crisis: Top brokers holding government to ransom


There is an interesting story doing the rounds in the corridors of powers in the Indian Capital. And it revolves around how some top, Mumbai-based brokerages, which had routinely evaded all kinds of scrutiny and punitive action in the much-hyped, much-debated and till-unresolved NSEL (National Spot Exchange Limited) payment crisis, are suddenly triggering breaking headlines.

The movers and shakers of the financial markets in the country are, expectedly, perplexed. Is this happening because the brokerages are suddenly in limelight, and finding themselves in the list of the investigating agencies for their alleged misdeeds that perpetrated the crisis. The answers are almost out, like the case of the proverbial cat walking out of the bag.

The heat is on and high, the investigating agencies like EOW (Economic Offences Wing), SFIO (Serious Fraud Investigation Office) and the Securities and Exchange Board of India (SEBI), the market regulator, are increasingly putting their focus on five brokers accused of misdeeds in the Rs 5,600-crore payment crisis. The names are big, namely Motilal Oswal Commodities, Anand Rathi Commodities, Geojit Comtrade, India Infoline Commodities and Philips Commodities.

Hence, it is no wonder that the brokerages are frantically trying to make it an industry issue. They are trying their level best to shift the scales of the issue, they are explaining it to approximately 300 brokers, even illegitimately using brokers’ forums like ANMI (Association of National Exchanges Members of India) and BBF (BSE Brokers Forum) to bolster their case. 

The idea is simple — let the forums take up the case as an industry issue (even when it is not) and lay a trap to rope in other members, while culpability remains primarily on their side. It is, sadly, working. Over the last one week, ANMI and BBF have called for repeated meetings to collectively fight against NSEL, SEBI, EOW and SFIO in the ongoing investigations and legal actions. In short, they were trying to project themselves as above board, above law. Worse, little did ANMI and BBF realise that they have no business to step in a dispute involving regulatory and criminal action against the top five brokers for their non-compliance and other malpractices. The forums are hyping the case as if any action against them will trigger a big-bang market collapse and hence, SEBI should be very, very cautious. But that is just not the case. The truth is nearly 80% of NSEL’s default is caused by these top five brokerages only. And now, by hyping the case in favour of these handful of powerful brokerages, the industry bodies are doing disservice to other members whose interest, in fact, it should be protecting. 

In reality, the entire exercise is aimed at arm-twisting the government into not taking any punitive action against them, claim those in the know.

So what is the reality? Let’s check the facts. Based on the findings of the Economic Offences Wing of Mumbai Police, SEBI has repeated show cause notices (SCNs) to the top 5 erring brokers seeking why action should not be taken against them for their malpractices such as mis-selling of NSEL products as assured return products, manipulation of client KYCs and PAN details, Client Code Modifications, infusion of funds through benami accounts and even money laundering on the NSEL platform. Now, a punitive action that awaits these brokers, there are high chances that they could be declared “not-fit-and-proper”. And the charges levelled against the top guns are quite different from the show cause notices sent to the other lot of 300 brokers. That is for alleged FCRA (Foreign Contribution Regulation Act) violation, which – in normal circumstances – attracts minuscule penalty if proven guilty. 

But a closer look at the game plan will show who is playing ducks and drakes. The top, errant brokers want to club the rest, which almost sounds like mixing chalk and cheese to make it an industry issue and force the government in letting them scot-free. It may not work that way. It’s worth nothing here that the then head of EOW-Mumbai, Rajyavardhan Sinha had explained in detail the brokers’ criminalities in his report to the Forward Markets Commission (FMC). But the FMC, then headed by Ramesh Abhishek, a seasoned bureaucrat, did not talk about it for reasons known best to them. Expectedly, no action was taken.

Sinha last week walked into the studios of a top business channel and explained what all he detailed in the report. There was a deathly silence in Mumbai, and also in the corridors of power in Delhi, where Abhishek is the head of DIPP, an influential arm of the government. 

Then came the report of the Serious Fraud Investigation Office (SFIO) which also urged SEBI to take stern action against the top brokers by putting them through the market regulator’s “fit and proper” test and wind up their brokerage houses for conducting in a “fraudulent manner” their businesses’. Now, the top brokers — seen as the biggest perpetrators of the NSEL crisis — are crying wolf, some are crying Mamma, Mamma, Mamma, and trying to hide behind the larger group of brokers.

The case is nearly eight years old and very few remember how NSEL, its parent company FTIL (Financial Technologies India Ltd., now known as 63 moons) and its promoters were persecuted under the Maharashtra Protection of Interest of Depositors (MPID) Act despite the fact that the said act is not applicable to a markets dispute. But it was done, and both men and the organisation (NSEL) suffered due to the pressure mounted by these top brokerage houses. Very few will even remember how the assets of NSEL and its promoters were hastily attached under the provisions of MPID.

Now, the very same brokers are crying wolf when it is their time to face the music. 

NSEL has filed a writ petition before the Bombay High Court in December praying for directions to the state government to attach the properties of member-brokers as clearly liable under Section (1) of the MPID Act. The court had issued a notice to the state government asking it to seize the assets of the accused brokers.

The story is far from over, the twist and turns are still triggering breaking headlines. 

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