TaxTMI 
TaxTMI 
2023 (9) TMI 1717
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....ation as a commodity derivatives broker. Pursuant to the same, a Post Enquiry Show Cause Notice dated January 28, 2020 (hereinafter referred to as the "SCN"), along with the copy of the aforesaid Enquiry Report and other relevant documents was issued to the Noticee. 2. While the aforesaid proceedings were pending, Securities and Exchange Board of India (hereinafter referred to as the "SEBI") had also passed five separate orders (during February 2019) rejecting the applications filed by five other entities for registration as commodity brokers who were involved in the National Spot Exchange Limited ("NSEL") matter. Aggrieved by the said SEBI orders, the entities filed separate appeals before the Hon'ble Securities Appellate Tribunal (hereinafter referred to as "Hon'ble SAT"). Hon'ble SAT, vide its common order dated June 9, 2022, remanded the aforesaid SEBI orders to SEBI to decide these matters afresh within six months from the date of the said order. While remanding the aforesaid SEBI orders, Hon'ble SAT, inter alia, held as under: "42...The matters are remitted to the WTM to decide the matter afresh in the light of the observations made aforesaid in accordance with la....
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....intraday squaring trades for silver mini and gold mini. c. There were no trades for Agri commodities, with all trades being limited to gold mini or silver mini contracts. d. The Noticee also ensured that gold mini and silver mini trading activities were conducted with the minimum quantity, and followed all the rules and regulations stipulated by NSEL. e. The Noticee has not received any email from NSEL regarding any violation of any rules and regulations. f. Noticee has never defaulted on daily pay-in obligations and have fulfilled NSEL all debit amounts on time. g. The ledger copy of account from NSEL, in which a credit of Rs. 2,50,000 is reflected. h. The Noticee has already closed the commodity broking business since 2017/ 2018. CONSIDERATION OF ISSUE AND FINDINGS 6. I have carefully perused the SCNs issued to the Noticee, the Enquiry Report, the replies filed by the Noticee and other material/ information available on record. After considering the allegations made / charges levelled against the Noticee in the instant matter as spelt out in the SCNs, the limited issue which arises for my consideration in the prese....
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....ard under these or any other regulations; Intermediaries Regulations, 2008 SCHEDULE II SECURITIES AND EXCHANGE BOARD OF INDIA (INTERMEDIARIES) REGULATIONS, 2008 [See regulation 7] (1) The applicant or intermediary shall meet the criteria, as provided in the respective regulations applicable to such an applicant or intermediary including: (a) the competence and capability in terms of infrastructure and manpower requirements; and (b) the financial soundness, which includes meeting the net worth requirements. (2) The 'fit and proper person' criteria shall apply to the following persons: (a) the applicant or the intermediary; (b) the principal officer, the directors or managing partners, the compliance officer and the key management persons by whatever name called; and (c) the promoters or persons holding controlling interest or persons exercising control over the applicant or intermediary, directly or indirectly: Provided that in case of an unlisted applicant or intermediary, any person holding twenty percent or more voting rights, irrespective of whether they hold controlling interest or....
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....rder, if no such period is specified in the order. (5) At the time of filing of an application for registration as an intermediary, if any notice to show cause has been issued for proceedings under these regulations or under section 11(4) or section 11B of the Act against the applicant or any other person referred in clause (2), then such an application shall not be considered for grant of registration for a period of one year from the date of issuance of such notice or until the conclusion of the proceedings, whichever is earlier. (6) Any disqualification of an associate or group entity of the applicant or intermediary of the nature as referred in sub -clause (b) of clause (3), shall not have any bearing on the 'fit and proper person' criteria of the applicant or intermediary unless the applicant or intermediary or any other person referred in clause (2), is also found to incur the same disqualification in the said matter: Provided that if any person as referred in sub-clause (b) of clause (2) fails to satisfy the 'fit and proper person' criteria, the intermediary shall replace such person within thirty days from the date of such disqualification failing ....
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....e of personal hearing, whichever is later. 8. As noted above, taking cognizance of the order passed by the Hon'ble SAT on June 09, 2022 (hereinafter referred to as "SAT Order"), in NSEL matters, a supplementary show cause notice dated February 13, 2023 was issued to the Noticee calling upon the Noticee to show cause as to why the following information/ material along with the Enquiry Report dated December 30, 2019 should not be considered against it for determining whether the Noticee satisfies 'fit and proper person' criteria as laid down under Schedule II of the Intermediaries Regulations: a. SEBI complaint dated September 24, 2018 filed with Economic Offence Wing; b. First Information Report dated September 28, 2018; and c. Amended Schedule II of the Intermediaries Regulations. 9. Before moving forward to consider the matter on merits and test the fulfilment of the 'fit and proper person' criteria by the Noticee, on the basis of available material including the additional material as detailed at paragraph 8 above, the background facts necessary for the present proceedings are narrated in brief, hereunder: a. NSEL was incorporated in May,....
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....ed' was being not complied with by the NSEL and its members. FMC further observed that the 'paired contracts' offered for trading in the NSEL platform were in violation of the provisions of the FCRA and also in violation of the conditions specified by the Government of India in its 2007 Exemption Notification, while granting exemptions to the one day forwards contract for sale and purchase of commodities traded on the NSEL, from the purview of the FCRA. 10. I note that prior to merger of FMC with SEBI on September 28, 2015, the Noticee was required to be a member of an association recognised by the Central Government under Section 6 of the FCRA, and was not required to be registered with either FMC or any other regulatory authority under the FCRA. The Parliament, noticing that the intermediaries dealing with commodities derivatives market were not required to be registered under FCRA and were not under control of any competent authority, rectified the same through the Finance Act, 2015, as notified on May 14, 2015, by bringing them under the regulatory supervision of SEBI. With regards to the aforesaid, the Hon'ble Bombay High Court while dealing with the Writ Petition Nos. 3262....
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....Act- (a).... (b) .... (c) .... (d) .... (e) a fresh proceeding related to an offence under the Forward Contracts Act, may be initiated by the Security Board under that Act within a period of three years from the date on which that Act is repealed and be proceeded with as if that Act had not been repealed; (f) no court shall take cognizance of any offence under the Forward Contracts Act from the date on which that Act is repealed, except as provided in clause (d) and (e); (g) clause (d), (e), (f) shall not be held to or affect the general application of section 6 of the General Clauses Act, 1897 with regard to the effect of repeal to matters not covered under these sub-sections." 13. I note that the aforesaid provision empowers SEBI to initiate a fresh proceeding with respect to the offences within a period of three years from the date on which FCRA is repealed. Thus, pursuant to the merger of FMC with SEBI, SEBI stepped into the shoes of FMC and was well within its powers to initiate proceedings under Chapter V of FCRA i.e., filing of the criminal complaint to the EOW. I note from the complaint dated September 24, 2018 filed ....
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....nal materials that have been brought on record, it would be appropriate to look at the background of NSEL and understand the nature of the 'paired contracts' that were offered on the exchange which ultimately is the cause/ genesis of the current proceedings. 16. From the perusal of the FMC Order No. 4/5/2013-MKT-1/B dated December 17, 2013 (hereinafter referred to as the "FMC Order") in respect of the 'paired contracts', which were traded on the NSEL platform during the relevant period, I note that the FMC had, inter alia, observed that the following conditions stipulated in the 2007 Exemption Notification were violated: 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 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-transfera....
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....re treated as Non-Transferable Specific Delivery contracts. It is, therefore, seen that even though MCA had stipulated in the 2007 Exemption Notification that only contracts of one-day duration were permitted to be offered on the NSEL, the FMC, in its order, relying on the definition of the "forward contract" under FCRA held that the NSEL was allowed to only trade in one-day forward contracts and was obliged to ensure delivery and settlement within 11 days. However, what is beyond doubt is that the NSEL had permitted 55 contracts of various commodities having duration longer than 11 days and these contracts were in contravention of the exemption granted to NSEL. 19. 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. vs. Union of India & Others (Civil Appeal No. 4476 of 2019 decided on April 30, 2019) (hereinafter referred to as the "merger petition"), wherein it was, inter alia, held that: "There is no doubt that such Paired Contracts were, in fact, financing transactions which were distinct from sale and pur....
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....e across the commodities. The return remained the same irrespective of the duration of the contract. At Para 45 of the said order, the Hon'ble Supreme Court has also depicted certain examples of 'paired contracts', which offered assured returns. For example, a T+2 and T+25 paired contract in steel had the same offered return as a T+5 and T+35 paired contract in castor oil. The 'paired contracts' were being marketed as an alternative to fixed deposits. It was also noted in the judgement of the Hon'ble Supreme Court in the MPID matter that the overwhelming majority of the sale leg of the 'paired contracts' which were executed were short sales i.e., commodities to back such sales were not available at the designated warehouses of the NSEL. 22. I now proceed to examine the allegations levelled against the Noticee in the SCNs. The main allegation against the Noticee, as levelled in the SCNs, is that by facilitating the trading in 'paired contracts' on NSEL platform during the relevant period, the granting of registration to the Noticee as a broker is detrimental to the interest of the Securities Market and the Noticee is not a 'fit and proper person' for grant of certificate of regis....
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....ton India LLP was appointed. The report dated September 21, 2013 contained a list of 148 members of NSEL against whom NSEL had pay-out obligations as on September 19, 2013. It was observed that the name of the Noticee did not appear in this said list. The interim report of EOW identified a list of broking houses/brokers with client exposure and money exposure who were alleged to have indulged in 'paired contracts'. The name of the Noticee did not appear in the list either. Further, EOW had forwarded the trade details of the Noticee on NSEL during the referred period. On perusal of the same, it is noted that the Noticee has carried out trades in the contracts pertaining to E-Gold and E-silver. The Noticee in its reply of April 26, 2023 has submitted that it has traded in metals i.e. in gold and silver. It was also noted that the Noticee is a member of MCX whereby he has applied for surrender of membership on July 2, 2018 and was deactivated on July 5, 2018. 25. In this regard, I find it pertinent to refer to the observations of Hon'ble Supreme Court in its judgment in respect of the merger petition (supra) that "We have seen that neither FTIL nor NSEL has denied the fact that pai....