Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

WTM/SM/MIRSD/DOP/13986/2021-22 SECURITIES AND EXCHANGE BOARD OF INDIA ORDER Under section 12(3) of Securities and Exchange Board of India Act, 1992 read with regulations 27 of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 and Regulation 27 of the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992 In respect of S. No. Name of the Noticee SEBI Registration No. 1 Banka Bullion Pvt. Ltd. INZ000046835

In the matter of National Spot Exchange Limited

1. National Spot Exchange Limited (hereinafter referred to as ‘NSEL’) was incorporated in May 2005 with a purpose to develop an electronic Spot Exchange for trading in commodities. In order to promote and develop such a market, the Central Government, using the powers conferred under Section 27 of the Forward Contracts (Regulation) Act, 1952 (hereinafter referred to as “FCRA”), exempted all forward contracts of one-day duration for the sale and purchase of commodities traded on NSEL from operations of the provisions of FCRA vide a gazette notification dated June 05, 2007 (hereinafter referred to as ‘Exemption Notification’). However, the said exemption was subjected to certain conditions which were mentioned in the aforesaid gazette notification. The conditions relevant for the purpose of present proceedings were as follows: Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

 no short sale by the members of the exchange shall be allowed  all outstanding positions of the trades at the end of the day shall result in delivery.  All information or returns relating to the trade as and when asked for shall be provided to the Central Government or its designated agency; On the basis of these exemptions, NSEL commenced its operations in October 2008 by providing an electronic trading platform to participants for spot trading of commodities such as bullion, agricultural produce, metals, etc. 2. It is observed that in September 2009, NSEL introduced the concept of ‘paired contracts’ for trading. Under the said concept, NSEL used to launch two different contracts for the same commodities, one having a short duration settlement i.e. T+2/T+3 and another having long settlement duration viz. T+25/T+30/T+36. Under the concept of ‘paired contract’, buying and selling of same commodity used to take place simultaneously involving two different contracts at two different prices, where investor was provided with the liberty to buy a short duration settlement contract and sell a long direction settlement contract and vice versa, involving the same counter parties. Subsequently, it is observed that the trading volume in those paired contracts kept on increasing so much so that by July 2013, almost 99% of the volume at NSEL was in those paired contracts. 3. In the meantime, Forward Markets Commission (hereinafter referred to as ‘FMC’), the then regulator of Commodities futures market, was appointed as ‘Designated Agency’ by Central Government vide notification dated February 06, 2012 to collect all the information and returns relating to the trades executed on the spot exchanges including NSEL. FMC, on the basis of its analysis of the trade data collected from Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

NSEL, observed that the trades executed through such paired contracts were in violations of the conditions prescribed by Central Government vide the Exemption Notification. Accordingly, on the basis of such findings by FMC, Department of Consumer Affairs i.e. the Ministry which had granted exemption to NSEL from the operations of FCRA vide the aforesaid Exemption Notification issued a letter dated July 12, 2013 thereby directing NSEL to not launch any further/fresh contracts until further instructions and to settle all existing contracts on due dates. Subsequently, certain entities defaulted in fulfilling their payment obligations leading to a huge settlement default of outstanding contracts to the tune of INR 5500 Crores. 4. Pursuant to the aforementioned settlement default at NSEL in 2013, an investigation was carried out by Economic Offences Wing (hereinafter referred to as “EOW”) which led to certain arrests and various complaints were also received from investors against the members/brokers of NSEL around the same time. 5. It is noted that vide Finance Act, 2015, FMC was merged with SEBI on September 28, 2015 and SEBI was entrusted with the powers to regulate the trading in commodities futures market under Section 131(5) read with Section 132 of the Finance Act, 2015. Pursuant to the repeal of FCRA, SEBI had notified the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) (Amendment) Regulations, 2015, SEBI (Stock Brokers and Sub Brokers) (Amendment) Regulations, 2015 and SEBI (Regulatory Fee on Stock Exchanges) (Amendment) Regulations, 2015 on September 08, 2015 bringing in various enabling provisions in the context of regulation of commodity derivatives market by SEBI. 6. The Noticee was a member of NSEL at the relevant point of time when

Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

the Settlement default occurred and it is presently registered with SEBI as a commodities derivatives broker having registration number INZ000046835. 7. As noted above, from the examination of trading data submitted by NSEL to FMC, it was observed that NSEL was organising trading in ‘paired contracts’ in violation of the notification dated June 05, 2007 wherein it was continuously facilitating the entities in entering into short selling (which was prohibited under the Exemption Notification) and contracts with settlement period going beyond 11 days were being launched by it for trading which was also not permitted to it under the said Exemption Notification. The Trading Members and Clearing members of the NSEL facilitated and/or participated in trading in such ‘paired contracts’ in alleged violation of the conditions stipulated under the Exemption Notification dated June 05, 2007 issued under the FCRA. Thus, it was alleged that, by participating in/facilitating trading in ‘paired contracts’, such Trading Members had acted in a manner detrimental to the interest of securities market. 8. As per the information available with SEBI, a number of entities, including the Noticee, which had applied to or are registered with SEBI as trading members/clearing members, were also members of the NSEL and had either themselves participated or had facilitated trading in ‘paired contracts‘ on the platform of NSEL markets, which has allegedly made the Noticee a person not ‘fit and proper’ to hold the registration as a stock broker in terms of Regulation 5(e) of Securities and Exchange Board of India (Stock Broker) Regulations, 1992 (hereinafter referred to as ‘Stock Broker Regulations’) read with Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 (hereinafter

Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

referred to as ‘Intermediaries Regulations’). Further, it has also been alleged that the Noticee has violated the provisions of Clauses A(1), A(2) and A(5) of the Code of Conduct for stock broker, as given in Schedule II read with Regulation 9(f) of the Stock Broker Regulations as well as provisions of Regulation 9(b) of Stock Broker Regulations by not complying with the rules, regulations and by-laws of the stock exchanges. 9. In view of the above allegation, a proceeding in terms of the Intermediaries Regulations was initiated by SEBI against the Noticee, as a registered stock broker in commodity derivative segment having registration number INZ000046835. For the said purpose, SEBI, vide an Order dated September 24, 2018, appointed a Designated Authority (hereinafter referred to as ’DA’) under Regulation 24(1) of the Intermediaries Regulations to enquire into the violations alleged to have been committed by the Noticee and to submit a report in accordance with the provisions of the Intermediaries Regulations. Upon completion of the enquiry, an Enquiry Report dated April 22, 2019 was submitted by the DA for consideration and taking appropriate measure by the Designated Member (hereinafter referred to as ’DM’). 10. Based on the findings of facts and after considering the explanations offered by the Noticee, the DA has noted the following in his Enquiry Report: a. The transactions involving trading in ‘paired contracts’ on the platform of NSEL were prima facie in violation of prevalent laws. The Noticee, as a member of NSEL, had traded and/or facilitated its clients in trading in ‘paired contracts’ on NSEL platform during September 2009 to August 2013 against the provisions of FCRA and in violation of the conditions stipulated under the Exemption Notification. Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

b. NSEL had pay-out obligations against the Noticee as on September 19, 2013, amounting to ₹53,19,201/- which has reduced to ₹49,47,750/ as on date. c. By indulging in such illegal acts, the Noticee has failed to maintain the requisite standards of reputation, fairness, honesty, integrity and character as required under Schedule II of the Intermediaries Regulations read with regulation 5(e) and 27(iv) of the Brokers Regulations. It has also acted in complete disregard to due skill, care and diligence in the conduct of its business and did not comply with the applicable statutory requirements in its business conduct, thereby violating the provisions of clause A(1), A(2) and A(5) of Code of Conduct for Stock Brokers as given in Schedule II read with regulation 9(f) of the Stock Brokers Regulations. Therefore, the DA has found the Noticee to be not ‘fit and proper person’ to continue to hold the certificate of registration as commodity derivatives broker and has held that the Noticee is liable for action under section 12(3) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as ‘SEBI Act’) read with regulation 27(iv) of the Stock Brokers Regulations and Chapter V of the Intermediaries Regulations. 11. In the light of the aforesaid findings and observations and in accordance with regulation 27 of the Intermediaries Regulations, vide Enquiry Report dated April 22, 2019, the DA has recommended that the certificate of registration of the Noticee, as a commodities derivative broker (under certificate of Registration ref. INZ000046835) be cancelled. 12. Subsequently, a post-enquiry Show Cause Notice (“SCN”) dated June 10, 2019 was issued to the Noticee in terms of regulation 28(1) of Intermediaries Regulations enclosing therewith a copy of the Enquiry Report and calling upon it to show cause in terms of Regulations 28(1) Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

and 28(2) of the Intermediaries Regulations, as to why necessary action, including passing of appropriate direction, as the DM considers appropriate, should not be issued to it. Subsequently, some more material such as letter dated December 30, 2014, Judgment dated April 30, 2019 passed by the Hon’ble Supreme Court of India and Order dated August 22, 2014 of the Hon’ble High Court of Bombay in the criminal bail application of Jignesh Prakash Shah vs. State of Maharahashtra, which were viewed relevant for the purpose of the present proceedings have been forwarded to the Noticee vide supplementary SCN dated September 20, 2019. 13. Vide letter dated July 03, 2019 and another undated letter, the Noticee has submitted its reply to the SCN wherein it has made the following submissions: 13.1. The Noticee has submitted that none of the agencies and courts have taken the name of Noticee and/or has found it to be in violation of any provision of law. 13.2. The Noticee further contended that the paired contracts were introduced by NSEL, after approval from its Board and further re-affirmed by its MD that the said contracts were not in violation of any conditions laid down by the regulatory authority. Trading in those contracts started in September, 2009 whereas the Noticee started trading in them from 2012 onwards after seeing many brokerage houses trading on it. 13.3. The Noticee has denied to have promoted trading in such contracts amongst its clients or having issued any advertisement or email to lure investors for trading on NSEL. Rather, two of its clients approached it for trading on NSEL.

Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

13.4. The Noticee has submitted that none of its clients lost a single rupee by trading on NSEL and all the money remain payable by NSEL was for its own proprietary funds. Further, none of its clients made any complaint against it to any authority in this regard. 13.5. The Noticee has further contended that there is no specific charge and/or accusation against it and its name does not feature anywhere in the documents supplied by SEBI, save and except in the List of Trading Members/Fund name & Clearing Member name and the amount mentioned against their name in the EOW Interim report dated April 04, 2015 and in the List of 148 members against whom NSEL has pay-out obligations as on September 19, 2013 as mentioned in the Grant Thornton Report. 13.6. The Noticee has further contended that SEBI has made out a case against it merely on the basis of ‘guilt by association’. However, the Noticee, citing certain case laws, has argued that the doctrine of guilt by association is not applicable in India until and unless there is specific proof that a party intends to accomplish the aim of the organization it is working with, the said party cannot be held liable for the wrongs done by that organization. The Noticee has further contended that in the instant case there is no allegations and/or evidence which can suggest that the Noticee was in any manner colluding with NSEL and was one of its cohorts. 13.7. The Noticee has further contended that the enquiry report has failed to mention any evidence which would have shown that it had acted in facilitation of trading on NSEL platform. Further, it also appears that the matter is still under investigation, which renders the conclusion arrived at by DA with regard to the alleged guilt and/or wrongdoing completely inexplicable. Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

13.8. The Noticee has strongly submitted that the entire amount, which NSEL owes to it, is owed to the proprietary fund of the Noticee and does not include a single rupee of any of its clients. 13.9. The Noticee has denied being the agent of NSEL and has submitted that it cannot be held liable for any alleged illegality committed by NSEL. It is merely a commodity broker who facilitated transaction between the NSEL and its client (investors). The Noticee has also denied that it ever indulged in trading in paired contracts and thus allowed itself to become an instrument in promoting paired contracts amongst its clients. 13.10. The Noticee has also denied the allegation that such association of Noticee in paired contracts has seriously put questions on the reputation, fairness, honesty, integrity and character of the Noticee in the securities market, by again contending that Guilt by Association is not applicable in our country as observed by the Apex Court. 13.11. The Noticee has contended that it is not within its purview to check, inquire, investigate exchanges like NSEL as to whether they are running the exchange in accordance with law. In spite of there being no evidence on record that directly or indirectly involve the Noticee of any wrongdoing or illegality, the Noticee has been found guilty by only its association with NSEL. 14. During the instant proceedings before me, after receipt of the afore-stated written submission from the Noticee, vide email dated January 07, 2020, the Noticee was provided with an opportunity of personal hearing on February 07, 2020. Shri Yogesh Banka, Director and Shri Sunil Kumar Agarwal, Compliance Officer appeared as Authorized Representatives (ARs) of the Noticee for personal hearing on the scheduled date and reiterated the submissions made by the Noticee vide its abovementioned Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

letters. The ARs were also granted two weeks’ time to file certain additional documents in support of their submissions made in reply to the SCN. However, the Noticee failed to submit any such document as called for, subsequent to the personal hearing. 15. Subsequently, another opportunity of personal hearing was granted to the Noticee on September 14, 2021 and the same was informed to the Noticee vide email dated August 26, 2021. However, vide emails dated August 26, 2021 and September 14, 2021, the Noticee submitted that its earlier submissions may be taken on record. Consideration of issues: 16. I have considered the report of the DA, the SCN issued to the Noticee, the written as well as the oral submissions made by the Noticee and the materials available on record. Having considered the above, the issues which arise for my consideration are: a. Whether the Noticee, in the light of its alleged involvement in trading/facilitation of trading in ‘paired contracts’ on the exchange platform of NSEL in violation of the extant provisions of law, has violated the provisions of clauses A(1), A(2) and A(5) of the Code of Conduct as given in Schedule II read with Regulations 9(b) & 9(e) of Stock Broker Regulations, and therefore, is not a ‘fit and proper’ person for holding the certificate of registration as a market intermediary in terms of Regulation 5(e) of Stock Broker Regulations read with schedule II of Intermediaries Regulations? 17. Before moving ahead, I find it appropriate to refer to the relevant provisions of the law allegedly violated by the Noticee or referred to in the present proceedings. The said relevant legal provisions are reproduced below:

Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

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 Broker 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; or Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

SCHEDULE II Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992 CODE OF CONDUCT FOR STOCK BROKERS [Regulation 9] 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. THE INTERMEDIARIES REGULATIONS, 2008 Action in case of default. 27. After considering the representations, if any, of the noticee, the facts and circumstances of the case and applicable provisions of law or directions, instructions or circulars administered by the Board the designated authority shall submit a report, where the facts so warrant, recommending, – (i) suspension of certificate of registration for a specified period; (ii) cancellation of certificate of registration; (iii) prohibiting the noticee to take up any new assignment or contract or launch a new scheme for the period specified in the order; (iv) debarring a principal officer of the noticee from being employed or associated with any registered intermediary or other registered person for the period specified in the order; (v) debarring a branch or an office of the noticee from carrying out activities for the specified period; (vi) warning the noticee. Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

SCHEDULE II SECURITIES AND EXCHANGE BOARD OF INDIA (INTERMEDIARIES) REGULATIONS, 2008 (See regulations 7) Criteria for determining a ‘fit and proper person’ For the purpose of determining as to whether an applicant or the intermediary is a ‘fit and proper person’ the Board may take account of any consideration as it deems fit, including but not limited to the following criteria in relation to the applicant or the intermediary, the principal officer, the director, the promoter and the key management persons by whatever name called – (a) integrity, reputation and character; (b) absence of convictions and restraint orders; (c) competence including financial solvency and networth (d) absence of categorization as a wilful defaulter. 18. I note that the Noticee is registered as a stock broker in terms of Stock Broker Regulations, 1992 under Registration No. INZ000046835. In order to continue to hold certification of registration from the SEBI, the Noticee is required to satisfy the conditions of eligibility, which inter alia included continuance of its status as a ‘fit and proper’ person. The above condition to be ‘Fit and Proper’ is not an onetime requirement applicable only at the time of seeking registration. Rather, the provisions governing the ‘Fit and Proper’ criteria show that each and every entity is required to qualify those criteria on a continuous basis as long as the entity wishes to remain associated with the Securities Market as a registered intermediary. 19. It is relevant to note here that the Hon'ble Securities Appellate Tribunal (hereinafter referred to as “SAT/Tribunal”) in the matter of Jermyn Capital LLC v. SEBI, (decided on September 06, 2006), while dealing with the nature

Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

and requirement of criteria of ‘fit and proper’ person under the SEBI (Criteria for Fit and Proper Person) Regulations, 2004, inter alia held as under: “Good reputation and character of the applicant is a very material consideration which must necessarily weigh in the mind of the Board in this regard. Reputation is what others perceive of you. In other words, it is the subjective opinion or impression of others about a person and that, according to the Regulations, has to be good. This impression or opinion is generally formed on the basis of the association he has with others and/or on the basis of his past conduct. A person is known by the company be keeps. In the very nature of things, there cannot be any direct evidence in regard to the reputation of a person whether he be an individual or a body corporate. ... " It is further held by the Hon’ble Tribunal that “….The Regulations apply across to all sets of regulations and all intermediaries of the securities market including those who associate themselves with the market and they all have to satisfy the criteria of 'fit and proper person" before they could be registered under any of the relevant regulations and this criteria they must continue to satisfy throughout the period of validity of their registration and throughout the period they associate with the market”. 20. Therefore, it is clear that the criteria of ‘fit and proper’ person, is an ongoing compliance requirement throughout the period the Noticee remains operational in the securities market as a registered intermediary. In case, pursuant to the grant of registration by the SEBI, any evidence comes to the notice of the SEBI that casts a doubt on the integrity, reputation and character of a registered intermediary, SEBI is well within its powers to examine the ‘fit and proper’ status of such entity based on various parameters including the Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

following parameters provided under Schedule II of the Intermediaries Regulations. (a) integrity, reputation and character; (b) absence of convictions and restraint orders; (c) competence including financial solvency and networth; (d) absence of categorization as a willful defaulter. 21. While observing that SEBI was entitled to take a view that an entity was not a ‘Fit and Proper’ person where there were charges of criminal conspiracy levelled against the chairman of the company though the same were yet to be established in court of law, the Hon’ble SAT in the matter of Mukesh Babu Securities Ltd. v. SEBI (Appeal No. 53 of 2007 decided on December 10, 2007) has held that: “It is true that these are only allegations made in the charge-sheet and we are conscious that these are yet to be established in a court of law but from what is stated in the charge-sheet liaison between Shri Mukesh Babu and the chairman of the bank prima facie appears to be established. ... The charges leveled are indeed serious and if established, they involve moral turpitude...” I, therefore, note that the Courts have held that good reputation and integrity are critical facets of the ‘fit and proper’ criteria laid down in the Intermediaries Regulations. It has also been held by the Courts that while determining as to whether an entity enjoys a good reputation, the prima-facie observations made by courts and other regulatory authorities would be relevant. 22. Considering the aforesaid deliberations, I am of the view that the existence of any material on record which questions the integrity, reputation or character of the Noticee, or that proves a close association of the Noticee with any person who does not enjoy a good reputation, is parameter good enough to determine if the Noticee is not ‘Fit and Proper’ person to continue operating as a Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

registered intermediary in the Securities Market. Further, the statutory requirements to obtain a certificate of registration as laid down under various provisions of the Intermediaries Regulations and the Stock Broker Regulations, are applicable to and required to be complied with by the Noticee not only at the time of making such application and obtaining such registration, but also subsequently at all time after the registration is granted. 23. Having discussed the scope, nature and requirement of the criteria for determining ‘fit and proper’ person, I will now proceed to deliberate on the allegations levelled against the Noticee in the instant matter. It is noted that the main allegation against the Noticee is that by participating/facilitating in the trading in ‘paired contracts’ on the NSEL platform during the relevant period as a Trading Member/Clearing Member (which were not permitted in terms of the Exemption Notification), the Noticee has, prima facie, violated the conditions of the said Exemption Notification and consequently also has violated the provisions of the FCRA. Therefore, it is alleged in the SCN that the continuance of the registration of the Noticee as a commodity derivatives broker is detrimental to the interest of the securities market and the Noticee can no longer be considered to be a ‘Fit and Proper’ person for holding the certificate of registration as a commodity derivatives broker in the securities market, which is one of the conditions for continuance of registration as specified in regulation 5(e) of the Stock Broker Regulations read with Schedule II of the Intermediaries Regulations and regulations 9(b) and 9(f) read with Clauses A(1), A(2) and A(5) of the Stock Broker Regulations. 24. Before moving ahead, I deem it fit to delve on the concept of paired contract and the settlement default scam that was perpetrated by NSEL by allowing trading in such contracts on its platform in which the various trading and clearing members, including the Noticee participated. In these paired contracts,

Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

NSEL used to launch two contracts simultaneously, one short term contract (T+2/T+3 duration) and another long duration contract (T+26/T+30/T+36 duration) in different commodities. All the investors, who were trading on NSEL through various brokers, including the Noticee, were buyers on short term contracts and sellers in long term contracts. On the other hand, certain big entities (hereinafter referred to as ‘Defaulters’) were sellers in those short term contracts and were buyers of the long term contracts as counterparties to the investors. These contracts were not run on free market basis and prices of these two contracts were managed in such a way that the investors were getting annualized return of 13-18% from trading in those contracts. On the other hand, the defaulters were getting money on easy terms from trading in those contracts, that too without giving delivery or taking delivery of the goods in terms of those contracts. Thus, under the garb of commodities spot market, NSEL was running a range of financing transactions. 25. Subsequently, when NSEL stopped trading in those paired contracts after getting letter dated July 12, 2013 from Department of Consumer Affairs, all the defaulters, who were buyers in long term contracts, failed to pay the consideration to the investors triggering a default approximately to the tune of INR 5500 Crores. At that stage, it was found from the inspection of warehouses, where the commodities were required to be kept by those defaulters for effecting delivery of good against their sell transactions in short term contracts, that the required commodities were not available. Since then, the common investors, who were lured by NSEL with a promise of ‘assured returns’ with the help of the brokers who facilitated those transactions, including the Noticee, are running from pillar to post to recover their hard earned money that has been locked up in the aforesaid Settlement default. 26. I also note that the FMC, in its order dated December 17, 2013, has held that,

Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

using the paired contracts, NSEL was continuously violating the following two conditions stipulated in the Exemption Notification:- “a. Short Sale The NSEL had not made it mandatory for the seller to deposit goods in its warehouse before taking a sell position. Hence, the condition of “no short sale by members of the NSEL shall be allowed” was not being met by NSEL and its trading/clearing members who traded in the paired contracts during the relevant period. b. Contracts with Settlement Period going beyond 11 days Some of the contracts offered for trade on the NSEL had settlement periods exceeding 11 days and therefore, such contracts were “non-transferable specific delivery” contracts under the FCRA. As per the FCRA, the “ready delivery contracts” were required to be settled within 11 days of the trade and hence, the contracts traded on the NSEL, which provided settlement schedule for a period exceeding 11 days were not allowed and were in violation of 2007 Notification.” 27. In this regard, the relevant observations of the FMC as recorded in its Order dated December 17, 2013 and also captured in the SCN are as under: “….It has also come to the knowledge of the Commission from the report of the forensic auditor that a large number of NSEL exchange trades were carried out with paired back-to-back contracts. Investors simultaneously entered into a “short term buy contract” (e.g. T+2 — i.e. 2 day settlement) and a "long term sell contract" (e.g. T + 25 i.e. 25 day settlement). The contracts were taken by the same parties at a pre-determined price and always registering a profit on the long-term positions. Thus, there existed a financing business where a fixed rate of return was guaranteed on investing in certain products on the NSEL..... NSEL conducted its business not in accordance with the conditions stipulated in the notification dated 05.06.2007 granting it exemption from the operation of FCRA,

Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

1952, with regard to the one-day forward contracts to be traded on its exchange platform. As noted in the SCN, the condition of ‘no short-sell’ and ‘compulsory delivery of outstanding position at the end of the day’ stipulated in the notification were violated by NSEL. NSEL Board allowed launching of paired back-to-back contracts on its exchange platform comprising a short-term buy contract (T+2 settlement) and a long-term sell contract (T+25 settlement) with predetermined price and profit for the buyer and seller, which violated the very concept of spot market of commodities and the transactions ultimately were in the nature of financial transactions” (emphasis supplied) 28. The Hon’ble Bombay High Court, while deciding Writ Petition No. 2743 of 2014 dated December 04, 2017, in the matter of 63 Moons Technologies Limited v. Union of India has observed as under: “85] The very offer of T+18, T+25 or T+36 contracts by NSEL prima facie constituted breach of the condition that the exemption from applicability of FCRA was only in respect of contracts of one day’s duration. There is really no dispute, either in facts or in law on this aspect because even FTIL in its list of dates and events at entry 4 against date 05.06.2007, accepts this position... 86] Further, apart from the note against entry 8 (November 2011 onwards) in the list of dates and events of FTIL, there is ample material on record which establishes that NSEL offered ‘paired contracts’ at its exchange from 2009 itself. Further, the record indicates and it has not been disputed that by the year 2013 the volume of paired contracts constituted almost 99% of the turnover at the NSEL exchange. In monetary terms, this turn over from 2009 to 2013 was in the region of Rs. 1,34,000 crores. Therefore, to say that all this was without the involvement or even knowledge of FTIL and NSEL and to attempt to blame ‘certain trading clients, commodities sellers or brokers’ is just not prima facie acceptable. 88] The material on record, including in particular the presentations made by and on behalf of NSEL and the Grant Thornton Report establish that this modus operandi of Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

paired contracts, was in reality, nothing but financing transactions. These contracts were invariably at predetermined prices and the long terms sell contract, was always at a profit, the difference effectively being the cost of lending. These paired contracts were obviously in breach of the conditions of the exemption notification and consequently the FCRA itself. Under the guise of offering spot delivery or ready delivery contracts, the NSE-L Exchange indulged not just in forward trading but in financing unhindered by any regulatory checks which would, but for the exemption notification dated 5th June 2007 have applied to such operations. 89] The record indicates and it has not been disputed that by the year 2013, the volumes of paired contracts constituted almost 99% of the turnover of the NSEL Exchange. In monetary terms, this turnover of paired contracts was in the region of Rs.1,34,000 crores between the years 2009 to 2.013. This means that the entire operations at the NSEL Exchange, which was meant to be a commodities stock exchange, were entirely subverted in gross disregard of the conditions of the exemption notification dated 5th June 2007 and consequently, the FCRA itself. 90] The FTIL in its pleadings as well as the list of dates, is really in no position to factually dispute the manner in which the operations were held at the NSEL Exchange. The NSEL itself has not even instituted any petition to question the impugned order, which takes cognizance of such facts. The learned counseî for NSEL when requested to comment on the operations at NSEL Exchange simply chose to submit that since the impugned order is based only on one ground or reason, namely, facilitating NSEL in recovering dues from the defaulters, there is no point in offering any comments or explanations about the operations at the NSEL Exchange. Even otherwise, there is extensive material on record in the form of Grant Thornton Report etc. which establishes that the operations at the NSEL Exchange were inconsistent with the conditions of the exemption notification dated 5th June 2007 and consequently the FCRA itself.” 29. The Economic Offences Wing, Mumbai, vide letter dated April 04, 2015, had

Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

forwarded an interim report in connection with the investigation conducted by it to identify the role played by the broking houses in the NSEL Case (EOW C.R. No. 89/2013). The relevant extracts of the 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

Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

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.” 30. At this stage, it is also pertinent to refer to the judgment of the Hon'ble Supreme Court of India passed in the matter of 63 Moons Technologies Ltd. (formerly known as Financial Technologies India Ltd.) & Ors. v. Union of India & Others (Civil Appeal No. 4476 of 2019 decided on April 30, 2019), wherein it has been inter alia observed that: “15.1.2: Since the objective of the NSEL was promoting spot trading in commodities on an electronic platform, its business model did not contemplate venturing into trading in forward contracts. FTIL had already promoted MCX, a regulated exchange under FCRA, 1952, for the purpose of trading in forward contracts. Therefore, having secured an exemption from the purview of FCRA, 1952 on the ground that it was intended to promote spot trading, NSFL was not authorised to allow trading in forward contracts through the scheme of Paired Contracts, thereby defying conditions stipulated in the exemption notification granted to it. 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.” 31. I further find it apt to reproduce the observations of the Hon’ble Bombay Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

High Court in its order dated August 22, 2014 in the matter of Jignesh Prakash Shah vs. The State of Maharashtra (Criminal Bail Application no. 1263 of 2014) wherein the Hon’ble Bombay High Court observed the following at prima-facie level: “16 There is great substance in the contentions advanced by the learned counsel for the applicant that the brokers through whom the so called trade transactions were entered into, do have their own legal team and a full knowledge of how the market operates. The legalities of the transactions were quite expected to be known to the brokers and the traders who do not hesitate to term themselves as 'investors', and they were expected to assess the legalities of the transactions. The brokers being quite experienced, and the investors being informed persons, it is apparent that the issue of illegality of the transactions raised by them is not out of their concern to adhere to legalities, but in order to project the applicant as the main offender, rather than the defaulting parties.” I find that, even six years and several litigations later, the above observations of the Hon’ble Bombay High Court stand its grounds and haven’t been overturned by any judicial forum. 32. In view of the aforesaid observations and findings of the various courts and agencies, I note that NSEL, by providing a platform for trading in ‘paired contracts’, which was in reality a financing transaction, violated the conditions of exemption mandated to it by way of the Exemption Notification issued by the Central Government under the FCRA and used its platform to provide services which were specifically barred under the FCRA. Despite going beyond its approved regimen, NSEL operated with complete impunity to the Rule of Law under the garb of the Exemption Notification and never bothered to apply for registration before FMC. 33. I note that the Noticee was one of the commodity derivatives brokers that participated/facilitated its clients to trade on the platform of the NSEL in Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

‘paired contract’ in violation of the extant sovereign law i.e. FCRA, 1952, which have attracted serious adverse charges from several authorities and serious observations as well from various courts as discussed in detail above. At this stage, I find that the Noticee was not a novice in the market and was very well aware of and understood the nature of transactions that were actually taking place on NSEL platform. It is not the case of the Noticee that it entered into a transaction by mistake or its transactions were genuine and were intended for taking actual delivery of commodities at a fair price, which was the very basic purpose of the Central Government behind allowing NSEL to run an electronic spot market. I find that, once the Noticee got the taste of earning assured returns from execution of paired contracts under the garb of spot trading in commodities, the Noticee kept on entering into paired trades repeatedly so much so that in the end it admittedly was left hanging in such a situation that an amount of INR 49,47,750/- of its own money was trapped in those trades when NSEL ultimately committed the Settlement default to the tune of INR 5500 Crores. 34. The Noticee has vehemently contended that ‘guilt by association’ principle has been rejected by the Hon’ble Supreme Court of India. However, I note that the said principle has been rejected in criminal proceedings and the present proceedings are civil in nature. Further, the said principle has been rejected where it is found that a party is a mere spectator and no role could be attributed to it in the wrongdoing of the group. However, the facts of present matter are completely different wherein not only the Noticee itself has traded in those ‘paired contracts’ in its greed to earn ‘assured returns’ but has also facilitated its clients to trade in those contracts using its own broking platform. Therefore, the case here is of active participation in the violation of law and not one of passive attendance.

Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

35. Thus, I am of the view that the active association of the Noticee with such trading on the NSEL is relevant to determine the ‘fit and proper’ status of the Noticee. 36. I note from both the trade data available on record as well as from the submissions made by the Noticee during the course of the present proceedings that the Noticee has admittedly traded in ‘paired contracts’ not only in its own proprietary account but has also facilitated its clients in trading in those contracts using its platform. The Noticee has further contended that all the monies lost in the NSEL settlement default were its own proprietary funds. I find this contention to be irrelevant at this stage of present proceedings as profit eared or loss made is not the core point of consideration in the present proceedings but the participation per se in those blatantly illegal contracts, which the Noticee has admitted to have executed for itself as well as facilitated its clients to execute trades in those contracts on NSEL platform is what makes the Noticee liable for breach of law including contravention of the conditions stipulated in the aforesaid Exemption Notification of 2007, issued by the Central Government. 37. I note that the Noticee, as a commodity derivatives broker, represented the face of NSEL for regular investors. Execution of the trades in ‘paired contracts’ by the Noticee shows active participation of the Noticee in the fraudulent scheme perpetrated by the NSEL by allowing those paired contracts to be traded on its platform illegally. Therefore, the Noticee has acted as an active conduit of the NSEL in promoting ‘paired contracts’ which were in the nature of pure financing transaction as held by the Hon’ble Supreme Court of India and described in detail earlier. Under the circumstances, I am of the view that the trading of the Noticee in ‘paired contracts’ on the NSEL platform has seriously jeopardized the reputation, belief in competence, fairness, honesty,

Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

integrity and character of the Noticee in the securities market. 38. To put the aforesaid deliberation in perspective, I find it appropriate to capture the legislative intent and regulatory mandate of the SEBI Act, 1992 and the Stock Brokers Regulations. Section 12(3) of the SEBI Act, 1992 vests SEBI with the power of suspending or cancelling a certificate of registration in a manner which may be determined by regulations, provided that a reasonable opportunity of being heard is given to such person. Regulation 5 of the Stock Broker Regulations makes is mandatory that for grant of a certificate of registration to an applicant, the applicant inter-alia has to be a fit and proper person based on the criteria specified in Schedule II of the Intermediaries Regulations. Further, regulation 9 of the Stock Brokers Regulations casts an obligation on a market intermediary that after grant of the certificate of registration, it shall abide by the rules, regulations and bye-laws of the stock exchange which are applicable to it and that shall at all times abide by the Code of Conduct as specified in Schedule II of the Intermediaries Regulations, thereby making it amply clear that the criteria of ‘fit and proper’ person is an ongoing requirement and the same has to be complied with at all the times by any market intermediary. 39. Looking holistically at the alleged conduct of the Noticee who is a registered market intermediary, I find that by no standard, the aforesaid conduct of the Noticee of blindly running after illegally earned profit can be said to be fair and honest and the said conduct overwhelmingly proves that the Noticee has not acted in an honest or bonafide manner with due skill, care and diligence in the conduct of its business as required under Schedule II of the Intermediaries Regulations and therefore the said conduct of the Noticee is inimical and detrimental to the securities market and a serious doubt has been cast on the deeds of the Noticee being not in conformity with the applicable code of Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

conduct. It may also be noted that the scope of the instant proceeding is not to analyze the actual impact and consequences of the conduct of the Noticee but to examine as to whether or not, the Noticee has acted in a manner it behoves a market intermediary to act and the answer to the same manifestly goes against the Noticee. In my considered view, it is immaterial if no client of the Noticee has lost money on NSEL or if the Noticee has not taken any undue advantage of the clients by facilitating the investors to trade on the NSEL. The fact that is undeniably clear before me is that the involvement of the Noticee in trading/facilitation of trading in ‘paired contracts’ on the NSEL is certainly a conduct which is not permitted either by the Exemption Notification or by any of the applicable provisions of the FCRA and hence, is detrimental to the interest of the securities market. 40. In view of the above observations and admission of the Noticee about its trading activities on NSEL, I have no hesitation in holding that the Noticee has participated/facilitated in the trading in ‘paired contracts’ on the NSEL platform during the relevant period as a Trading Member/Clearing Member and has violated the conditions stipulated in the Exemption Notification alongwith the provisions of the FCRA. Therefore, the continuance of the registration of the Noticee as a commodity derivatives broker is detrimental to the interest of the securities market as I no longer find the Noticee to be a ‘Fit and Proper’ person for holding the certificate of registration as an intermediary in the securities market, which is one of the conditions for continuance of registration as specified in regulation 5(e), regulations 9(b) and 9(f) of the Stock Broker Regulations read with the provisions of Schedule II of the Intermediaries Regulations. 41. Before summarizing my observations and discussions in the foregoing paragraphs, I must note here that an entity which is granted registration to Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

operate as an intermediary in securities market is required to act in a manner as if it is an extension of the Regulator in so far as the Regulator strives to make the securities market fair, trustable and free from any wrongdoing. In this regard, the intermediary is expected to comply with all applicable regulatory requirements which are in the best interests of the securities market and its investors so as to uphold the integrity of the securities market. 42. The role of a registered intermediary is of utmost importance as the job of a registered intermediary including a registered commodity derivatives broker is not only sensitive and predominantly fiduciary in nature but also demands honesty, transparency, fairness and integrity to be the hallmarks of such market intermediaries. Given the fact that one of the avowed objects of the SEBI Act is the protection of interest of investors apart from promotion and development of the securities market, the legislature through enactment has empowered SEBI to grant registration to several class of entities including commodity derivatives broker, which are not only required to act as an intermediary simplicitor i.e., a bridge or a connector between regulator and investors, but also have a very important role to play in creating an ecosystem of trust and fairness so as to provide a fair and secure market to the investors and any deviation from the above noted objective could have a cascading adverse impact on the development of the securities market. Thus, undisputedly a stock broker is obligated to act in a transparent manner and comply with all applicable regulatory requirements which are in the best interests of its clients and which will uphold the integrity of the securities market. 43. However, contrary to the aforesaid, the conduct displayed by the Noticee in performing functions of a commodities derivatives broker, through its indulgence in the trading ‘paired contracts’ on of an unregulated entity like

Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

NSEL with a view to earn easy illegal profit by putting a blind eye to all the illegalities taking place on the platform of NSEL has seriously hampered the trust of the Regulator in the integrity of the Noticee hence, the continuation of the Noticee in securities market as an intermediary becomes untenable in the interest of investors and the securities market more so when such misconduct has amounted to serious violation of Regulations 9(b) and 9(f) of read with Clauses A(1), (2) and A(5) of the Schedule II of the Stock Broker Regulations as well as Regulation 5(e) of Stock Broker Regulations read with Schedule II of the Intermediaries Regulations. As regards to the issue of incurring profit/loss raised by the Noticee, it needs to be appreciated that the issue under consideration is not to gauge the profit/loss incurred or likely to be incurred by an individual, but to ascertain as to whether the indulgence, engagement and promotion of such activities could be held to be beneficial to the development of Securities Market or the same contain elements that are potentially dangerous and detrimental to the interest, integrity, safety and security of the Securities Market. In this respect, from the undisputed facts that the scheme of paired contracts illegally traded on NSEL platform has inflicted a huge loss to the market to the extent of INR 5500 Crore one can certainly cast serious aspersion on the conduct, integrity and reputation of the associate person like the Noticee who were trading in such illegal contracts and therefore, the continuous association of the Noticee with the Securities Market cannot be viewed as good and congenial for the interest of the market. 44. Under the circumstances, I am constrained to conclude that the Noticee is not a ‘Fit and Proper’ person in terms of regulation 5(e) read with regulation 27(iv) of the Stock Broker Regulations read with Schedule II of the Intermediaries Regulations and the continuance of the Noticee as a commodity derivatives broker will be detrimental to the securities market. Thus, I hold the Noticee guilty of violating the aforesaid provisions of securities law. Therefore, such Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

activities of the Noticee as a registered commodity derivatives broker cannot be condoned and deserve appropriate remedial measure to prevent for such wrong doings from recurring to the detriment of the interest of the securities market. ORDER 45. In view of the foregoing discussions and deliberations, in exercise of powers conferred upon me under Section 12 (3) of the SEBI Act, 1992 read with regulation 27 of the SEBI (Intermediaries) Regulations, 2008 and upon considering the gravity of the violations committed by the Noticee viz. Banka Bullion Pvt. Ltd., as a registered commodity derivatives broker, I hereby cancel the registration of the Noticee viz. Banka Bullion Pvt. Ltd. (SEBI Registration nos. INZ000046835) as a commodity derivatives broker. 46. The Noticee shall, after receipt of this order, immediately inform its existing clients about the aforesaid direction in paragraph 45 above. 47. Notwithstanding the direction at paragraph 45 above, the Noticee shall allow its existing clients to withdraw or transfer their securities or funds held in its custody, within 60days from the date of this order. In case of failure of any clients to withdraw or transfer their securities or funds within the said 60days, the Noticee shall transfer the funds and securities of such clients to another registered stock broker within a period of 30 days thereon, under advice to the said clients. 48. The Order shall come into force with the immediate effect. 49. It is clarified that in view of the amendment made w.e.f. January 21, 2021 in the Intermediary Regulations, powers that were exercised under regulation 28 of the Intermediary Regulations are now being exercised under regulation 27 of the Regulations.

Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.

50. A copy of this order shall be served upon the Noticee, the Stock Exchanges, Registrar and Transfer Agent and Depositories for ensuring compliance with the above order. Sd/- Date: October 29, 2021 S. K. Mohanty Place-Mumbai Whole Time Member

Order in respect of Banka Bullion Pvt. Ltd. in the matter of National Spot Exchange Ltd.