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Sebi order in NSEL case rattles financial services firms

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Sebi has traditionally applied the rule to all the segments of a firm’s business.

MUMBAI: The Securities and Exchange Board of India (Sebi) order that declared leading brokers Motilal Oswal Commodities and India Infoline Commodities as not being ‘ t and proper’ to undertake commodities derivatives trading has sent a ripple of fear through them and other financial services rms over whether this will apply to all their business activities.

The market awaits similar orders against several other brokers for their alleged role in the Rs 5,500-crore National Spot E change Ltd (NSEL) scam in 2013. The bigger concern is whether the capital market regulator and the Reserve Bank of India will now impose the ‘ t and proper’ criteria on other units that they run such as stock broking, nonbanking finance companies (NBFCs), mutual funds and portfolio management services.

Sebi has traditionally applied the rule to all the segments of a firm’s business.

“You can’t be un t as a broker and t as a merchant banker,” said a person familiar with the development. “Generally, there is no automatic revocation. When the licences come up for renewal, Sebi will have to consider this order.”

The regulator said it had initiated enquiry proceedings against about 300 brokers and is likely to pass orders on them. ET had reported in November that Anand Rathi Commodities, Geofin Comtrade and Philip Commodities were also under the scanner, apart from the two cited above.

Unlike the equity broking licence which is a permanent one, the others have to be periodically renewed.

“Generally, ‘ fit and proper’ criterion is universal in the context of a particular company or promoters. If you are considered un t and improper to run a particular segment, then you are not allowed to operate in another segment as well,” said Sumit Agrawal of RegStreet Law Advisors and former law o icer, Sebi.

Clarifications Needed: Lawyers

“In the past, Sebi has sought to apply this in the MCX Exchange and Sahara matters. However, it was contested and there is no final decision on this question of law.”

Several Sebi regulations, including those on mutual funds and alternative investment funds, require detailed disclosures in the offering or scheme documents related to disciplinary history.

“These include any adverse regulatory fundings, actions taken by regulators and other such similar deficiencies… of the concerned applicant/registered entity, its directors, and associate entities,” said IC Universal Legal senior partner Tejesh Chitlangi.

Some lawyers said Sebi should have provided clarifications in its order about the impact on the other businesses of these brokers.

“It is an interpretational issue. It is incumbent on Sebi to provide clarification on whether it would impact their other businesses, otherwise it leads to speculation. It is a natural corollary to the order,” said a senior advocate of the Bombay High Court. “If you pass such orders without clarification it impacts other people who are just bystanders.”

Motilal Oswal and India Infoline said in separate statements that the ban will not impact group businesses.

Reputation, an important factor for consideration of t and proper criteria, has been seriously eroded, Sebi said in its order.

To determine whether an intermediary is t and proper, the regulator has to take into account the integrity of the directors, promoters and key management personnel. It also considers the reputation, character and absence of convictions and restraint orders.

Another lawyer said Sebi had invoked regulation 24 of rules covering intermediaries to reject the application by the two for registration as commodities brokers.

“Regulation 24 is applicable for intermediaries who are registered with Sebi and not entities who are applying for registration,” he said.