The Brokers sold the contracts to their trading clients as a structured product in violation of two NSEL circulars dated February 7, 2012 and August 2012 which prohibited promise/guarantee of assured returns by any member, and that is how the popularity of the contracts increased. The volumes in these types of contracts increased only during 2012-13. During 2012-13, the equity markets were not doing well and many brokers and their trading clients started participating in the T+2 and T+25 contracts with a view to make trading profits.
• All the brokers and their trading clients who traded on NSEL are experts and knowledgeable and
participated in the contracts after duly assessing the risks. All the trading clients made financial gains
through trading commodities until July 2013 when the market was halted due to government directions.
• The contracts on NSEL were traded by large listed brokerage houses. These brokers have large legal
and compliance teams and are operating in equity and commodity futures markets as well. These
brokers have participated in NSEL only after exercising due diligence. Brokers pushed client investment in a particular NSEL contract due to higher yield they could get for the clients and higher brokerage they could charge from their clients. Many brokers sold this product as a part of portfolio management and also made loans available where client's paid only 10-20 percent and the balance money was deployed as loan taken by the client from the brokers, which earned the brokers additional return on money lent. The clients got lured due to fixed cost of borrowing and a higher returns against the commodities trading.
• Further, several brokers acted as C&F agents for their trading clients and visited (50 times over a 36
month period) warehouses (of the defaulting members) storing the commodities under intimation of
NSEL for stock verification and never complained or brought to the notice of NSEL about missing or
shortfall in commodities. Further their audit firms have also certified inventories and reported the
same in the annexures to the balance sheets of the respective broking firms.
• The police found that in some instances the broking houses used their clients' accounts, without their (clients') information and consent for doing purchases. The brokers altered the rules for their personal benefit.
• Essentially, a distinct aspect came to the EOW's notice during their investigation, which was also
mentioned in their charge sheet - that a big broking firm assured its trading clients about the security
of their invested money, besides the existence of stocks in the warehouses.
• The defaulting members are operating entities and were having huge bank limits as well. Prima facie it was impossible to detect that irregularities were being committed as the warehouse inspections by market players did not raise any alarms. It appears that many of these defaulters have repaid the banks out of the funds received from trading at NSEL. The defaulting members are willful defaulters.
• Further, these defaulting sellers issued VAT invoices in the name of the trading clients as late as until June 30, 2013.
• Throughout the vilification campaign against the Financial Technologies Group, the impression that
was created was that of innocent trading clients were duped by NSEL and thus needed to be helped
with great urgency. It took more than a year till Hon'ble Justice, in it's Order given on August 22, 2014 in the Criminal Bail Application No. 1263 of 2014, observed as under.
• All the brokers and their trading clients who traded on NSEL are experts and knowledgeable and
participated in the contracts after duly assessing the risks. All the trading clients made financial gains
through trading commodities until July 2013 when the market was halted due to government directions.
• The contracts on NSEL were traded by large listed brokerage houses. These brokers have large legal
and compliance teams and are operating in equity and commodity futures markets as well. These
brokers have participated in NSEL only after exercising due diligence. Brokers pushed client investment in a particular NSEL contract due to higher yield they could get for the clients and higher brokerage they could charge from their clients. Many brokers sold this product as a part of portfolio management and also made loans available where client's paid only 10-20 percent and the balance money was deployed as loan taken by the client from the brokers, which earned the brokers additional return on money lent. The clients got lured due to fixed cost of borrowing and a higher returns against the commodities trading.
• Further, several brokers acted as C&F agents for their trading clients and visited (50 times over a 36
month period) warehouses (of the defaulting members) storing the commodities under intimation of
NSEL for stock verification and never complained or brought to the notice of NSEL about missing or
shortfall in commodities. Further their audit firms have also certified inventories and reported the
same in the annexures to the balance sheets of the respective broking firms.
• The police found that in some instances the broking houses used their clients' accounts, without their (clients') information and consent for doing purchases. The brokers altered the rules for their personal benefit.
• Essentially, a distinct aspect came to the EOW's notice during their investigation, which was also
mentioned in their charge sheet - that a big broking firm assured its trading clients about the security
of their invested money, besides the existence of stocks in the warehouses.
• The defaulting members are operating entities and were having huge bank limits as well. Prima facie it was impossible to detect that irregularities were being committed as the warehouse inspections by market players did not raise any alarms. It appears that many of these defaulters have repaid the banks out of the funds received from trading at NSEL. The defaulting members are willful defaulters.
• Further, these defaulting sellers issued VAT invoices in the name of the trading clients as late as until June 30, 2013.
• Throughout the vilification campaign against the Financial Technologies Group, the impression that
was created was that of innocent trading clients were duped by NSEL and thus needed to be helped
with great urgency. It took more than a year till Hon'ble Justice, in it's Order given on August 22, 2014 in the Criminal Bail Application No. 1263 of 2014, observed as under.
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