Stockbrokers association Anmi expresses concern over orders issued by SEBI regarding illegal twinning contracts on NSEL

The association of securities brokers Anmi has expressed concerns about the action taken by the market regulator SEBI against a few brokerage entities for trading matched contracts on the National Spot Exchange Ltd (NSEL) platform and classified them as an “unfit and appropriate person”.

These brothers were members of the late NSEL.

It comes after SEBI deregistered a few brokers, including state-owned PEC Ltd, for allegedly allowing their clients to negotiate illegal NSEL twinning contracts and failing to meet “fit and proper” criteria.

In a letter to PMO and the Ministry of Finance on October 14, the Association of National Exchanges Members of India (Anmi) said: “If the contracts being negotiated were illegal, the Ministry of Consumer Affairs should have immediately stopped negotiating the contract. contract. “This action would have spared many investors and members the timely action of the MCA and they would not have suffered losses as business in the twin contracts had only started to pick up and accounted for only 30 percent of volume. exchange in the Fiscal Year 2011-12 “, he added.

He further stated that the Ministry of Consumer Affairs (MCA) failed to take timely action on the NSEL which had obtained an exemption from it, and that blaming the brokerage entity needs to be reconsidered.

“The orders issued will not only erode Sebi’s credibility, but will also hugely damage the reputation of India’s commodity markets,” he added.

From September 2009, the NSEL started negotiating paired contracts in which members could buy contracts (T + 2 / T + 3) and sell contracts (T + 25 / T + 36), and transactions were carried out on the same day and as by NSEL, the transactions carried out in matched contract complied with the exemption received from the Ministry of Consumer Affairs.

The Ministry of Consumer Affairs, by a notification in June 2007, exempted all one-day futures contracts for the sale and purchase of commodities traded on the NSEL from the application of the provisions of the FC (R) law.

This was subject to certain conditions, including that no short selling by exchange members will be allowed and that all open positions of the trade at the end of the day will result in a delivery.

As of February 2012, the Futures Commission (FMC) appointed by the MCA is a designated authority to verify any possible violations by NSEL.

FMC observed that the NSEL did not require the seller to actually deposit goods in the warehouse before taking a short position through a member of the exchange. In addition, 55 contracts offered for negotiation by the NSEL had a settlement period of more than 11 days.

Based on the report submitted by the CMF to the MCA in April 2012, the ministry asked the NSEL to explain why no action should be taken against it for violating the terms of the notification.

The Investment Dealers Association noted, however, that “neither the authorization nor the exemption granted by MCA had been withdrawn and the matched contracts continued to be traded, suggesting that MCA was satisfied with the response received. of NSEL and that negotiations were continuing ”.

Trading continued on the NSEL until trading on the NSEL halted due to a stock market default of Rs 5,600 crore in July 2013, where it was observed that the 24 buyers who were on the buy side and who had to pay money to the defaulting stock exchange.

According to Anmi, which has more than 900 stock brokers across the country, more than eight years have passed since the stock market failed and not even 10% of the overdue amount could be recovered from buyers.

This suggested that the settlement system and payment made by the exchange only happened with brokers other than the 24 buying brokers and that in the event of default the exchange came to a screeching halt.

“It is the stock exchange that is responsible for the default that caused brokers and thousands of clients to lose money in this exchange-run Ponzi scheme,” noted Anmi.

(With PTI entries)

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Posted on: Wednesday October 27, 2021 5:35 PM IST

Dolores W. Simon