Sebi has taken action. When the current exchange failed to repay 13,000 investors in 2013, it resulted in a Rs 5,600 crore payment default, resulting in fraud. This is what occurred.
Due to their alleged involvement in the current National Spot Exchange Ltd (NSEL) scam, the Securities and Exchange Board of India (Sebi) barred five commodity brokers from obtaining new commodity broker registrations as of November 29.
Because they did not meet the “fit and proper” person criteria for their main alleged role in the mis-selling NSEL contracts by mainly promising assured returns without even ensuring delivery, the regulator also barred Anand Rathi Commodities, Geofin Comtrade, and India Infoline Commodities from submitting new registration applications for six months. Motilal Oswal Commodities Broker and also Phillip Commodities India were barred for three months by the regulator.
When the main exchange failed to repay 13,000 investors in 2013, it resulted in a Rs 5,600 crore payment default, resulting in fraud.
NSEL swindle
In September 2009, Jignesh Shah’s FTIL’s NSEL introduced the concept of “paired contracts” on its platform. Pairing contracts involved two concurrent transactions at different prices with the same counterparty, one a purchase transaction (settling at T+2 or T+3) and also the other the main sale transaction (settling at T+25 or T+36). The transaction structure ensured that buyers of short-term contracts always came out ahead. These five brokers have been accused of defrauding investors by selling them these contracts.
The MCA later discovered that NSEL had not required the seller to deposit goods in the warehouse prior to taking a short position through an exchange member. There was no stock check feature on the exchange, which would have allowed members’ positions to be verified. It was also noted that the NSEL contracts were for periods longer than 11 days.
MCA later directed NSEL to finish all current contracts by the deadlines and not start any new ones. Following the government-ordered suspension of trade, NSEL was faced with the challenge of repaying the Rs 5,600 crore owed to the 148 brokers. Several top officials from the Forward Market Commission (FMC), which was in charge of the investigations, were arrested on fraud charges.
The issue
Following the December 2015 merger of FMC and market regulator Sebi, all five organisations applied to Sebi for commodity derivatives broker registration.
However, Sebi denied these applications in 2019 because the entities in question did not meet the requirements for “fit and proper persons” under Schedule II of the SEBI (Intermediaries Regulations) 2008. (Intermediaries Regulations). When registering with SEBI and for the duration of its registration with SEBI, any intermediary must meet the “fit and proper person” criteria.
The “paired contracts” traded on the NSEL platform, according to Sebi, were in the nature of new financing transactions and thus violated the provisions of the Forward Contracts (Regulation) Act of 1952. (FCRA).
These organisations were also associated with NSEL. In June 2022, the five brokers filed an appeal with the Securities Appellate Tribunal (SAT), which overturned the Sebi order and requested that the market regulator reassess the situation.
The actions of Sebi
“There is no doubt that such’paired contracts’ were, in fact, financing transactions distinct from commodity sale and purchase transactions,” wrote Sebi Whole Time Member Ashwani Bhatia in a November 29, 2022 order, “and were thus in violation of both the exemptions granted to NSEL and the FCRA.”
These contracts were marketed as a replacement for fixed deposits. “There were enough red flags for a good reasonable person to conclude that what was also being offered as paired contracts on the NSEL were not spot contracts in commodities,” according to the order.
“After reviewing all of the documentation on file,” he added, “it is concluded that the five entities, presumably motivated by a desire to earn brokerages, provided a good platform for clients to access a product that raised serious doubts about their ability to conduct appropriate and effective due diligence on the product itself.”
The Sebi has requested that mutual fund companies take action against questionable Telegram groups.
Any actions or posts on social media that are detrimental to the interests of asset management companies, according to the market regulator, must be taken immediately.
Asset management firms have been tasked by the capital market regulator with being vigilant and monitoring social media platforms for Telegram groups that misrepresent themselves as registered mutual funds or use the names of mutual funds incorrectly.
According to the letter sent to fund houses by the Securities and the Exchange Board of India, some dubious groups have been seen on the messaging app Telegram using the names of mutual funds in misleading or false ways. A copy of this letter has been reviewed by Moneycontrol.
The regulator also mentioned a few Telegram groups that pose as mutual fund companies in the letter. For example, Tata Mutual Fund Investment had 77,509 users, Paytm Doubling Mutual Funds had 90,818 users, Paytm Doubling Funds Mutual had 86,435 users, and Close Friends Traders had 65,723 users.
“During such monitoring, if the AMC also comes across any activities or posts on social media that are questionable in nature and against the interests of such entities’ investors, the AMC should take appropriate actions promptly, and including issuing a press release/public notice, filing a police complaint/FIR, and so on,” the regulator advised fund houses.
Sebi has asked AMCs to ensure that other parties, such as distributors, brokers, and investment advisors, are aware of the need for similar due diligence and to act quickly.
“One must always be vigilant, and there are enough tools running at the backend to try and identify such cases, and also when such cases arise, we take the necessary action, including legal,” said Swarup Mohanty, director of the Mirae Asset Investment Managers (India). India’s cyber security laws are relatively stringent, vigilant, and timely. As a result, whenever incidents occur—and there have been a few—quick and decisive action is taken.
Social media leaders
According to Mohanty, Mirae Asset Mutual Fund has not come across any shady accounts falsely representing them on Telegram. However, a few instances of websites misrepresenting them have been reported to the cyber cell.
The letter from Sebi, according to experts, is an extension of a recent initiative to control unlicensed financial advice on social media sites such as Twitter, YouTube, Instagram, and Facebook. The regulatory body recently announced that it is working on rules for those who offer financial advice on social media platforms.
“We’re talking about social influencer regulations here and on Telegram.” Because the regulator is approaching the entire digital space holistically, which is always the correct approach to take, the entire Telegram process should not be viewed in isolation. According to Mohanty, those who do this must be held accountable and punished; if this is supported by law, the process becomes much easier.
Investors in mutual funds should keep the following principles in mind:
Mutual funds make no guarantees about their returns. It is illegal to guarantee returns on mutual fund investments.
Mutual funds are market-linked investments in equity and debt. Their success is inextricably linked to market success. Even the least risky MF scheme, liquid funds, cannot guarantee returns.
Edited by Prakriti Arora
