Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of NSEL

1. IndiaNivesh Commodities Private Limited (hereinafter referred to as “ICPL”/ “Noticee”) is registered with Securities and Exchange Board of India (hereinafter referred to as “SEBI”) as a stock broker bearing registration no. INZ000017437. ICPL was earlier a member of National Spot Exchange Limited (hereinafter referred to as the “NSEL”).

2. The present proceedings originate from the Enquiry Report dated February 28, 2020 (hereinafter referred to as the “Enquiry Report”), submitted by the Designated Authority (hereinafter referred to as the “DA”) in terms of regulation 27 of the SEBI (Intermediaries) Regulations, 2008 (hereinafter be referred to as the “Intermediaries Regulations”) as it stood at the relevant point of time prior to its amendment vide SEBI (Intermediaries) (Amendment) Regulations, 2021, w.e.f.

Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of NSEL

January 21, 2021. The DA, based on findings recorded in the said Enquiry report, recommended that the registration of ICPL as a stock broker may be cancelled.

B. SHOW CAUSE NOTICE, REPLY AND HEARING

3. Pursuant to the Enquiry Report, a post enquiry show cause notice dated March 13, 2020 (hereinafter referred to as “SCN”) was issued to the Noticee, along with copies of (i) the aforesaid Enquiry Report; (ii) Finance Ministry letter dated December 30, 2014 to Forward Markets Commission (“FMC”); (iii) Hon’ble Bombay HC’s order in criminal bail application no. 1263 of 2014 in Jignesh Prakash Shah vs. State of Maharashtra dated August 22, 2014.

4. While the aforesaid proceedings were pending, SEBI passed five separate orders rejecting the applications filed by five other entities for registration as commodity brokers in NSEL matter during February 2019. Aggrieved by the said SEBI orders, the entities filed separate appeals before the Hon’ble Securities Appellate Tribunal (“Hon’ble SAT”). The Hon’ble SAT vide its common order in the matter of Geofin Comtrade Ltd. And Ors. vs. SEBI (Appeal no. 214 of 2019) dated June 09, 2022 (“June 2022 SAT Order”), remanded the aforesaid SEBI orders to decide these matters afresh within six months from the date of the said order. While remanding the aforesaid SEBI orders, the Hon’ble SAT inter alia held as under: “... 42...The matters are remitted to the WTM to decide the matter afresh in the light of the observations made aforesaid in accordance with law after giving an opportunity of hearing to the brokers. All issues raised by the brokers for which a finality has not been reached remains open for them to be raised before the WTM. It will be open to the WTM to rely upon other material such as the complaint letters of NSEL, EOW report, EOW charge sheet, etc. provided such copies are provided to the brokers and opportunity is given to rebut the allegations. Such additional documents relied upon by the respondent should form part of the show cause notice for which purpose, it will be open to the WTM to issue a supplementary show cause notice...”

Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of 5. In light of the June 2022 SAT Order, it was felt necessary to furnish certain additional documents/material to the Noticee and grant an opportunity of personal hearing, before concluding the present proceedings. Accordingly, a supplementary SCN dated February 27, 2023 (“SSCN”) was served on the Noticee along with the following documents: 5.1. Copy of SEBI complaint dated September 24, 2018 filed with Economic Offences Wing (“EoW”); 5.2. Copy of FIR dated September 28, 2018 filed by SEBI under section 154 of Criminal Procedure Code, 1973 (“CrPC”); and 5.3. Amended Schedule II of Intermediaries Regulations.

6. Vide letter dated July 19, 2023, the Noticee requested for inspection of documents and the same was granted on August 11, 2023. Though the Noticee was granted an opportunity of personal hearing on August 23, 2023, the Noticee vide letter dated August 14, 2023 inter alia sought adjournment of the hearing and requested for additional time to file its reply to the SCN and SSCN. Thereafter, the Noticee was granted another opportunity of personal hearing on September 26, 2023 and the Noticee once again sought adjournment of hearing and requested for additional time to file its reply. The Noticee, vide letter dated October 05, 2023, submitted its reply. Subsequently, the Noticee was granted another opportunity of personal hearing on October 17, 2023 and the Noticee once again sought adjournment stating that its director was unwell. Then, the Noticee was granted a final opportunity of personal hearing on November 21, 2023. On the said date, the Authorized representative of the Noticee appeared before me and reiterated the submissions made in the Noticee’s replies and also made additional submissions. I note that vide letter dated November 27, 2023, the Noticee has inter alia again requested for an opportunity of personal hearing. In light of the four opportunities of hearing granted, one hearing held and the four submissions filed (including one post hearing submission), I am of the view that principles of natural justice have been duly complied with.

Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of 7. The written submissions filed by the Noticee dated July 19, 2023, August 14, 2023, October 05, 2023 and November 27, 2023 and those made during the personal hearing are summarized hereunder:

7.1. The documents requested have not been provided. 7.2. The Noticee has submitted that the alleged paired contracts were executed on behalf of its clients under their instructions and authorization. No funding/ financing was given to them. None of its clients have raised any grievance / complaint against the Noticee in this regard. 7.3. The recommendation of the DA to cancel the certificate of registration is arbitrary, harsh, inappropriate and not sustainable on the facts and in law. 7.4. There were no trades executed in the alleged paired contracts in proprietary account. 7.5. During the relevant period, the Noticee’s turnover on NSEL was miniscule in comparison with its total turnover in other commodity exchanges. A CA certificate regarding the same has been submitted. 7.6. The alleged paired contracts were formulated and approved by NSEL. Verification of stocks in the warehouses was the responsibility of NSEL. 7.7. Trading in alleged paired contracts was being openly carried out and the Noticee had no reason to doubt the legality or validity of these contracts. 7.8. Dealing on the NSEL including in the alleged paired contracts was considered normal as the trades were executed by numerous brokers and even the auditors had not raised any red flags at the relevant time.

7.9. Proper response was furnished by SEBI on every point raised by the brokers w.r.t. request for documents in 5 cases namely, Anand Rathi Commodities Ltd., Geofin Comtrade Ltd., India Infoline Commodities Ltd., Motilal Oswal Commodities Broker Pvt. Ltd., Philip Commodities India Pvt. Ltd. Documents were also provided to them. The Noticee has requested that similar approach may be adopted in the Noticee’s case also. 7.10. NSEL had been openly carrying out trading in a variety of commodities and the details of the same were being regularly reported to the Forward Market Commission (FMC). From August 2011, FMC was performing the function of a regulator over NSEL. Trading in alleged paired contracts was Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of being openly carried out and the Noticee had no reason to doubt the legality or validity of these contracts. 7.11. At the relevant time, trades on NSL platform were executed by Government organisations such as NAFED, FCI, APMDC, RAJFED, AP Markfed and CCI. The dealing on the NSEL including the alleged paired contracts was considered normal as the trades were executed by numerous brokers and even auditors had not raised any red flags at the relevant time.

7.12. There was a gross failure of FMC in performing their duties as an Apex Regulator of the Commodities Market. 7.13. The Noticee has dealt with large number of persons / entities and NSEL is one amongst all those persons / entities and therefore, triggering serious questions on the Noticee on the ground of its alleged close association with NSEL is untenable. 7.14. The first leg of the alleged paired contract was always a purchase. Hence there is no question of a short sale. There was never any default in delivery obligations for any of the Noticee’s contracts. 7.15. The paired contracts were also referred to as ‘Trader Contract’. Noticee had fulfilled its total obligation on execution of buy and sell contracts independently. Notably, it was acting as a ‘Member’ of NSEL and thus on execution of buy order, it made full payment of consideration on buy contract and were in totality delivery based transaction executed on NSEL. Thus on making full payment for buy contract, it had complied with entire obligation. With regard to sell contracts, on fulfilment of pay in obligation for delivery of underlying commodities, pay out was received by it.

Thus, it had complied with its entire obligation qua sell contracts. On each buy and sell contracts, levy of VAT as applicable, warehousing charges and octroi as applicable were recovered and paid by it. No adverse inference on post trade activities with regard to settlement obligations should be drawn against the Noticee. 7.16. As per NCDEX Circular dated 17.12.2012, the settlement period is T+30. 7.17. Except Member / Broker relation with NSEL, the Noticee has no other connection or association with NSEL, its directors, promoters and Key management persons in any manner.

Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of 7.18. The Noticee earned meagre brokerage w.r.t. execution of alleged paired contracts on behalf of its clients. 7.19. At the relevant time, the Noticee had carried out transactions in due compliance of the bye-laws, rules, regulations and circulars as issued by NSEL from time to time and no grievance of any nature was raised against the Noticee by NSEL or FMC or any of its clients. 7.20. While granting registration to the Noticee, SEBI was fully aware that the Noticee had carried out trades in alleged paired contracts and therefore the principles of res judicata and estoppel would apply. 7.21. NSEL had introduced the concept of alleged “paired contracts” and the broker members had not role to play. 7.22. No Court or authority had ever held or even alleged that any contracts launched by NSEL were without the prior concurrence of FMC as stipulated in the NSEL by-laws. It was Noticee’s genuine and bona fide belief that the alleged paired contracts were in compliance with the conditions of GOI notification.

If any such alleged paired contracts had to be considered to be “illegal” then the same had to be annulled as the same would be void in law ab initio. However, neither GoI nor FMC nor the DCA nor SEBI or any other authority has held that all such transactions need to annulled. 7.23. FMC was the regulator of the commodities derivatives markets including commodity exchanges and brokers. At the relevant time, SEBI was not the regulator of NSEL and therefore, SEBI ought not to initiate any action under Regulation 23 of the Intermediaries Regulations on the purported ground of alleged contravention of provisions of securities laws. 7.24. There was no exemption/ prohibition for grant of personal hearing by the DA under the Intermediaries Regulation. Thus, the Noticee ought to have been granted an opportunity of personal hearing before issuing ER, particularly when such harsh, extreme and excessive recommendations are made against the Noticee. 7.25. Apart from the SCN dated 13.03.2020, SSCN dated 27.02.2023 relies upon SEBI complaint letter dated 24.09.2018, FIR dated 28.09.2018 and the amended Schedule II of the SEBI Intermediaries Regulation.

In view of the Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of additional documents as referred to and relied upon and for fair dispensation of justice and in the interest of compliance with requirements of basic principles of law, the Noticee has requested to remit the matter to the DA in terms of Regulation 27(3) of the Intermediaries Regulations. 7.26. As per bye-law point no. 4.1 of the NSEL, all contracts launched by NSEL were with the prior concurrence of FMC. 7.27. The bye-laws of NSEL inter alia stipulates that if the relevant authority of the Exchange concludes that there were “financial transactions”, then it would have the authority and discretion to withdraw the Exchange as the legal counterparty to such transactions. Further, vide letter dated 16.08.2013, FMC directed NSEL that it would be the sole responsibility of the NSEL to settle all the trades, including the alleged paired trades. Hence, at the relevant time such trades were not considered as financial transactions as alleged. 7.28. Bye-law 5.26 of the NSEL further stipulated that NSEL would act as the legal counterparty for the transactions as it may specify transactions for which it would not be the legal counter party.

7.29. The alleged paired contracts were not mere financing transactions and the Noticee did not lend any money and trades were backed by payment and delivery. The trading platform was anonymous and the Noticee was not aware of the counterparty. There was no predetermination of profit between the Noticee and the counterparty. 7.30. In the Enquiry report, SEBI has placed reliance on various orders, judgements passed/ issued by various regulatory authorities. The Noticee was not a party to the said proceedings. The observations made in the said orders/ reports were specific to the entities therein and not specific to the Noticee. The Hon’ble SAT vide order dated 09.06.2022 in the matter of 5 commodity brokers including the matter of Philip Commodities India Pvt. Ltd. vs. SEBI remanded the said matter back to WTM to decide the matter afresh in light of the observations made by Hon’ble SAT in the said order. Further, based on the observations of WTM in his order dated 29.11.2022, the judgements/ reports referred in the Enquiry Report cannot be considered.

Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of 7.31. In the FMC Order dated 17.12.2013, it has been stated that the market participants and general public as well as the Government were kept completely in the dark by the Board and management of NSEL on unpermitted financing scheme run by NSEL. This itself proves that there was no association or collusion between the Noticee and NSEL. Further, FMC Order dated 17.12.13 had been challenged by way of writ petitions which are pending before the Hon’ble Bombay High Court (HC) and therefore the same is sub-judice. 7.32. NSEL had filed a writ petition before the Hon’ble Bombay High Court against the SCN dated 27.04.2012 issued by DCA. Vide Order dated 04.10.2021, the Hon’ble Bombay High Court has granted ad-interim relief on the ground of submissions made by NSEL that proceedings have become stale. Hence, whether there was any violation of exemption notification is in itself sub-judice before the Bombay High Court. 7.33. Hon’ble SAT in the matter of Geofin Comtrade Limited vs. SEBI (appeal no. 214 of 2019 dated 09.06.2022) has already quashed the allegations made in the SCN against the Noticee. Therefore, the SCN and SSCN issued against the Noticee ought to be disposed without issuing any directions. 7.34. The insertion of paragraph 3b(i) was pursuant to SEBI (Intermediaries) (Third Amendment) Regulations, 2021 that was w.e.f. 17.11.2021 and prior to that there was no reference of criminal complaint. The FIR was registered with MIDC Police Station, Mumbai on 28.09.2018 i.e., prior to the amendment and therefore the said Regulation is not applicable to the Noticee. Retrospective application of Intermediaries Regulations would be in gross violation of principles of natural justice. 7.35. FIR is only the first instance of reporting of the complaint and is a preliminary document based on the one sided statement of the complainant without any adjudication of the same. There is no final determination. 7.36. The main plank of the said FIR is that the Noticee like all other trading members of NSEL has traded in paired contracts on the NSEL platform. It appears that SEBI has initiated enquiry not only against the Noticee but also against 300 members of NSEL who allegedly participated in paired contracts.

Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of It is illogical to contend that anyone who dealt in alleged paired contracts as member of NSEL would be declared as not a ‘fit and proper person’. 7.37. SEBI cannot reply on its own complaint dated 24.09.2018 pursuant to which FIR dated 28.09.2018 was filed as evidence against the Noticee since the observations / allegations contained in the FIR are made by SEBI itself. 7.38. The complaint was filed by SEBI pursuant to section 29A (2) (e) of the FCRA just a few days before expiry of 3 years’ period specified therein, impliedly indicating that the alleged violations of FCRA are not serious in nature else SEBI would have acted promptly and not waited for about 3 years to file the said complaint. 7.39. The FIR filed by SEBI does not prove the commission of the offence by the Noticee. Furthermore, no charge sheet has been filed on the said FIR. Thus, the allegation in the said FIR against the Noticee may not survive, but in the meantime, if relying upon the said FIR, SEBI declares the Noticee as not a “fit and proper person” for acting as a commodity broker, such decision would cause irreparable damage to the business as well as its reputation. 7.40. The Noticee has placed reliance on the judgements in the cases of Almondz Global Securities Limited vs. SEBI (appeal no. 222 of 2015) and Geeta Lunch Home vs. State of Maharashtra & Ors. (Writ Petition no. 12188 of 2022) in respect of the recommendation of the DA for cancellation of the Noticee’s certificate of registration. 7.41. With respect to the amendment to the Intermediaries Regulations, the Noticee has submitted that a writ petition has been filed in the Hon’ble Bombay High Court in the matter of Venkatraman Rajamani vs. SEBI (Writ petition (L) no. 17978 of 2023) and other connected matters. Further, order dated 06.07.23 has been passed by the Hon’ble Bombay High Court. As the legality of the amended regulations are still sub-judice before the Hon’ble Bombay High Court, the Noticee has requested to keep the proceedings in abeyance till the disposal of the writ petition. 7.42. Merely since a complaint has been filed / FIR has been lodged cannot indicate that a person is not a Fit and Proper Person. There should be a conclusive / valid conviction and not merely allegations.

Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of 7.43. It is understood that EOW has completed the investigation and no chargesheet has been filed against the Noticee. The Noticee has been duly co-operating with EOW in respect of the complaint filed by SEBI. 7.44. No clients were permitted to execute trades directly on NSEL and had to do so only through a registered broker, hence the same cannot amount to an “association” between the Noticee and the NSEL. 7.45. At the relevant time, MCX and NSEL had common directors and common shareholding. Consequently, MCX was closely associated with NSEL but no proceedings were commenced against MCX. On the other hand, the Noticee who had no actual “association” with NSEL was proceeded against to declare it as not fit and proper person. This is a contradictory stand taken by SEBI culminating into gross discrimination. 7.46. On 20.11.2015, the Ministry of Finance directed SEBI not to exercise any “regulatory function” in respect of NSEL. On 11.02.2016, review meeting of special teams of secretaries which was set up by GoI to examine the violation of NSEL, decided that SEBI should take action against defaulting brokers.

The Noticee is not a defaulter and rather is a victim of the default. SEBI has not taken action against the defaulting brokers and proceedings are relentlessly being pursued against non-defaulting brokers like the Noticee. 7.47. The doctrine of proportionality and Wednesbury rule / test should applied to ensure that relevant vital and material facts have been taken into consideration. The Noticee has placed reliance on the judgements in the case of E.P. Royappa vs. Tamil Nadu [1974 (4) SCC 3], Teri Oat Estates (P.) Ltd. 2 SCC 130] and Chairman-cum-Managing Director, Coal India Limited and Anr. Vs. Mukul Kumar Choudhari and others (Civil Appeal nos. 5762-63 of 2009). 7.48. The alleged transactions of NSEL relate to the period 2009 to 2013 and the Noticee was granted registration by SEBI much after the date of alleged transactions. Hence, the Noticee fulfilled the condition of fit and proper at the time of grant of registration by SEBI in March 2016. 7.49. The Noticee has submitted that in a similar matter of NSEL, appeal was filed before the Hon’ble Securities Appellate Tribunal (“SAT”) by one B.N.

Rathi Comtrade Pvt. Ltd. (Appeal no. 282 of 2023). In this regard, vide order dated

Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of 24.03.2023, SAT has stayed the effect and operation of the order passed thereto considering the fact that the appellant was already granted a registration as a broker and the SCN issued was on 25.09.2018 for the trades of 2011. 7.50. Certain persons / entities have filed writ petition before the Hon’ble Bombay High Court and the legality of the amended regulation / provision of intermediary regulation is also a part of the said writ petitions. The subject matter of SSCN dated 27.02.2023 is sub judice and the Noticee has requested to keep the present proceedings in abeyance till the disposal of the writ petition before the Hon’ble Bombay High Court. 7.51. The Chapter II of the SEBI (Intermediaries) Regulation which contains the details of consideration of application and the applicability of fit and proper person is not notified. Therefore, the applicability of Schedule II against the Noticee w.r.t. fit and proper criteria is untenable and unsustainable. 7.52. The Noticee had executed trades in the alleged paired contracts on behalf of certain clients that had approached the Noticee on their own accord. The Noticee’s trading on NSEL platform and in the alleged paired contracts was miniscule in comparison with its total turnover across all the commodity exchanges. 7.53. The Noticee has requested another opportunity of hearing on the ground of fresh development in the matter. 7.54. The Noticee has placed reliance on the order dated October 20, 2023 passed by SEBI w.r.t Kedia Capital Services Private Limited (Formerly known as Kedia Commodity Comtrade Private Limited).

C. BRIEF HISTORY OF NSEL SCAM

8. Before moving forward to consider the matter on merits, the background facts necessary for the present proceedings are narrated in brief as under: 8.1. NSEL was incorporated in May 2005 with the purpose of developing an electronic spot exchange for trading in commodities. In exercise of powers conferred under section 27 of the FCRA, the Central Government vide the Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of 2007 Exemption Notification, granted an exemption to all forward contracts of one-day duration for the sale and purchase of commodities traded on NSEL from operations of the provisions of the FCRA subject to certain conditions. The said notification inter alia stated that “no short sale by the members of the exchange shall be allowed” and “all outstanding positions of the trades at the end of the day shall result in delivery”. It was also stipulated that all information or returns relating to the trade as and when asked for shall be provided to the Central Government or its designated agency.

8.2. In October 2008, NSEL commenced operations providing an electronic trading platform to its participants for spot trading of commodities, such as bullion, agricultural produce, metals, etc. It is observed that NSEL had introduced the concept of ‘paired contracts’ in September 2009 which allowed buying and selling in same commodity through two different contracts at two different prices on the exchange platform wherein the investors could buy a short duration contract and sell a long duration contract and vice versa at the same time and at a pre-determined price. The trades for the buy contract (T+2 /T+3) and the sell contract (T+25/T+36) used to happen on NSEL on the same day at same time and at different prices, involving the same counterparties. The transactions were structured in a manner that buyer of the short duration contract always ended up making profits.

8.3. On February 06, 2012, the erstwhile FMC was appointed by DCA as the ‘designated agency’ as stipulated in one of the conditions prescribed under the said 2007 Exemption Notification, authorizing it to collect the trade data from NSEL and to examine the same for taking appropriate measure, if needed, to protect investors’ interest.

8.4. DCA on April 27, 2012 directed NSEL to show cause as to why action should not be initiated against it for violation of the conditions mentioned in the 2007 Exemption Notification.

Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of 8.5. Subsequent to the above, NSEL filed a reply. Further, MCA sought comments of FMC on the said replies. MCA also sought certain information from NSEL pursuant to which vide its letter dated July 12, 2013, MCA directed NSEL to give an undertaking that:

8.5.1. No further/fresh contracts shall be launched by NSEL until further instructions from the concerned authority; and 8.5.2. All the existing contracts will be settled on the due dates

8.6. NSEL issued a circular on July 31, 2013 suspending its spot exchange operations.

8.7. On August 27, 2013, FMC directed a forensic audit of NSEL by Grant Thornton LLP. Further, the Union of India ordered an inspection of accounts of NSEL and 63 Moons Technologies Ltd. (earlier FTIL) under section 209A of the Companies Act. The EoW also registered cases against the directors and key management personnel of the NSEL and 63 Moons (earlier FTIL) and against trading members and brokers of NSEL under the provisions of the Indian Penal Code and Maharashtra Protection of Interest of Depositors Act, 1999 (“MPID Act”).

8.8. After analysing the trade data received from NSEL and the forensic audit report submitted by Grant Thornton LLP, the FMC passed Order dated December 17, 2013 in the matter (“FMC Order”) wherein it inter alia observed that Financial Technologies (India) Ltd. is not a fit and proper person to continue to be a shareholder of 2% or more of the paid-up equity capital of MCX. Further, from paragraph 8 of the FMC Order, I note that the DCA vide its letter dated April 27, 2012 directed NSEL to explain as to why action should not be initiated against NSEL for violation of the conditions of the 2007 Exemption Notification. In response to the same, NSEL submitted a reply vide their letter dated May 29, 2012. DCA, vide its letter dated May 31, 2012, sought comments of FMC on the NSEL reply. The FMC, vide its letter dated August 02, 2012 to the DCA

Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of provided its comments on the two main issues, which are relevant for consideration of the matter at hand, as paraphrased hereunder:

8.8.1. Short sale by members of the exchange: NSEL did not insist upon ownership of goods before allowing its members to place the sale order. FMC was of the view that all the sale transactions which are not backed by the ownership of goods were in violation of the condition of “no short sale by the members of the Exchange shall be allowed" as stated in the 2007 Exemption Notification.

8.8.2. Contracts in which settlement period goes beyond 11 days: In view of the definition of “forward contract” under FCRA, FMC was of the view that all the contracts traded on NSEL which provide settlement schedule for a period exceeding 11 days are “non-transferable specific delivery contracts”. Thus, even if the 2007 Exemption Notification does not specify the delivery period, NSEL had to settle the delivery for all open positions within a period of 11 days as NSEL was allowed to only trade in one-day forward contracts and was obliged to ensure delivery and settlement within 11 days.

8.9. On September 19, 2014, Ministry of Finance, Government of India, issued a notification withdrawing the exemption granted to NSEL vide the 2007 Exemption Notification.

8.10. From the above, it is clear that NSEL had permitted contracts of various commodities having duration longer than 11 days and these contracts were in contravention of the exemption granted to NSEL. Subsequently, certain entities who were primarily borrowing on the NSEL platform through the modus of trading in the aforesaid “paired contracts” defaulted in fulfilling their payment obligations leading to a huge settlement default of outstanding contracts to the tune of ₹5,600 Crores.

Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of 8.11. EoW, Mumbai, vide letter dated April 04, 2015, had forwarded an interim report in connection with the investigation conducted by them to identify the role played by the broking houses in the NSEL case. The relevant extracts of the said interim report are as follows:

“IV. Objectives of this investigation into the brokers’ role: A scam of this magnitude would be difficult to continuously occur for 3 years without some of the large brokers’ gross negligence or perhaps active participation.

The actual role of the brokers was: • To bring in investors to invest in ‘pair trades’ promising them assured returns and the investors got about 13-16% p.a. for investing in the commodity • The sellers got finance at 18-20 or more % by pledging their commodity in NSEL warehouses They got brokerage from investors on the NSEL platform, and those brokers who had their NBFCs got additional revenue by financing investors for investing on NSEL. Though the matter is still under investigation, brokers have also received back from exchange certain charges collected from investors such as transaction fees, delivery and warehousing charges, etc. It is suspected that these are indirect motivation incentives for brokers to generate huge volumes. It is also possible that brokers may have benefitted from or compensated by the sellers or defaulters. The higher the trading turnover, the higher revenues for the exchange and the brokers. Therefore, both wanted to increase turnover at the exchange. In light of the foregoing, the objective of EOW in investigating brokers was to inquire whether they had been involved in any wrongdoing connected with trading on NSEL, specifically, to determine whether they participated in Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of a) Any activities which were detrimental to the investors, NSEL, or third parties. To determine whether they had made false and misleading representations, offered inducement, financing and deliberately made wrongful assertions purely to get brokerage and facilitate NSEL in generating higher volumes. b) Whether they had any illegitimate personal enrichment, or, there has been knowing dereliction in their duties as clearing and forwarding agents towards the commodities and protect the investors. c) It was also deemed necessary to ensure that their activities were within the framework of law.

8.12. Vide the Finance Act, 2015, FMC was merged with SEBI on September 28, 2015 in pursuance thereof SEBI was entrusted with the powers to regulate the trading in commodities futures market. As per the said act, an existing intermediary could continue to buy, sell or deal in commodity derivatives as a commodity broker, if it would make an application for its registration as an intermediary to SEBI within a period of 3 months from the date of merger till the disposal of such application by SEBI. Accordingly, the Noticee on the basis of an application so made by it, was granted SEBI registration number to operate as a stock broker in the securities market. In terms of the said act, FCRA was also repealed with effect from the aforesaid date.

8.13. On September 24, 2018, SEBI filed a complaint with EoW to initiate appropriate action against brokers/members of NSEL and other persons in the NSEL matter under sections 20, 21 and other appropriate provisions of the FCRA.

8.14. On September 28, 2018, SEBI gave a statement to the police which resulted into a FIR under section 154 of CrPC.

8.15. It is also pertinent to refer to the judgment of the Hon’ble Supreme Court decided on April 30, 2019, passed in the matter of 63 Moons Technologies Ltd.

Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of (formerly known as Financial Technologies India Ltd.) & Ors. vs. Union of India & Ors. (Civil Appeal No. 4476 of 2019) (2019)18 SCC 401 (“Merger Petition”), wherein it inter alia held that:

“….There is no doubt that such Paired Contracts were, in fact, financing transactions which were distinct from sale and purchase transactions in commodities and were, thus, in breach of both the exemptions granted to NSEL, and the FCRA…..”

8.16. Further, in judgement dated April 22, 2022 passed by the Hon’ble Supreme Court in the matter of The State of Maharashtra vs. 63 Moons Technologies Ltd. (Civil Appeal No. 2748-49 of 2022) (“MPID matter”), the Hon’ble Supreme Court while drawing reference to the presentations made by NSEL in respect of the “paired contracts” has inter alia held that:

“The above representation indicates that ‘paired contracts’ were designed as a unique trading opportunity by NSEL under which a trader would, for instance, purchase a T+2 contract (with a pay-in obligation on T+2) and would simultaneously sell a T+25 contract (with a pay-out of funds on T+25). The price differential between the two settlement dates was represented to offer an annualized return of about 16%. NSEL categorically represented that all trades were backed by collaterals in the form of stocks and its management activities included selection, accreditation, quality testing, fumigation and insurance. Therefore, NSEL represented that on receiving money and commodities, the members would receive assured returns and a service. Though NSEL has been receiving deposits, it has failed to provide services as promised against the deposits and has failed return the deposits on demand. Therefore, the State of Maharashtra was justified in issuing the attachment notifications under Section 4 of the MPID Act.”

Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of 8.17. In the background of the aforesaid discussion pertaining to “paired contracts” as captured in the preceding paragraphs, I now move on to examine whether the Noticee satisfies the “fit and proper person” criteria as laid down in Schedule II of the Intermediaries Regulations.

D. CONSIDERATION OF ISSUES AND FINDINGS

9. I have carefully perused the contents of the Enquiry Report, the SCNs issued to the Noticee, the responses filed by the Noticee and the submissions made during the course of the personal hearing and other documents available on record as shared with the Noticee.

10. Before moving forward to examine charges and the evidence available on record, it would be appropriate to take a look at the legal provisions of the SEBI Act, which are relevant in the present case. It is alleged that the Noticee has violated (i) regulation 5(e) of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as “Stock Brokers Regulations”) read with Schedule II of Intermediaries Regulations; and (ii) regulation 9(b), 9(f) read with clause A (1), A (2) and A (5) of Schedule II of Stock Brokers Regulations. The same are reproduced below for reference:

SEBI Act Registration of stock brokers, sub-brokers, share transfer agents, etc. 12. (3) The Board may, by order, suspend or cancel a certificate of registration in such manner as may be determined by regulations: Provided that no order under this sub-section shall be made unless the person concerned has been given a reasonable opportunity of being heard.

Stock Brokers Regulations Consideration of application for grant of registration.

Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of 5. The Board shall take into account for considering the grant of a certificate, all matters relating to trading, settling or dealing in securities and in particular the following, namely, whether the applicant, - (e) is a fit and proper person based on the criteria specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008; Conditions of registration. 9. Any registration granted by the Board under regulation 6 shall be subject to the following conditions, namely, (b) he shall abide by the rules, regulations and bye-laws of the stock exchange which are applicable to him; (f) he shall at all times abide by the Code of Conduct as specified in Schedule II; and Liability for action under the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 27. A stock broker shall be liable for any action as specified in Chapter V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 including suspension or cancellation of his certificate of registration as a stock broker, if he — (iv) has been found to be not a fit and proper person by the Board under these or any other regulations; SCHEDULE II Code of Conduct for Stock Brokers A. General. (1) Integrity: A stock-broker, shall maintain high standards of integrity, promptitude and fairness in the conduct of all his business. (2) Exercise of due skill and care: A stock-broker shall act with due skill, care and diligence in the conduct of all his business. (5) Compliance with statutory requirements: A stock-broker shall abide by all the provisions of the Act and the rules, regulations issued by the Government, the Board and the Stock Exchange from time to time as may be applicable to him.

Intermediaries Regulations

Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of Schedule II 1. The applicant or intermediary shall meet the criteria, as provided in the respective regulations applicable to such an applicant or intermediary including: (a) the competence and capability in terms of infrastructure and manpower requirements; and (b) the financial soundness, which includes meeting the net worth requirements. (2) The ‘fit and proper person’ criteria shall apply to the following persons: (a) the applicant or the intermediary; (b) the principal officer, the directors or managing partners, the compliance officer and the key management persons by whatever name called; and (c) the promoters or persons holding controlling interest or persons exercising control over the applicant or intermediary, directly or indirectly: Provided that in case of an unlisted applicant or intermediary, any person holding twenty percent or more voting rights, irrespective of whether they hold controlling interest or exercise control, shall be required to fulfill the ‘fit and proper person’ criteria.

Explanation– For the purpose of this sub-clause, the expressions “controlling interest” and “control” in case of an applicant or intermediary, shall be construed with reference to the respective regulations applicable to the applicant or intermediary. (3) For the purpose of determining as to whether any person is a ‘fit and proper person’, the Board may take into account any criteria as it deems fit, including but not limited to the following: (a) integrity, honesty, ethical behaviour, reputation, fairness and character of the person; (b) the person not incurring any of the following disqualifications: (i) criminal complaint or information under section 154 of the Code of Criminal Procedure, 1973 (2 of 1974) has been filed against such person by the Board and which is pending; (ii) charge sheet has been filed against such person by any enforcement agency in matters concerning economic offences and is pending; (iii) an order of restraint, prohibition or debarment has been passed against such person by the Board or any other regulatory authority or enforcement agency in Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of any matter concerning securities laws or financial markets and such order is in force; (iv) recovery proceedings have been initiated by the Board against such person and are pending; (v) an order of conviction has been passed against such person by a court for any offence involving moral turpitude; (vi) any winding up proceedings have been initiated or an order for winding up has been passed against such person; (vii) such person has been declared insolvent and not discharged; (viii) such person has been found to be of unsound mind by a court of competent jurisdiction and the finding is in force; (ix) such person has been categorized as a wilful defaulter; (x) such person has been declared a fugitive economic offender; or (xi) any other disqualification as may be specified by the Board from time to time.

(4) Where any person has been declared as not ‘fit and proper person’ by an order of the Board, such a person shall not be eligible to apply for any registration during the period provided in the said order or for a period of five years from the date of effect of the order, if no such period is specified in the order. (5) At the time of filing of an application for registration as an intermediary, if any notice to show cause has been issued for proceedings under these regulations or under section 11(4) or section 11B of the Act against the applicant or any other person referred in clause (2), then such an application shall not be considered for grant of registration for a period of one year from the date of issuance of such notice or until the conclusion of the proceedings, whichever is earlier. (6) Any disqualification of an associate or group entity of the applicant or intermediary of the nature as referred in sub-clause (b) of clause (3), shall not have any bearing on the ‘fit and proper person’ criteria of the applicant or intermediary unless the applicant or intermediary or any other person referred in clause (2), is also found to incur the same disqualification in the said matter: Provided that if any person as referred in sub-clause (b) of clause (2) fails to satisfy the ‘fit and proper person’ criteria, the intermediary shall replace such

Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of person within thirty days from the date of such disqualification failing which the ‘fit and proper person’ criteria may be invoked against the intermediary: Provided further that if any person as referred in sub-clause (c) of clause (2) fails to satisfy the ‘fit and proper person’ criteria, the intermediary shall ensure that such person does not exercise any voting rights and that such person divests their holding within six months from the date of such disqualification failing which the ‘fit and proper person’ criteria may be invoked against such intermediary. (7) The ‘fit and proper person’ criteria shall be applicable at the time of application of registration and during the continuity of registration and the intermediary shall ensure that the persons as referred in sub-clauses (b) and (c) of clause (2) comply with the ‘fit and proper person’ criteria.

11. I find it appropriate to first deal with the preliminary contentions raised by the Noticee.

12. The Noticee has contended that at the relevant time, SEBI was not the regulator of NSEL and it should not initiate an action under regulation 23 of Intermediaries Regulations. In this regard, I note that pursuant to the merger of FMC with SEBI, the Noticee had applied for a certificate of registration as a commodity broker and it was granted a certificate of registration by SEBI. Therefore, the Noticee has become a SEBI registered intermediary from the said date. Being a SEBI regulated intermediary, SEBI has the jurisdiction to examine whether the activities of the Noticee in ‘paired contracts’ for its clients on the NSEL platform violates securities law (including provisions of FCRA) and affects its ability to be considered as a “fit and proper person” under the Intermediaries Regulations. The power of SEBI to investigate / inquire into the alleged violation of FCRA flows from the Finance Act, 2015, which amended the provisions of FCRA. I note that Section 29A(2)(e) of FCRA, as inserted by the Finance Act, 2015, reads as follows:

“29A. Repeal and savings (2) On and from the date of repeal of Forward Contracts Act-

Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of (e) a fresh proceeding related to an offence under the Forward Contracts Act, may be initiated by the Security Board under that Act within a period of three years from the date on which that Act is repealed and be proceeded with as if that Act had not been repealed;”

13. I note that the aforesaid provision empowers SEBI to initiate a fresh proceeding with respect to the offences within a period of three years from the date on which FCRA is repealed. Thus, exercising its powers, SEBI has filed a complaint dated September 24, 2018 with EoW, seeking appropriate action under Sections 20 and 21 and other applicable provisions of FCRA against the brokers/members of NSEL, mentioned in the list attached thereto. Pursuant to the SEBI complaint, FIR No. Spl LAC No. 110/18 dated September 28, 2018 under section 154 of the CrPC at the MIDC Police Station, Mumbai was registered requesting it to take lawful action against the same trading members, which were listed in the SEBI complaint to EoW (Noticee’s name is listed at serial no. 104). However, the aforesaid proceedings are different from the proceedings before me. The present proceedings pertain to adjudging the ‘fit and proper person’ status specified in the Stock Broker Regulations and the Intermediaries Regulations in light of the activities undertaken by the Noticee on the NSEL platform and consequent action taken by SEBI. The Noticee is obligated to maintain the “fit and proper person” criteria on a continuous basis and it is well within SEBI’s jurisdiction and powers to adjudge the said fit and proper status of the market intermediaries in the interest of securities market. Therefore, I am of the considered view that the preliminary issue pertaining to jurisdiction of SEBI has no force and is accordingly rejected.

14. The Noticee has contended that all the documents sought by it was not provided. In this regard, I note that all the relevant documents pertaining to the instant proceedings have already been provided to the Noticee. I note that the Noticee was provided with the following documents in the present proceedings:

14.1. Copy of the relevant FMC Order with Annexures; 14.2. Copy of the Grant Thornton Report with Annexures;

Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of 14.3. Copy of the Notification issued by the Ministry of Consumer Affairs dated June 05, 2007; 14.4. Copy of letter from DEA, Ministry of Finance dated December 30, 2014; 14.5. Copy of EOW interim report dated April 04, 2015; 14.6. Copy of SIT email; 14.7. Copy of FMC letter dated January 16, 2015; 14.8. Copy of SEBI letters dated July 09, 2018 and September 28, 2018; 14.9. Copy of NSEL complaints dated March 17, 2015 and March 24, 2015; 14.10. Copy of SEBI complaint dated September 24, 2018 filed with EoW; and 14.11. Copy of FIR dated September 28, 2018 filed by SEBI under section 154 of CrPC.

Therefore, I find that all the material / relevant documents have been duly provided to the Noticee in compliance with the principles of natural justice in conducting present enquiry proceedings. Hence, the contention of the Noticee is devoid any merit.

15. The Noticee has also contended that it was not provided with personal hearing before the DA. In this regard, I note that the DA had issued the show cause notice dated September 26, 2018 under the then existing Regulation 25(1) of the Intermediaries Regulations. Thereafter the Enquiry Report was submitted on February 28, 2020. The Intermediaries Regulations were amended vide the SEBI (Intermediaries) (Amendment) Regulations, 2021, w.e.f. January 21, 2021. The amended Regulations now provide that the DA shall grant an opportunity of personal hearing and issue or cause to issue a notice scheduling a date for hearing. Thus, under the then existing Intermediaries Regulations prior to its amendment w.e.f. January 21, 2021, there was no legal requirement for providing the opportunity of personal hearing to the Noticee by the DA as contended by the Noticee. The Regulations specified granting of opportunity of personal hearing by the competent authority, which as has been detailed in the previous paras has been more than adequately provided and also availed by the Noticee. Thus, every opportunity was provided to the Noticee and no prejudice has been caused to the Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of Noticee and there is no defect in the process followed in the present enquiry proceedings. Accordingly, the contention raised by the Noticee in this regard is also misplaced and devoid of any merit.

16. The Noticee has argued that the matter should be remitted to the DA as additional documents have been issued post submission of the DA Report. I note that while the instant matter was under consideration, the Hon'ble SAT vide the June 2022 SAT Order remitted certain orders pertaining to some other brokers who had also participated in paired contracts on NSEL to SEBI to decide the matter afresh. The Hon’ble SAT left it open to SEBI to rely on other material like EOW charge sheet, complaint letters etc., after providing the same to the appellants therein. In line with the aforesaid order of the Hon’ble SAT, SSCN was issued to the Noticee along with the FIR and complaint. Therefore, present proceedings cannot be considered in violation of Intermediaries Regulations as documents were supplied in compliance with the order of Hon’ble SAT and in order to enable the Noticee to defend itself.

17. Coming to the merits of the case, I note that after issuance of the SCN, June 2022 SAT Order was passed by Hon’ble SAT wherein it set aside the impugned orders of WTM concerning similar facts and evidence as the present case. I find it appropriate here to briefly delve into the grounds on which the impugned orders of SEBI were set aside by Hon’ble SAT leading to the issuance of SSCN. The grounds are as follows:

17.1. The observations of the Hon’ble Bombay High Court (“HC”) in the matter of 63 Moons vs. Union of India (Writ Petition No. 2743 of 2014 dated December 04, 2017) cannot be relied upon as the said judgement has been set aside in appeal by the Hon’ble Supreme Court in the Merger Petition judgment.

17.2. The observation from the order dismissing the Writ Petition filed by NSEL against the invocation of the MPID Act in NSEL vs. State of Maharashtra and Ors. (Writ Petition No. 1403 of 2015 dated October 01, 2015), cannot be relied upon, as in a subsequent Writ Petition moved by 63 Moons Technologies Ltd., Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of in Writ Petition No. 1181 of 2018, a Division Bench of the Hon’ble Bombay High Court observed that the prima facie observations made in its earlier order were not binding and the same was observed since further investigation was in process at the relevant stage.

17.3. The observations in the bail rejection order dated August 22, 2014, passed by the Hon’ble Bombay High Court in the matter of Jignesh Prakash Shah vs. The State of Maharashtra, also cannot be relied upon as such observations were limited to the fact as to whether the bail should be granted or not.

17.4. Reliance on the SFIO Report was misplaced. The report only directs EoW/Police to initiate appropriate proceedings against NSEL and its directors/promoters. Based on the SFIO Report, the Special Sessions Judge took cognizance of the matter by an order dated July 29, 2019 which was challenged due to jurisdiction before Hon’ble Bombay High Court. The Hon’ble Bombay High Court by an order dated January 15, 2020 passed an interim order staying the effect and operation of the impugned order dated July 29, 2019.

17.5. Reliance placed on decisions of the Hon’ble Tribunal in the matter of Jermyn Capital vs. SEBI and Mukesh Babu Securities vs. SEBI is misplaced as decisions in the said matters are distinguishable on facts. Jermyn Capital (supra) was held to be in relation to an Interim Order passed by SEBI, and the Hon’ble Tribunal was of the view that passing an ad interim order are based on a different criterion, namely prima facie case, the balance of convenience and irreparable injury which are distinct and different while considering an application for grant of certificate of registration. The decision in the matter of Mukesh Babu Securities (supra) was distinguished by the Hon’ble Tribunal on the basis that in the said matter a criminal complaint was filed against the chairman of the company. The Hon’ble Tribunal noted that with respect to the Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of appellants, there is no evidence to show that any proceedings have yet been initiated against the appellants in the matter under consideration.

17.6. Regarding close association of the appellant with NSEL, forensic report which was made at the behest of SEBI has exonerated the appellant on this charge. This fact has not been considered by the WTM while holding the appellant to be closely connected with NSEL. There is no finding in the impugned cases indicating that the appellants have any control directly or indirectly over NSEL and, therefore, the question as to whether the appellant is a close associate of NSEL has not been considered in the right perspective.

17.7. In the impugned cases, the application for grant of registration certificate has been rejected without specifying how long the rejection of application would continue. Such rejection cannot continue indefinitely and if an application is rejected, a period should be prescribed within which the broker cannot apply for grant of a fresh registration certificate but after the expiry of the period he could file such an application.

18. I note that Hon’ble SC in Merger Petition judgment, has inter alia held that: “We have seen that neither FTIL nor NSEL has denied the fact that paired contracts in commodities were going on, and by April to July, 2013, 99% (and excluding Eseries contracts), at least 46% of the turnover of NSEL was made up of such paired contracts…..” Thus, it is clear that on NSEL (other than E-series contracts), the proportion of paired contracts as a percentage of total trades amounted to 99% in 2013. I note that the Noticee in its replies has admitted that it had traded in “paired contracts”. In this regard, I note from the EoW report that the Noticee had a client exposure of INR 37,92,06,876. Therefore, transactions on NSEL facilitated by the Noticee, could not have been anything but “paired contracts”.

19. Having established that the Noticee has traded in ‘paired contracts’ on behalf of its clients, I now proceed to examine the allegations levelled against the Noticee in the SCN and the SSCN. It is noted that the main allegation against the Noticee, as levelled in the SCN, is that by facilitating the trading in ‘paired contracts’ on NSEL

Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of platform during the relevant period as a Trading Member/ Clearing Member, the continuance of the registration of the Noticee as a broker is detrimental to the interest of the Securities Market and the Noticee is no longer a ‘fit and proper person’ for holding the certificate of registration as a broker in the Securities Market, which is one of the conditions for continuance of registration as specified in regulation 5(e)of the Stock Brokers Regulations read with Schedule II of the Intermediaries Regulations as applicable at the relevant time. Subsequently, SEBI, on the strength of certain documents/material (such as SEBI Complaint dated September 24, 2018 and FIR dated September 28, 2018 etc.) as provided to the Noticee vide SSCN dated February 27, 2023, further alleged that in light of the aforesaid documents filed against the Noticee by SEBI as well as observations/ findings against the Noticee in the Enquiry Report dated February 28, 2020, the Noticee is no longer a ‘fit and proper person’ for holding the Certificate of Registration being in violation of regulation 5(e) of the Stock Brokers Regulations read with Schedule II of the Intermediaries Regulations.

20. The Noticee has submitted that all the trades were executed in accordance with bye-laws of NSEL. I note that under the FCRA, a “forward contract” is defined as a “contract for delivery of goods and which is not a ready delivery contract”. A ‘ready delivery contract’ is defined as “a contract which provides for the delivery of goods and the payment of a price therefor, either immediately or within such period not exceeding eleven days”. Given these definitions in the FCRA, all the contracts traded on the NSEL which provided for a settlement schedule exceeding 11 days were treated by the FMC as Non-Transferable Specific Delivery Contracts. It is, therefore, seen that while the Ministry of Consumer Affairs (MCA) had stipulated in the Exemption Notification that only forward contracts of ‘one-day’ were permitted to be offered on the NSEL, the FMC, in its order, relying on the definition of the “forward contract” under FCRA held that the NSEL was allowed to only trade in forward contracts of ‘one-day duration’ and was obligated to ensure delivery and settlement within 11 days. Thus, 55 contracts of various commodities, having duration longer than 11 days that were executed on the NSEL were paired contracts without regulatory approval and in contravention of the exemption granted to NSEL and thus clearly not in accordance with law.

Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of 21. The Noticee has contended that at the relevant time, trades in alleged paired contracts were not considered as financial transactions. I note that in the merger petition (63 Moons Technologies Ltd. vs. UOI), the Hon’ble Supreme Court held that these contracts were in the nature of financing transactions and were thus, in breach of the exemptions granted to NSEL and the FCRA. Further, in the MPID matter (The State of Maharashtra vs. 63 Moons Technologies Ltd.), the Hon’ble Supreme Court enlarged the interpretation and held that such transactions come within the definition of ‘deposits’ under the MPID Act. While extensively referring to the claims made on the website of the NSEL and the contents of the publicity material and other investor resources, the Hon’ble Court also observed that the NSEL were advertising assured and uniform returns of 16% per annum for the ‘paired contracts’ traded on the NSEL platform where the return offered was the same across the commodities and that the return remained the same irrespective of the duration of the contract.

At paragraph 45 of the said order, the Hon’ble Supreme Court also depicted certain examples of ‘paired contracts’, which offered assured returns. For example, a T+2 and T+25 paired contract in Steel had the same offered rate of return as a T+5 and T+35 paired contract in Castor Oil. Thus, the judgement of the Hon’ble Supreme Court in the MPID matter highlighted how the ‘paired contracts’ were being marketed as an alternative to fixed deposits wherein the overwhelming majority of the sale leg of the ‘paired contracts’ which were executed were in fact short sales and further that, the commodities to back such sales were not available at the designated warehouses of the NSEL.

22. The Noticee has also submitted that it is neither a party to the proceedings / orders / judgments mentioned in the DA Report nor any specific reference has been made to it (i.e, in DEA letter dated December 30, 2014, EoW report dated April 04, 2015, FMC order dated December 17, 2013, decision in 63 Moons Technologies Ltd. (supra), decision in Jignesh Shah (supra), and Jermyn Capital LLC (supra). With respect to the aforesaid DEA letter, EoW letter, FMC order, and decision of 63 Moons Technologies Ltd. (supra), the aforesaid have been considered in the present proceedings in order to state that the ‘paired contracts’ executed on the NSEL platform were in violation of the 2007 Exemption Notification. Therefore,

Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of even though the Noticee was not a party to the proceedings which led to the said orders / letters / report, mention of such orders, letters and reports of other authorities are relevant to the proceedings. In relation to the decision of Jermyn Capital LLC (supra), considering the findings of Hon’ble SAT with respect to the said decision in the June 2022 SAT Order, I find that the said case is not relevant for consideration in the present matter.

23. The Noticee has submitted that the FMC order has been challenged by way of writ petitions before Hon’ble Bombay HC and therefore it is sub judice. Further, it has also submitted that NSEL has filed a petition before Hon’ble Bombay HC regarding the SCN issued by the DCA dated April 27, 2012 (Original Ordinary Civil Jurisdiction) (Writ Petition No. 2135 of 2021). Vide order dated October 04, 2021, Hon’ble Bombay HC has granted ad-interim relief basis the submissions made by NSEL that proceedings have become stale and that after long lapse of time SEBI is trying to revive the matter. Hence, any violation of 2007 Exemption Notification is itself sub judice before the Hon’ble Bombay HC. In this regard, I note that no directions have been issued by Hon’ble Bombay HC to SEBI to keep the present proceedings in abeyance. On the other hand, Hon’ble SC in the Merger Petition judgment has commented on the illegal nature of ‘paired contracts’ as follows:

“55.3. We have seen that neither FTIL nor NSEL has denied the fact that paired contracts in commodities were going on, and by April to July, 2013, 99% (and excluding E-series contracts), at least 46% of the turnover of NSEL was made up of such paired contracts. There is no doubt that such paired contracts were, in fact, financing transactions which were distinct from sale and purchase transactions in commodities and were, thus, in breach of both the exemptions granted to NSEL, and the FCRA…..”

Thus, in my view, this submission of Noticee does not merit any further discussion.

24. The Noticee has also relied upon the order passed by Hon’ble Bombay HC on July 06, 2023, in the matter of Venkataraman Rajamani and Ors. vs. SEBI in a batch of Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of writ petitions to submit that the legality of amended Intermediaries Regulations is under challenge, and therefore, the current proceedings should be kept in abeyance till the disposal of the writ petition. Further, it has relied upon stay granted by Hon’ble SAT in respect of M/s. B.N. Rathi Comtrade Pvt. Ltd. decision dated March 24, 2023, to submit that the current proceedings should be kept in abeyance. In this regard, I note that Hon’ble Bombay HC or Hon’ble SAT has not issued any directions to SEBI to keep the present proceedings in abeyance. In light of the above, I find that reliance on the aforesaid writ petition / decision does not aid the Noticee.

25. The Noticee has contended that there were no outstanding obligations or any default committed by the Noticee. With regard to the said submissions, I note that it is an admitted fact that the Noticee had indulged in / facilitated paired contracts and therefore, the same does not alter the fact that the Noticee did facilitate trading in paired contracts, which as discussed above, were not in accordance with the 2007 Exemption Notification.

26. The Noticee has argued that it had no reason to doubt the legality of the contracts traded on NSEL as (i) they were widely traded; (ii) trades of NSEL were being reported to FMC; (iii) NSEL was issuing delivery allocation reports; (iv) NSE’s bye laws inter alia stated that it was under obligation to take permission from FMC for all contracts; (v) no money was lent by the Noticee and the trades were backed by payment and delivery; (vi) while executing trades in paired contracts, additional costs such as sales tax, octroi etc had to be incurred which was not payable in case of borrowing of funds from banks/NBFCs; (vii) The trades in alleged paired contracts have to be annulled if they are considered to be illegal; and (viii) NCDEX offered similar contracts as paired contracts.

27. In this regard, I note that there are no two opinions of the fact that the paired contracts were being advertised as an alternative to fixed deposit returns by offering fixed returns (approx. 16%) across all commodities, irrespective of the nature of the contract or the duration and were in fact structured in a manner which ensured that the buyer always made pre-determined profits. Any prudent person

Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of (including the Noticee, who is an intermediary and well versed with financial and commercial knowledge) would have or should have come to the conclusion that what was being offered were not spot contracts in commodities rather that they had the trappings of a financial product which offered fixed and assured returns, as has been already observed by the Hon’ble Supreme Court in State of Maharashtra vs. 63 Moons Technologies Ltd., which was contrary to the FCRA and the Exemption Notification and which eventually caused losses to the market stated to be to the extent of ₹ 5,600 Crores. Therefore, I am of the view that while participating in such contracts, the Noticee failed to examine the basic nature of the product and also failed in understanding the source of powers relied upon by NSEL for selling such products which other exchanges were not offering. Thus, the Noticee failed to conduct proper and effective due diligence on these aspects of “paired contracts” which were not essentially spot contracts. Hence, the Noticee cannot evade its responsibility by citing that paired contracts were widely traded or that no money was lent by Noticee etc. For these reasons, the Noticee is found to have violated Clauses A (1), A (2) and A (5) Code of Conduct of Stock Brokers Regulations.

28. The Noticee has contended that SEBI has not taken any action against the defaulting brokers, insurance companies, auditors, banks etc. and proceedings are relentlessly being pursued against non-defaulting brokers. In this regard, I note that proceedings have been proposed and initiated against several entities based on the trades executed by them in the paired contracts on the NSEL platform and the accompanying facts and circumstances of their respective cases, solely relying on the material available on record. Since the Noticee was one such entity that had facilitated the trading in paired contracts on behalf of its clients, the present proceedings have been initiated against it. The extent of the role of the Noticee has been clearly brought out in the SCNs issued to it and as a quasi-judicial authority, the issue before me is to adjudicate the gravity of the allegations in the SCNs and arrive at a finding. Thus, the contention of the Noticee is devoid of any merit.

Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of 29. The Noticee has submitted that while granting of registration to the Noticee, SEBI was aware that the Noticee had carried out trades in the alleged paired contracts and therefore, principles of res judicata and estoppel would apply. The Noticee has further contended that SEBI Regulations cannot be made applicable retrospectively and that the amendment of the criteria for fit and proper person laid out in Schedule II of the Intermediaries Regulations took effect from November 17, 2021 which is after the initiation of the present proceedings. It is a settled position of law that every registered intermediary in the securities market is required to fulfil all the conditions of its registration at all points of its functioning including any additional criteria statutorily provided for, from time to time. Else, there would arise an anomalous situation where an entity that has obtained a certificate of registration after fulfilling the said criteria would fail the test after a period of time and yet continue to function in the securities market despite not fulfilling the required criteria.

On this premise, it can be said that the requirement of being a ‘fit and proper’ person, is a continuing ‘eligibility criteria’/ statutory requirement, which ought to be satisfied by all registered entities at all points of time. This condition is not a one-time condition applicable only at the time of seeking registration. Rather, the provisions governing the grant of registration provides that this is a condition which every registered intermediary is required to fulfil, on a continuous basis as long as the entity remains associated with the securities market as a registered intermediary. Therefore, the criteria of ‘fit and proper person’, is an ongoing requirement throughout the period during which an entity remains operational in the securities market as a registered intermediary. If the continued applicability of the fit and proper criteria to its functioning is challenged, there would exist a market where the overall interest of the investors would stand compromised. In case, pursuant to the grant of registration by SEBI, any evidence comes to the notice of SEBI that casts a doubt on the integrity, reputation and character of the registered intermediary, SEBI is well within the powers to examine the ‘fit and proper’ status of such entity based on various parameters.

Therefore, even if the Noticee was found to have fulfilled the ‘fit and proper person’ criteria while granting the Certificate of Registration, in 2015, such an intermediary can still be assessed on being fit and proper at a later date. Furthermore, as and when the ‘fit and proper’

Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of criteria changes, the Noticee will be required to comply with the revised criteria, and in the instant case, criteria as revised vide the amendments in November, 2021. Thus, Noticee’s contention that due to estoppel it cannot be held liable for any wrongdoing committed before its registration is rejected.

30. The Noticee has further contended that Chapter II of Intermediaries Regulations has not been notified and thus, applicability of Schedule II is untenable and unsustainable. I note that Noticee has been granted certificate of registration under the Stock Brokers Regulations. Regulation 5 of the Stock Brokers Regulations has been notified and regulation 5(e) of the Stock Brokers Regulations provides that for the purpose of grant of certificate of registration, the applicant has to be a ‘fit and proper person’ in terms of Schedule II of the Intermediaries Regulations. I note that Schedule II of Intermediaries Regulations is relied upon for the purpose of granting certificate of registration under Stock Brokers Regulations. Thus, this argument of Noticee is not tenable.

31. The contention of the Noticee that its trading volume was miniscule or that it earned meagre brokerage is equally misplaced and flawed as the quantum of such dealings is not relevant for the present proceedings.

32. As regards its submission that it was not closely associated with NSEL and the ‘paired contracts’ were introduced by NSEL, it cannot be denied that the involvement of the Noticee in trading/facilitation of trading in ‘paired contracts’ on the NSEL is certainly a conduct which was neither permitted by the 2007 Exemption Notification nor by any of the applicable provisions of the FCRA and therefore, a conduct similar to that displayed by the Noticee in its trading on the NSEL platform would be detrimental to the interest of the Securities Market.

33. Regulation 5(e) of the Stock Brokers Regulations provides that for the purpose of grant of Certificate of Registration, the applicant has to be a ‘fit and proper person’ in terms of Schedule II of the Intermediaries Regulations and Regulation 9(b) of the Stock Brokers Regulations mandates a registered stock broker to abide by the rules, regulations and bye-laws of the stock exchange which are applicable to it. In Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of terms of Regulation 9(f) of the Stock Brokers Regulations, a registered stock broker is required to abide by the Code of Conduct as specified in Schedule II of the Stock Brokers Regulations. I further note that the ‘fit and proper person’ criteria specified in Schedule II of the SEBI (Intermediaries) Regulations, 2008, was amended vide SEBI (Intermediaries) (Third Amendment) Regulations, 2021 with effect from November 17, 2021.

34. Thus, as and when any of the ‘fit and proper’ criteria change, every registered entity is required to comply with the revised criteria, including as in this instance, the criteria as revised vide the amendment in November 2021. The requirement is not a onetime condition applicable only at the time of seeking registration. Rather, the provisions governing the criteria provides it to be a condition which each and every registered intermediary is required to fulfil on a continuous basis as long as the entity remains associated with the securities market as a registered intermediary. It is well within SEBI’s jurisdiction and powers to adjudge the said fit and proper status of the market intermediaries in the interest of securities market at any point of time.

35. The parameters provided under paragraph 3(b) of the amended criteria of Schedule II of the Intermediaries Regulations lay down a list of disqualifications which, inter alia, include the following:

“(1)….. (2)….. (3) For the purpose of determining as to whether any person is a ‘fit and proper person’, the Board may take into account any criteria as it deems fit, including but not limited to the following: (b) the person not incurring any of the following disqualifications: (i) criminal complaint or information under section 154 of the Code of Criminal Procedure, 1973 (2 of 1974) has been filed against such person by the Board and which is pending; …..” 36. The Noticee has submitted that an FIR is only the first instance of reporting of a complaint that is lodged with the police and only a preliminary document based on the one-sided statement(s) of the complainant without any adjudication of the same

Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of and such an FIR is far from being equivalent to a final determination, thus, no reliance can be placed on any FIR particularly an FIR which has been filed by SEBI itself. Further, the Noticee has contended that it has not been included in the charge sheets filed by EOW. As detailed in the SSCN, FIR was registered by the EOW with the MIDC Police Station, Mumbai, against the Noticee under section 154 of the CrPC on September 28, 2018. I note that this FIR is subsisting and has not been challenged, quashed or stayed by any competent court qua the Noticee till date. The disqualifications listed under paragraph 3(b) of the amended criteria of Schedule II of the Intermediaries Regulations are unambiguously clear and no exemption from such criteria has been provided. Once the disqualification is triggered, the ‘fit and proper’ person criteria is open for determination by SEBI. The disqualification provided in paragraph 3(b)(i) under the amended Schedule II of the Intermediaries Regulations has also been triggered vis-à-vis the Noticee.

37. Thus, by virtue of its conduct, trades and being a member of NSEL, the Noticee acted as an instrument in promoting and/or dealing in ‘paired contracts’ which were in the nature of financing transactions (as held by the Hon’ble Supreme Court of India referred supra). By providing a platform for trading to its clients and by providing access for taking exposure to such ‘paired contracts’, the Noticee exposed its clients to the risks involved in trading in a product that did not have regulatory approval.

38. I also note that the Noticee has submitted that under the instruction of its clients, it facilitated their participation in paired contracts and there are no complaints with respect to the Noticee. I am of the view that any argument on the lines that the clients demanded such access to the ‘paired contracts’ or that they hold no grievance with the Noticee who merely executed the contracts without soliciting, does not lessen the extent of its obligations. The lack of diligence required to be performed by an intermediary of prudence is indicative of lack of competence and integrity while acting as a registered intermediary. Undoubtedly such activities of the Noticee not only seriously jeopardized the integrity of market and that of its investors but also SEBI’s belief in the reputation, character, competence and integrity of the Noticee and other brokers which compelled SEBI to file the criminal Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of complaint against it as also against several other brokers. Thus, the Noticee has also attracted disqualification under Clause 3(b)(i) of the amended provisions of Schedule II of the Intermediaries Regulations on account of this complaint filed by SEBI and the FIR that was registered by the EOW based on the said complaint of SEBI, and the complaint remains pending.

39. In the present case, the conduct, integrity and reputation of the Noticee has been found wanting on account of its involvement in trading of “paired contracts” on the NSEL platform and also for the reason that since SEBI has filed a complaint on the basis of which an FIR dated September 28, 2018 has been registered by EOW, which is yet to be finally determined by a Court of competent jurisdiction, the disqualification provided in paragraph 3(b) under the amended Schedule II of the Intermediaries Regulations stands invoked. I have perused the orders / judgments cited by the Noticee, namely, Chairman-Cum-Managing Director, Coal India Limited (supra), E. P. Royappa vs. Tamil Nadu (supra), Teri Oat Estates P. Ltd. (supra), Almonds Global Securities Ltd. (supra), Geeta Lunch Home (supra) and Kedia Capital Services Pvt. Ltd. (supra).

40. The facts and circumstances along with other material available on record clearly leads me to the conclusion that the Noticee has not satisfied the “fit and proper person” criteria specified in Schedule II to the Intermediaries Regulations. I have also taken into consideration of an order previously passed by SEBI in the context of similar facts and circumstances, namely, Adroit Commodities Services Pvt. Ltd. (order dated September 01, 2023), wherein the registration of the said entity has been suspended for 3 months or till the said entity is acquitted by an order of a Court, whichever is later.

41. Considering all of the above, while I find that the Noticee does not satisfy the “fit and proper person” criteria specified in Schedule II of the Intermediaries Regulations, I do not agree with the measure recommended by the DA. Given the peculiar facts and circumstances of the case, I am of the considered view that a direction of suspension of certificate of registration of the Noticee for a period of three months or till discharge/ acquittal of the Noticee by a Court of competent Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of jurisdiction, whichever is later, would be more appropriate, and proportionate to the violations brought out in the present case.

E. ORDER

42. In view of the facts and circumstances of the case and the conclusions arrived at discussed above, I, in exercise of powers conferred upon me under Section 12(3) and Section 19 of the SEBI Act read with regulation 27 of the Intermediaries Regulations, hereby suspend the certificate of registration (bearing registration no. INZ000017437) of the Noticee i.e. IndiaNivesh Commodities Private Limited, for a period of three months from the date of this Order or till such time an order is passed by a Court of competent jurisdiction discharging or acquitting the Noticee, whichever is later.

43. The Noticee shall, after receipt of this order, immediately inform its existing clients, if any, immediately about the aforesaid direction in paragraph no. 42.

44. The Order shall come into force with immediate effect.

45. This Order is without prejudice to the criminal complaint filed by SEBI in the NSEL matter and/ or any proceedings pending before any authority in respect of similar matter concerning the Noticee or other relevant persons.

46. A copy of this Order shall be served upon the Noticee and all recognized stock exchanges and depositories for necessary compliance.

Sd/- ANANTH NARAYAN G. DATE: DECEMBER 14, 2023 WHOLE TIME MEMBER PLACE: MUMBAI SECURITIES AND EXCHANGE BOARD OF INDIA

Final Order in respect of IndiaNivesh Commodities Private Limited in the matter of