Order in respect Master Money Commodity Bazar Pvt. Ltd. in the matter of NSEL

WTM/AN/MIRSD/DOP/29710/2023-24

SECURITIES AND EXCHANGE BOARD OF INDIA ORDER UNDER SECTION 12(3) OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH REGULATION 27 OF SECURITIES AND EXCHANGE BOARD OF INDIA (INTERMEDIARIES) REGULATIONS, 2008

In respect of: Master Money Commodity Bazar Pvt. Ltd. SEBI Registration No: INZ000197733

In the matter of National Spot Exchange Limited (NSEL)

A. BACKGROUND

1. Master Money Commodity Bazar Pvt. Ltd. (hereinafter referred to as “Master Money” / “Noticee”) is registered with Securities and Exchange Board of India (hereinafter referred to as “SEBI”) as a stock broker in Commodity Derivative Segment, bearing SEBI registration no. INZ000197733. Master Money was earlier a member of National Spot Exchange Limited (hereinafter referred to as “NSEL”).

2. The present proceedings originate from the enquiry report dated December 17, 2020 (hereinafter referred to as “DA Report”), submitted by the Designated Authority (hereinafter referred to as “DA”) in terms of regulation 27 of the SEBI (Intermediaries) Regulations, 2008 (hereinafter referred to as “Intermediaries Regulations”) as it stood at the relevant point of time prior to its amendment vide SEBI (Intermediaries) (Amendment) Regulations, 2021, w.e.f. January 21, 2021. The DA, based on findings recorded in the said DA Report, recommended as follows:

“Therefore, in terms of Regulation 27 of the Intermediaries Regulations, I recommend that Noticee i.e. Master Money Commodity Bazar Private Limited

Order in respect Master Money Commodity Bazar Pvt. Ltd. in the matter of NSEL should not be granted registration and its business as a commodities derivatives broker may be stopped.” B. SHOW CAUSE NOTICE, REPLY AND HEARING

3. Pursuant to the DA Report, a post enquiry show cause notice dated January 15, 2021 (hereinafter referred to as “SCN”) was issued to the Noticee, along with copies of (i) the aforesaid DA Report; (ii) Finance Ministry letter dated December 30, 2014 to Forwards Market Commission (hereinafter referred to as “FMC”); (iii) Hon’ble Bombay High Court’s order in criminal bail application no. 1263 of 2014 in Jignesh Prakash Shah vs. State of Maharashtra dated August 22, 2014. In response to the SCN, the Noticee filed a reply dated February 9, 2021.

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 (hereinafter referred to as “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 (hereinafter referred to as “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…”

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 (hereinafter referred to as “SSCN”) was served on the Noticee along with the following documents: (i) Copy of SEBI complaint dated September 24, 2018 filed with Economic Offences Wing (hereinafter referred to as “EoW”); (ii) Copy of FIR dated September 28, 2018 filed by SEBI under section 154 of Criminal Procedure Code, 1973 (hereinafter referred to as “CrPC”); (iii) Amended Schedule II of Intermediaries Regulations.

6. In response to the SSCN, Noticee submitted another reply dated March 12, 2023. Thereafter, a hearing opportunity was granted to the Noticee on July 5, 2023. On the day of the scheduled hearing, the authorized representative (hereinafter referred to as “AR”) of the Noticee appeared through video conferencing. The AR reiterated submissions made in the replies and further stated that he has no additional submissions to make with respect to the Noticee.

7. The written submissions filed by the Noticee dated February 9, 2021 and March 12, 2023, are summarized hereunder:

7.1. The Noticee on account of being a trading member of the NSEL is bound to follow the Exchange rules, bye laws and the working mechanism adopted, implemented and continued for trading purpose.

7.2. It is submitted that the Noticee cannot implement the mechanism and the non-compliance on the part of the Exchange cannot be assumed/ deemed to be non-compliance on the part of the Noticee. Further, the Noticee has neither any role, involvement nor participation in the mechanism or has it acted in concert with anyone. 7.3. It is submitted that the Noticee’s clients have settled their trades on the same day and have not exceeded 11 days. Therefore, the Noticee cannot be placed on the same footing as that of the Exchange or other persons.

7.4. Noticee has neither executed any paired contracts nor it has any nexus with NSEL. Noticee has not even earned 2% of the membership fees i.e. INR 5,15,000 plus clearing member fees INR 1,00,000, as brokerage, which shows that Noticee does not have any nexus with NSEL.

7.5. It is pertinent to note that SEBI complaint dated September 24, 2018 is just a complaint. Further, mere filing of the complaint before any authority does not make the person or an entity unfit person for holding certificate of registration under the stock brokers regulation. Moreover, the said complaint does not spell out any role of the Noticee. The SCN does not spell out a single basis, conclusion, or derivation on which the Noticee can be charged for the serious charge of unfit person under the regulations.

7.6. The complaint filed before the EoW and FIR does not disclose the role, involvement, any conclusion, or any finding, which could connect to the integrity, reputation or character of the Noticee. General complaints filed before the EoW / Police authorities cannot be used against the Noticee for declaring it unfit person under Schedule II of the Intermediaries Regulations. 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:

(i) 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 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.

(ii) 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.

(iii) 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.

(iv) 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.

(v) 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:

a. No further/fresh contracts shall be launched by NSEL until further instructions from the concerned authority; and b. All the existing contracts will be settled on the due dates (vi) NSEL issued a circular on July 31, 2013 suspending its spot exchange operations.

(vii) 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 (hereinafter referred to as “MPID Act”).

(viii) After analyzing 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 (hereinafter referred to as “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 provided its comments on the two main issues, which are relevant for consideration of the matter at hand, as paraphrased hereunder:

(a) 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.

(b) 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.

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

(x) 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 INR 5600 crore.

(xi) 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: 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.

(xii) 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.

(xiii) 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.

(xiv) On September 28, 2018, SEBI gave a statement to the police which resulted into a FIR under Section 154 of CrPC.

(xv) 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. (formerly known as Financial Technologies India Ltd.) & Ors. vs. Union of India & Ors. (Civil Appeal No. 4476 of 2019) (2019)18 SCC 401 (hereinafter referred to as “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…..”

(xvi) 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), 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.”

(xvii) 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. Before moving forward to examine charges and the evidence available on record, it would be appropriate to 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 Brokers Regulations read with Schedule II of Intermediaries Regulations; and (ii) regulations 9(b), 9(f) read with clauses A(1), A(2) and A(5) of Schedule II of 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. Brokers Regulations Consideration of application for grant of registration. 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 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 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 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.

10. 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 platform during the relevant period as a Trading Member/ Clearing Member, the Noticee has, prima facie, violated the conditions stipulated in the 2007 Exemption Notification and consequently also the provisions of the FCRA. Therefore, it was alleged in the SCN that 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 December 17, 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.

11. Noticee has argued that on account of being a trading member of the NSEL, it is bound to follow the Exchange rules, bye laws and the working mechanism adopted, implemented and continued for trading purpose. In this regard, 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 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. 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 which were portrayed as spot contracts in commodities. In this regard, I am of the view that, the principle of ‘ignorantia juris non excusat’ or ‘ignorantia legis neminem excusat’ or ‘ignorance of law is no excuse’ becomes applicable in the situation, since trading in “paired contracts” was in violation of the 2007 Exemption Notification and ignorance of the conditions of the said 2007 Exemption Notification cannot be claimed. Therefore, not adhering to the terms of the 2007 Exemption Notification and attempting to deflect the responsibility to NSEL is misplaced, as the primary onus of diligence enjoined on an intermediary, has not been undertaken by the Noticee.

12. The Noticee has contended that the non-compliance on the part of the Exchange cannot be assumed / deemed non-compliance on the part of the Noticee. It is noted that the long leg of the paired transaction involved contracts being settled on a T+25 or T+36 basis, whereas the exemption granted by the DCA permitted NSEL to only offer spot delivery contracts. The 2007 Exemption Notification was available in the public domain and even basic due diligence would have shown that the paired contracts were per se in violation of the said notification. 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 (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 ₹ 5,500 crore. Therefore, I am of the view that 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, in the non-compliance on the part of the Exchange, the Noticee has also played a role by participating in such contracts and therefore, it cannot evade its responsibility.

13. Noticee has submitted that it has not executed any paired contracts. Noticee’s clients have settled their trades on the same day and have not exceeded 11 days. Therefore, the Noticee cannot be placed on the same footing as that of the Exchange or other persons. I find it relevant to refer to the finding of Hon’ble Supreme Court in the Merger Petition, wherein it 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. It is not the Noticee’s case that the transactions facilitated by it for its clients were only E-series contracts. Accordingly, by inference, transactions on NSEL facilitated by the Noticee, could not have been anything but “paired contracts”. Further, the Noticee has not demonstrated by way of illustration as to how the trades executed by its clients in contracts other than E-series are not paired contracts. More so, as it is noted from the trade log that the clients of the Noticee’s have bought both buy and sell contracts in the same commodity on the same day at different prices.

14. The submission of the Noticee that its clients have settled their trades on the same day and have not exceeded 11 days, is devoid of any merit. I note from the FMC Order and both the judgments of the Hon’ble Supreme Court (Merger Petition and MPID matter) that NSEL was permitting short sales, i.e., permitting sellers to offer contract for sale of commodities on its platform without ensuring that requisite amount of commodity is available in the warehouse. As noted above, the Hon’ble Supreme Court in the Merger Petition has held that these contracts were in the nature of financing transactions. Further, the Hon’ble Supreme Court in the MPID matter has held that the overwhelming majority of the sale leg of the “paired contracts” which were executed were naked short sales i.e. the commodities to back such sales were not available at the designated warehouses of NSEL. The Noticee, in the present matter has not submitted any details of its client’s settlement by way of delivery of commodities. Rather, it is noted from the trade log that excluding E-series contracts, its clients were simultaneous executing two transactions – one being a purchase transaction and the other being a sale transaction, at different prices on the platform of NSEL.

15. It has been contended by the Noticee that SEBI complaint dated September 24, 2018 is just a complaint. Mere filing of the complaint before any authority does not make the person or an entity unfit person for holding certificate of registration under the stock brokers regulation. Moreover, the said complaint does not spell out any role of the Noticee. I note that clause 3(b) of Schedule II of the amended Intermediaries Regulations lays down a list of disqualifications which includes the following:

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;

It is a matter of record that 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. I note that the Noticee is listed at serial no. 143 in the said list. 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. I note that the FIR is still subsisting. Thus, in light of the provision of clause 3(b) (i) of Intermediaries Regulations, the submission of the Noticee that mere filing of the complaint before any authority does not make the person or an entity unfit person for holding certificate of registration under the stock brokers regulations, being contrary, is not maintainable. Moreover, the complaint filed by SEBI clearly mentions that the complaint is filed against the trading members of NSEL as they have traded or were involved in trading of illegal forward contracts organised by NSEL.

16. Similarly, the SCN also unequivocally states that since the Noticee has participated in / facilitated trading in paired contracts, thereby the Noticee is closely associated with NSEL. It calls into question, the reputation / competence / character / integrity of the Noticee. The same, as alleged in the SCN has a bearing on Noticee’s ‘fit and proper’ status. Even the SSCN has clearly spelt the basis of the allegation against the Noticee in light of the amended Schedule II of the Intermediaries Regulations, which is the complaint dated September 24, 2018 filed by SEBI against the Noticee before EoW, and the FIR dated September 28, 2018 under Section 154 of the CrPC, filed by SEBI against the Noticee. Therefore, the submission of the Noticee that the SCN does not spell out the basis for charging the Noticee, is untenable.

17. In view of the above, I note that the Noticee has traded in “paired contracts” on behalf of its clients on NSEL. The execution of such paired contracts shows participation of the Noticee in the said scam which raises questions regarding the integrity, honesty, ethical behavior, reputation, fairness and character of the Noticee. The Noticee has also attracted clause 3(b)(i) of Schedule II to the Intermediaries Regulations which states that pendency of a criminal complaint or information under Section 154 of the CrPC against such person by the Board, is a ground that SEBI may take into consideration for determining whether any person is a “fit and proper person”. I have considered cases similar to the facts of the present case, namely, orders passed in respect of Dani Commodities Pvt. Ltd. decision dated December 20, 2022, Camco Commodities Pvt. Ltd. decision dated February 27, 2023 and Sharekhan Commodities Pvt. Ltd. decision dated June 16, 2023.

18. 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.

19. 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 and for this reason, the principles of estoppel do not apply to the instant case of the Noticee. 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.

20. 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. Hence, the continuation of the Noticee as a registered broker will be detrimental to the interest of the Securities Market. Therefore, activities of the Noticee, as discussed in the preceding paragraphs, as a registered broker requires that appropriate measure should be taken against the Noticee to prevent recurrence of such wrong doings which is detrimental to the interest of the Securities Market.

E. CONSIDERATION OF THE RECOMMENDATION OF THE DESIGNATED AUTHORITY

21. In the Enquiry Report, the DA has, after determining that the Noticee is not ‘fit and proper person’, recommended that Noticee’s business as a commodities derivatives broker may be stopped.

22. In this regard, the facts and circumstances in the instant matter lead to the conclusion that since the Noticee also attracts the disqualification provided in paragraph 3(b)(i) under the amended Schedule II of the Intermediaries Regulations, the Noticee does not fulfil the ‘fit and proper person’ criteria. Once an entity is declared to not fulfil the ‘fit and proper person’ criteria, in the interest of the securities market, such an entity should not be allowed to continue to act as an intermediary till the time it does not regain its ‘fit and proper person’ status. In this context, it is pertinent to mention that in several scenarios, a defect, which is the reason for holding an intermediary as not ‘fit and proper person’, is curable at the hands of the intermediary, while in certain scenarios it is not.

23. 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.

24. Schedule II of the Intermediaries Regulations, in clause 4 provides that “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”. This clause, in my view, covers scenarios of ‘cancelation’ or ‘suspension’ of the certificate of registration of the intermediary.

25. Thus, the Intermediaries regulations envisage a deeming time limit of 5 years or specification of a time limit by the deciding authority, within which the intermediary may cure the defects, which led to the determination of its status, if the same is done at its end. The said specification of period also serves as a reformative direction against the intermediary.

26. Considering the above, the question that now arises for determination is whether the Noticee should be stopped from carrying out its business as a commodities derivatives broker as recommended by the DA or whether it should be suspended for a specific period. A direction to stop its business, even when the EoW charge sheet is the subject matter of lis before the MPID Court, would entail the complete winding up of the business of the Noticee. On the other hand, “suspension for a specific period” would serve the purpose of keeping the Noticee out of the securities market for a specified period, after which, the Noticee may resume its business, upon curing the issues that have led to such an action.

27. 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 jurisdiction, whichever is later, would be more appropriate and proportionate to the violations brought out in the present case. F. ORDER

28. In view of the facts and circumstances of the case and the conclusions arrived at, I, in exercise of powers conferred upon me under Section 12(3) read with Section 19 of the SEBI Act and regulation 27 of the Intermediaries Regulations, suspend the Certificate of Registration (bearing no. INZ000197733) of Master Money Commodity Bazar Pvt. Ltd. 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.

29. The Noticee shall, after receipt of this Order, immediately inform its existing clients, if any, about the aforesaid direction in paragraph 28 above.

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

31. 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.

32. A copy of this Order shall be served on the Noticee and upon all recognized Stock Exchanges and Depositories for necessary compliance.

-Sd-

DATE: October 31, 2023 ANANTH NARAYAN G. PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA