Markets regulator Sebi cancels registration certificates of two brokers

Markets regulator Sebi has cancelled registration certificates of Joindre Commodities Ltd and Pragya Commodity Brokers Pvt Ltd for failing to fulfill the "fit and proper" criteria by allowing their clients to trade in illegal contracts on National Spot Exchange Ltd (NSEL).

The brokers were members of NSEL and had facilitated trading in paired contracts on the NSEL platform.

In September 2009, NSEL introduced the concept of "paired contracts" on its platform, which involved buying and selling the same commodity through two different contracts at two different prices wherein investors could buy a short duration settlement contract and sell a long duration settlement contract and vice versa, with the same counterparty at the same time, the regulator noted in separate orders passed on Friday.

Such contracts were "ex facie illegal" and NSEL was in effect running a financing transaction assuring a fixed rate of returns under the garb of paired contracts.

Conditional exemption was granted from the provisions Forward Contracts (Regulation) Act, 1952 for forward contracts of one-day duration for sale and purchase of commodities traded on NSEL and the conditions placed an absolute bar on short sales and stipulated that all outstanding positions at the end of the day, must result in delivery of commodities.

However, Forward Markets Commission found that 55 contracts offered for trade on NSEL were with settlement periods exceeding 11 days and all such contracts traded on NSEL were in violation of FCRA and the condition that no short sale by members of the exchange shall be allowed was not being met by NSEL.

Since Joindre and Pragya Commodities were members of the NSEL and had participated in / facilitated trading in paired contracts on the NSEL platform, Sebi initiated enquiry proceedings against them and appointed a designated authority to enquire into whether they were 'fit and proper' to continue to hold the certificate of registration as Trading and Clearing Member.

Designated authority concluded that they were not "fit and proper" in terms of stock broker regulations and intermediaries regulations and that the registration granted to them as commodities derivatives broker be cancelled.

"The Noticee by allowing its clients to trade paired contracts which were ex facie illegal, as noted above, and that too for a period of over two years, has failed in conducting its business in conformity with the standards expected to be maintained by registered securities market intermediaries," Sebi said in similarly worded separate orders.

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