Order in the matter of Joindre Commodities[SAT Appeal No.:672/2021 & Misc. App. No. 1230/2021]

WTM/GM/MIRSD/DOP/13469/2021-22 SECURITIES AND EXCHANGE BOARD OF INDIA ORDER Under Section 12 (3) of SEBI Act, 1992 read with Regulation 27 of SEBI (Intermediaries) Regulations, 2008 in the matter of Joindre Commodities Limited. NOTICEE SEBI REGISTRATION NO. Joindre Commodities Limited INZ000045333

BACKGROUND

1. Joindre Commodities Limited (‘JCL’/‘Noticee’) is registered with Securities and Exchange Board of India (“SEBI”) as a stock broker under the SEBI (Stock Brokers) Regulations, 1992 (“Stock Broker Regulations”). JCL is a member of the National Commodity and Derivatives Exchange Ltd., National Commodity and Derivatives Exchange Clearing Corporation, Multi Commodity Exchange of India Ltd. (‘MCX’) and Multi Commodity Exchange of India Clearing Corporation. The Noticee was earlier a member of the National Spot Exchange Limited (NSEL). The registered office of the Noticee is at 32, Raja Bahadur Mansion, Ground Floor, Opp. Mumbai Samachar Marg, Fort, Mumbai. 2. NSEL was incorporated in 2005 as an electronic platform for spot trading of commodities. On June 05, 2007, the Ministry of Consumer Affairs, Government of India, issued a notification under Section 27 of the Forward Contracts (Regulation) Act, 1952 ["FCRA"] granting conditional exemption from the provisions of FCRA for forward contracts of one-day duration for sale and purchase of commodities traded on NSEL. The conditions, inter alia, placed an absolute bar on short sales and stipulated that all outstanding positions Order in the matter of Joindre Commodities Limited at the end of the day, must result in delivery of commodities.

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. Thereafter, NSEL commenced operations in October 2008. 3. In September 2009, NSEL introduced, on its platform, the concept of 'paired contracts', which involved buying and selling the same commodity through two different contracts at two different prices wherein investors could buy a short duration settlement contract and sell a long duration settlement contract and vice versa, with the same counterparty at the same time. In other words, the paired contract involved two simultaneous transactions being undertaken at the same time with the same counterparty-one being a purchase transaction(settling at T+2 or T+3) and the other being a sale transaction (settling at T+25 or T+36) at different prices on the platform of NSEL. 4. On February 06, 2012, Department of Consumer Affairs, Government of India, vide Gazette Notification S.O. 228(E) partially amended the Notification dated June 05, 2007, to the effect that “all information or returns relating to the trade as and when asked for shall be provided to the Central Government or Forward Markets Commission, Mumbai” (“FMC”).

5. Pursuant to the said notification, Forward Markets Commission (FMC) called for trade data from the NSEL. On analysis of the data received from NSEL, FMC observed that “55 contracts offered for trade on NSEL were with settlement periods exceeding 11 days and all such contracts traded on NSEL were in violation of provisions of FCRA” and “the condition of ‘no short sale by members of the exchange shall be allowed’ was not being met by NSEL”.

Order in the matter of Joindre Commodities Limited

6. Subsequently, FMC vide order No.4/5/2013-MKT-1/B dated December 17, 2013, inter alia, held that the contracts traded on NSEL violated the following conditions stipulated in the aforesaid notification SO906(E) dated June 05, 2007:

a. Short Sale

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 the NSEL. b. Contracts with Settlement Period going beyond 11 days

Some of the contracts offered for trade on NSEL had settlement periods exceeding 11 days and 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 a settlement schedule for a period exceeding 11 days were not allowed under the aforesaid notification.

7. As the Noticee was a member of the NSEL and had participated in / facilitated trading in paired contracts on the NSEL platform, SEBI initiated enquiry proceedings against the Noticee under Chapter V of the SEBI (Intermediaries) Regulations, 2008 ("Intermediaries Regulations") and appointed a Designated Authority ("DA") vide order dated October 24, 2018, to enquire into whether the Noticee was ‘fit and proper’ to continue to hold the certificate of registration as Trading and Clearing Member in terms of Regulation 5 (e) read with Regulation 27 (iv) of the Stock Broker Regulations.

Order in the matter of Joindre Commodities Limited

8. Upon completion of the enquiry, a Report (DA Report) dated June 20, 2019, was submitted by the DA to the Designated Member (“DM”) recommending that the Noticee was not a fit and proper person in terms of Regulation 5(e) read with Regulation 27(iv) of the Stock Broker Regulations and Schedule II of the Intermediaries Regulations and the registration granted to the Noticee as a commodities derivatives broker be cancelled.

9. Pursuant to this, a post enquiry SCN (P-SCN) dated June 28, 2019, was issued to the Noticee, under Regulation 28 (1) of SEBI (Intermediaries) Regulations, 2008, to show cause as to why action, as recommended by the DA or any other action as considered appropriate by the Designated Member, should not be taken against the Noticee. A copy of the DA’s Report was also forwarded to the Noticee along with an advice to file a reply, if any, within 21 days from the date of receipt of the notice. Thereafter, a second post enquiry SCN dated September 20, 2019 was also issued to the Noticee inter alia highlighting the observations made the Hon’ble Supreme Court and Hon’ble Bombay High Court in respect of paired contracts offered on the NSEL platform. Subsequent to this, an opportunity of personal hearing was given to the Noticee on August 18, 2021.

10. The summary of the submissions made on behalf of the Noticee during the course of the oral hearing and in the written submissions is given below:

a. The Noticee stated that it had not participated and/or facilitated its clients’ trading on NSEL in alleged paired contracts during the relevant period with malafide intent.

b. The Show Cause Notice dated 20.09.2019 and the Enquiry Report dated 28.06.2019 have been issued without proper jurisdiction. Noticee has not violated

Order in the matter of Joindre Commodities Limited the provisions of the securities laws to attract the provisions of the SEBI Act and consequently the jurisdiction of SEBI.

c. The details of the paired trades executed by the clients of the Noticee have not been provided by SEBI. Further, the provisions of the Intermediaries Regulations were not applicable to the Noticee at the time the trades were carried out on NSEL as the Noticee was not a SEBI registered intermediary at that point in time. The provisions of the Intermediaries Regulations are applicable to violations of the provisions of the securities and paired contracts at the time they were traded on NSEL cannot be classified as securities.

d. The Noticee also requested that the present matter be kept in abeyance till the enforcement actions taken by the other agencies in the matter reach their logical conclusion.

e. The findings of the enquiry report is based on observations of the Hon’ble Supreme Court and Hon’ble Bombay High Court in cases pertaining to 63 Moons Technologies and Jignesh Shah. The Noticees were not party to the said cases and it is unfair to selectively quote from the said judgements.

f. The amount provided in the Enquiry Report (Rs. 58, 24,200) as the unsettled obligation of the clients of the Noticee is erroneous. The said amount is not the obligation which has to be paid out by the clients of the Noticee and is in fact the amount which is due to their clients. It was also clarified that the entire amount was due to just one client.

Order in the matter of Joindre Commodities Limited g. It was also submitted that Noticee’s client has received part payments from the MPID court towards the outstanding amount and the money left to be received as on date was Rs. 53, 90, 127.89.

h. There is no specific provisions in the securities laws dealing with paired contracts.

i. The Noticee further stated that its registration as a member of NSEL was granted on February 17, 2011 vide NSEL letter ref. No. NSEL/VG/ MEM / 498/ 10- 11/ 599, and the allegations were made against it without properly considering the documents of FMC/ NSEL.

j. The Noticee submitted that the Joindre Group was established for offering stock broking services in the year 1994 and gained trust and reputation over a period of time based on high-quality services to clients.

k. NSEL was responsible for not conducting its business in accordance with the conditions stipulated in the notification dated 05.06.2007 granting it exemption from the operation of FCRA, 1952, with regard to the one-day forward contracts to be traded on its exchange platform, violating the condition of 'no short-sale' and 'compulsory delivery of outstanding position at the end of the day' stipulated in the notification.

l. The Noticee has no trades on proprietary accounts. The Noticee only executed transactions during the period September 2011 to August 2013 on the screen-based trading platform of NSEL on behalf of and in accordance with the instructions of our respective clients.

Order in the matter of Joindre Commodities Limited m. The Noticee submitted that till the passing of the order dated 17.12.2013, it had no reason to suspect that the alleged paired contracts were in contravention of provisions of FCRA and aforesaid Central Government Notification dated June 05, 2007. Till passing of the said FMC order dated 17.12.2013, neither FMC nor any other Regulatory Authority raised any objection/ warning/ caution that the paired contracts were in contravention to the provisions of FCRA and Government Notification dated 05.06.2007 and consequently in violation of Regulation 9(b), 9(f) read with Clause A (1), A (2) and A(S} of the Schedule II and 5 (e) of the Brokers Regulations read with Schedule II of the Intermediaries Regulations. Thus it could be reasonably concluded that such alleged paired contracts were in the knowledge of the authorities from the inception of the concept of paired contracts and thus deemed to have been legal, permissible and enforceable since the same was deemed to have fallen within the provision of FCRA and the Notification dated 05.06.2007.

n. It was impossible for the Noticee as a broker to identify that contracts of its clients were ultimately in the nature of financial transactions and therefore in contravention to the provisions of FCRA and Government notification dated 05.06.2007 and consequently in violation of Regulation 9(b), 9(f) read with Clause A (1), A (2) and A(S) of the Schedule II and 5 (e) of the Brokers Regulations read with Schedule II of the Intermediaries Regulations.

o. The finding in the DA report that the continuance of the Noticee as a market intermediary is detrimental to the interest of the securities market is solely based on presumptions and assumptions, and is bereft of adequate evidence. This Order in the matter of Joindre Commodities Limited observation is based on improper and artificial interpretation of the meaning of due diligence and is far-fetched.

p. As a commodity broker, the Noticee has exercised proper due diligence at the time of registration of the clients by complying with the KYC norms. The Noticee has maintained high standards of integrity, promptitude and fairness in the conduct of its broking business and has duly abided by all the provisions of the Act and the Rules, Regulations and Bye-laws, and guidelines issued by the Government, the Board and the Stock Exchange from time to time as may be applicable to it and Code of Conduct as specified in Schedule II of Brokers Regulations.

q. Due diligence responsibility does not include the discovery of the purpose/intent of the clients. In support of this contention, the Noticee relied on the order dated 20.06.2006 passed by the Securities Appellate Tribunal to state that – “merely because the appellant acted as a broker cannot lead us to the conclusion that it must have known about the nature of the transaction. There has to be some other material on record to prove this fact.” The Noticee also cited the judgment of the Bombay High Court in the matter of Tri-Sure India Ltd. vs. A.F. Ferguson and Co & Others, wherein the Court has held that “It is well-established law that it is sufficient if one exercises the ordinary skill of an ordinary competent man exercising that particular act. It hardly requires to be stated that the burden to prove any action of negligence rest primarily on the plaintiff who, to maintain the action, must show that he was injured by the negligent act or omission for which the defendant in law, is responsible.”

Order in the matter of Joindre Commodities Limited r. The Noticee submitted that its principal officers and key management persons and the Noticee itself are persons of high integrity, reputation and character, with no convictions or restraint orders passed against them. Neither the Noticee nor its directors have ever been classified as wilful defaulters and are competent and financially solvent. The Noticee and its key management persons fulfil all criteria for being considered 'fit and proper person' as specified in Schedule II of the Intermediaries Regulations, 2008.

s. The Noticee has never miss-sold the alleged paired contracts as the contracts were in accordance with the conditions and stipulations applicable to the trading platform and the Noticee had no role to play in the same since the NSEL (recognised under the FCRA and MCA) had jurisdiction to regulate contracts and their validity and implementation.

t. The Noticee submitted that there has been no complaint from any client regarding the alleged paired contracts.

u. The Noticee submitted that discontinuing the business of the stock broker is a serious consequence which will not only cause loss of business but also irreparable damage to reputation.

11. Having considered the allegations levelled against the Noticee in the P-SCN, the submissions made on behalf of the Noticee and other materials available on record, I note that the limited issue that arises for consideration is whether the Noticee having traded/facilitated trading of its clients in paired contracts offered on the NSDL platform is ‘fit and proper’ to continue to hold the certificate of registration as a stock broker in terms

Order in the matter of Joindre Commodities Limited of Schedule II of the Intermediaries Regulations read with Regulation 5 (e), 9 (b) and 9(f) of the Stock Broker Regulations.

12. I note from the material available on record that the Noticee was granted registration as a member of NSEL in February 2011 and had allowed its clients to trade on the NSEL platform from September 2011 till the exchange had halted trading of paired contracts in August 2013. I also note that the Noticee had not executed proprietary trades or trades on its own behalf during the said time.

13. I note that the Noticee has contended in its reply that the Enquiry Report does not provide details regarding the quantum of trades executed by the clients of the Noticee. It was also submitted that the figure quoted in the enquiry report, which had relied upon the EOW interim report, regarding the outstanding liability of the clients of the Noticee was erroneous as the said amount which was quoted as the liability of its clients was in fact the outstanding amount which was receivable by their clients.

14. In this regard, even accepting the submissions made by the Noticee, the fact remains that the Noticee had provided a trading platform for over a period of two years, which allowed/facilitated its clients to take exposure to the paired contracts offered on the NSEL platform. Since the paired contracts were violative of the conditions stipulated in the Government Notification dated June 05, 2007, I am of the opinion that once as a member of NSEL, the Noticee executed trades either on its own behalf or on behalf of its clients, the quantum of such trades or number of occasions on which such trades were executed becomes immaterial, for the purpose of determining the compliance of the Noticee with the ‘fit and proper’ criteria.

Order in the matter of Joindre Commodities Limited

15. The criteria for fit and proper person which has to be complied by registered securities market intermediaries is provided under Schedule II of the Intermediaries Regulations. Regulation 5(e) read with regulation 9(f) of the Stock Broker Regulations mandate that fit and proper criteria are not just an eligibility criteria that need to be satisfied when an entity seeks registration with SEBI, but also a continuous requirement that has to be complied with as long as the entity is registered with SEBI. The relevant extracts of these provisions are reproduced below:

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,- …………… (f) he shall at all times abide by the Code of Conduct as specified in Schedule II;” Intermediaries Regulations Schedule II “Criteria for determining a ‘fit and proper person’

Order in the matter of Joindre Commodities Limited

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.”

16. The criteria provided in Schedule II of the Intermediaries Regulation are not exhaustive; they are more in the nature of indicative parameters that determine the ‘fit and proper’ aspect of entities. These parameters include 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.

17. The Hon’ble Securities Appellate Tribunal in the matter of Jermyn Capital LLC v. SEBI had interpreted the scope of fit and proper criteria laid down by SEBI and observed that,- “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 he 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. ...”

Order in the matter of Joindre Commodities Limited

18. I note that this issue has also been considered by the Hon’ble Tribunal in the matter of Mukesh Babu Securities Limited vs. SEBI (Appeal No. 53 of 2007), wherein it 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 CBI has alleged that there was criminal conspiracy among all the accused and that they have committed illegal acts which have resulted in wrongful loss to the depositors of the Bank and corresponding gain to the accused. The charges levelled are indeed serious and if established, they involve moral turpitude. We are unable to agree with the learned counsel for the appellant that the criminal case pending against Shri. Mukesh Babu and others has no concern with the securities market. It is through the terminals of the company that the chairman of the Bank had traded and incurred losses through speculative trading which losses have been made up by overdrawing money from the Bank. In these circumstances, the Board was entitled to take the view that the company was not a fit and proper person. It could not be said that Shri. Mukesh Babu or the company enjoyed good reputation within the meaning of the Fit and Proper Person Regulations.”

19. I, therefore, note that 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 Courts that while determining whether an entity enjoys a good reputation, the observations, even if prima facie, made by courts and other regulatory authorities would be relevant. I note that it is not disputed that the Noticee was a member broker of NSEL and was providing a trading platform enabling its clients to access the NSEL platform. It is also noted from the material available on record that by 2013-14, paired contracts represented 99% of the turnover of NSEL (excluding e-series). The details of the same are given in the table below: Order in the matter of Joindre Commodities Limited (Rs. crores) Type of 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 Contract (April - July) Turnover 763 3,359 14,032 59,981 73,390 38,520 excluding e-series Paired 0 848 6,207 18,100 71,127 38,204 contracts % of 0% 25% 44% 30% 97% 99% paired contracts turnover

20. The role of NSEL in the matter of paired contracts has been examined by multiple agencies and courts, extracts of which are reproduced below:

i. Observations of the FMC

FMC, vide order dated December 17, 2013, inter alia observed the following:

“.. 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, 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 Order in the matter of Joindre Commodities Limited ‘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)

ii. Observations of Department of Economic Affairs, Ministry of Finance

Department of Economic Affairs, Ministry of Finance vide letter dated December 30, 2014 observed that “This department is in agreement with FMC that NSEL has violated the first two conditions of exemption granted to it under section 27 of FCRA making it liable for appropriate action including penal action under section 21 of FCRA. Further, this department is also in agreement with the observations of Special Team of Secretaries that by offering contracts having settlement beyond 11 days, without obtaining recognition and/or registration, NSEL has also violated the Provisions of sections 5, 6, r/w 14A also making it liable for appropriate action including penal action under section 21 of FCRA.”

iii. Observations of Economic Offences Wing

Economic Offences Wing, Mumbai, vide letter 789 dated April 04, 2015, had forwarded an interim report on the investigation conducted to identify the role played by broking houses in NSEL Case (EOW C.R. No. 89/2013). EOW in its report had mentioned that a settlement obligation amounting to Rs. 5403.59 crore was due on the date of the closure of the business of NSEL. Relevant extracts of the report are as follows:- “IV. Objectives of this investigation into the brokers’ role:

Order in the matter of Joindre Commodities Limited

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. Order in the matter of Joindre Commodities Limited 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.”

iv. Observations of the Hon’ble Bombay High Court

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 observed:

“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 turn over 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.

….

Order in the matter of Joindre Commodities Limited

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 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 NSEL 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.

…..

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 counsel 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.

…”

Further, the Hon’ble Court in the matter of Jignesh Prakash Shah v. The State of Maharashtra (Criminal Bail Application No. 1263 of 2014) observed that “… the brokers

Order in the matter of Joindre Commodities Limited 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...”

v. Observations of the Hon’ble Supreme Court

These paired contracts were entered into between the same counterparties at a pre-determined price in such a manner that it always resulted in registering a profit on the long term position. The Hon’ble Supreme Court in the matter of 63 Moons Technologies Ltd. and Ors. v. Union of India (UOI) and Ors.1 had observed 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”.

21. It can, therefore, be noted from the above that multiple authorities, including the Hon’ble Supreme Court, have observed that NSEL was in effect running a financing transaction assuring a fixed rate of returns under the garb of paired contracts. Further, as stated above, such paired transactions represented an overwhelming majority of the trades on NSEL by 2013-14 and the Noticee was one of the commodity brokers that facilitated clients to trade paired contracts on the NSEL platform. 22. In this regard, I note that the Noticee has contended in its reply that the reliance placed on observations made by the Hon’ble Courts in cases were the Noticee was not a party and the EOW report which was interim in nature, was contrary to the settled principles of law. I, however, find this argument to be untenable as admissibility of the prima facie observations as valid ground while determining the compliance with the fit and proper criteria has been accepted by the Hon’ble Securities Appellate Tribunal in the matter of 1 (2019)18SCC401 Order in the matter of Joindre Commodities Limited

Mukesh Babu Securities and the relevant portions of the Hon’ble Tribunal’s Order have already been reproduced in para 18 above. 23. It is further 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 Ministry of Consumer Affairs permitted NSEL to only offer spot delivery contracts. The notification issued by the Ministry 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. The Noticee, by providing a platform for taking exposure to paired contracts has exposed its clients to the risk involved in trading a product that did not have regulatory approval, thereby raising doubts on the competence of the Noticee to act as a registered securities market intermediary. 24. The confidence of the investors in the integrity of the securities markets is critical for its orderly functioning. Stock Brokers play a vital role in this regard as they are not just the first point of contact for ordinary investors, but are also entrusted with clients’ monies and securities. In view of the same, it becomes imperative on the part of the SEBI to ensure that only entities enjoying good reputation and having competence, i.e. satisfying the ‘fit and proper’ criteria, act as stock brokers. The Noticee by allowing its clients to trade paired contracts which were ex facie illegal, as noted above, and that too for a period of over two years, has failed in conducting its business in conformity with the standards expected to be maintained by registered securities market intermediaries. 25. In view of the aforesaid, I note that the reputation, competence, fairness, honesty, integrity and character of the Noticee is put into question by such dealings The Noticee has fallen short of satisfying the aforesaid criteria, to the extent of its association with NSEL and the Order in the matter of Joindre Commodities Limited consequent exposure of its clients to paired contracts. I, therefore, find the Noticee not fit and proper in terms of Schedule II of the Intermediaries Regulations.

ORDER

26. I, in exercise of powers conferred under Section 19 of the Securities and Exchange Board of India Act, 1992 read with Regulation 27 of the SEBI (Intermediaries) Regulations, 2008, hereby cancel the certificate of registration granted to the Noticee/ Joindre Commodities Limited (SEBI Registration No. INZ000045333). 27. The Noticee shall, after receipt of this order, immediately inform its existing clients about the aforesaid direction in paragraph 26 above. 28. Notwithstanding the direction at paragraph 26 above, the Noticee shall allow its existing clients to withdraw or transfer their securities or funds held in its custody, within 60 days from the date of this order. In case of failure of any clients to withdraw or transfer their securities or funds within the said 60 days, 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. 29. This order shall come into force with immediate effect. 30. A copy of this order shall be served on the Noticee and upon all recognized Stock Exchanges and Depositories.

Place: Mumbai G. MAHALINGAM Date: September 24, 2021 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA

Order in the matter of Joindre Commodities Limited