Brokers cry crisis as action looms on 148 members

Likely Sebi action on NSEL scam would mean 300 brokers closing shop

As the ministry of corporate affairs is all set to take action against fraudulent stockbrokers in the Rs 5,600- crore National Spot Exchange ( NSEL) scam, the brokers’ body is upset about the ministry’s move. Reacting the move, Uttam Bagri, chairman of the Bombay Stock Exchange Brokers’ Forum ( BBF), said, “Any across- the- board action on hundreds of intermediaries affects the entire financial ecosystem. The masterminds of the scam are attempting to divert the regulatory attention from them by targeting brokers who are the victims themselves." Brokers, however, feel that if the Securities and Exchange Board of India ( Sebi) adjudicates, then the markets regulator will declare 300 brokers as not ‘ fit and proper.’ Consequently, they will not be allowed to carry out any business in the securities market. This will have serious repercussions on the capital markets. “If Sebi stops 300 brokers from doing business, millions of retail investors will panic and lose their hard- earned money and foreign investors will flee India. It will be catastrophic, to say the least,” said another senior official at an industry forum. The Serious Fraud Investigation Office ( SFIO) has found that over 148 brokers are involved in the massive NSEL scam. Sources said that the SFIO has got nod from the ministry to prosecute them. “The SFIO has also got instructions from the ministry to file winding up petition against at least 20 defaulting companies. It has also been asked to take action against the auditors of all the companies,” the source added. As a part of the NSEL investigation, the Economic Offences Wing ( EOW) has issued notices to 300 brokers after Sebi filed FIRs against 300 brokers. The notices allege that forward contracts on NSEL were illegal under the Forward Contracts Regulation Act ( FCRA) 1952. The show- cause notice questions the fit and proper status of these brokers. The illegality of transaction is because NSEL was set up to trade in spot transactions, but was not authorised to allow trading in forward contracts. Spot transactions must be settled in 11 days. The paired contracts issued by NSEL and passed on by brokers to their clients went beyond the prescribed period of 11 days and therefore were illegal. A senior criminal lawyer on condition of anonymity said, “A crime is a crime. For criminal law, nobody is big or small, nobody is rich or poor; the law applies to everybody the same way. For similar crime, punishment has to be similar and together.” “The Sebi has to take similar action against at least 300 brokers. At its peak, there were more than 600 brokers who issued such contract notes to their clients. These brokers together constitute a dominant part of the capital market with funds and securities of several million investors. It could possibly cause a system collapse,” the lawyer added.