One of the most controversial scams of recent times, the NSEL fraud is back in the news as two renowned NBFCs - Motilal Oswal Financial Services and IIFL Holding's commodity arms were given not ‘fit and proper’ status by Sebi. These two commodity subsidiary were Motilal Oswal Commodities Broker Private Limited (MOCBPL) and India Infoline Commodities Limited (IICL). For these two companies, the regulator on Monday  said, "It is alleged that the Noticee has not conducted its operations as a commodity broker at NSEL in a fair and transparent manner. The integrity, reputation and character of the Noticee is questionable from the conduct of its business at NSEL as a commodity broker.”

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“In view of the seriousness of the matter, facts and circumstances of the case, the conduct of the Noticee in its functioning as a commodity broker is questionable and has certainly eroded its general reputation, record of fairness, honesty and integrity and has therefore affected its status as a ‘fit and proper person’," it said.

Following this, share price of Motilal Oswal Financial Services and IIFL Holding plunged in the range of 7% to over 9%. On Tuesday, the stock price of Motilal Oswal was trading at Rs 593.65 per piece down by 1.01%, whereas IIFL was performing at Rs 347.30 per piece below 3.93% on Sensex at around 1120 hours. Both Motilal and IIFL are set to challenge the Sebi order. 

However, in a filing Motilal has informed that, “We would like to clarify that MOCBPL and the Motilal Oswal group itself is the victim of National Spot Exchange Limited ("NSEL") scam like thousands of investors. It has own investment of Rs 58.7 Crores which is due from NSEL on the date of default.”

 “The MOCBPL is aggrieved by said Order and it is in consultation with its lawyers to explore legal options before it. In our opinion, the said Order against MOCBPL will have no impact on overall business activities of companies of Motilal Oswal group,” said it added. 

Similarly, IIFL in a statement to exchanges said, “IICL does not have any outstanding dues to any clients. llCL also does not have any proprietary position. The order mentions that SEBI has initiated similar enquiry proceedings against approximately 300 brokers and there will be no discrimination.”

However, IIFL also mentioned that, "IICL is seeking legal advice as regards to going for an appeal, in this matter. We would like to clarify to all our stakeholders and clients that this order has no impact on businesses of other companies of IIFL Group."

What Sebi said about MOCBPL?

Sebi alleges that it had done client code modifications which shows lack of due diligence on the part of the Noticee; Noticee had done trading in clients name; which are in violation of provisions of various circulars, rules and bye laws of NSEL. Also, that the company had failed to report suspicious transactions to Financial Intelligence Unit under PMLA thereby violated provision of NSEL circulars.

In fact, according to Sebi, the company has  funded the clients and lured them to trade on NSEL which are in violation of provisions of bye laws of NSEL.

 Not only this, Sebi believes that MOCBPL has allowed its clients to execute trades despite debit balance in their accounts and has thereby violated provisions of the Guidance Manual for Audit of Members of Commodities Futures Exchange issued by the FMC, code of conduct and business rules of MCX and NCDEX.

With Sebi accuses the company that, it has partially collected the margin from its clients; Noticee had failed to renew its insurance policy in time; which are in violation of provisions of various circulars and business rule of NCDEX and MCX.

 What Sebi said about IICL?

Sebi alleges that, it has made false representation in respect of assured / risk free return, arbitrage opportunity in spot market by way of pair contracts, making assurances that pair trades are backed by collateral in the form of stock / sufficiency of commodities in warehouses, making statements that goods in warehouse are backed by insurance cover; which are in violation of provisions of various circulars, rules and bye laws of NSEL and sections 21(g) of the FCRA.

Apart from this, IICL has done client code modifications with manipulative artifice, done trading in clients name without their permission,  had allowed clients to execute trades despite debit balance in their accounts and had failed to report suspicious transactions to Financial Intelligence Unit under PMLA thereby violated provision of NSEL Circulars, as per Sebi. 

Finally, Sebi accuses saying that, IICL “had not segregated funds between clients account and its own account.”

All you need to know about NSEL scam

NSEL scam changed the history of commodities trading, it was crackdown in 2013, when the company defaulted in payment at the National Spot Exchange. Since then, investigations are still going on against various brokers, defaulters, investors and key decision makers. 

Promoted by Financial Technologies India, NSEL was trapped in its own wrongdoing, when the Forward Markets Commission (FMC) asked the company in stop issuing fresh contracts leading to an abrupt closure of exchange in July 2013.

Over Rs 5,500 crore investors wealth has been defaulted in NSEL. 

Should you buy the stock?

On IIFL, Anand Rathi highlighted that, during last quarter, the company have halved their commercial paper (CP) exposure, down from 24% of loans to 12%. Funding mix is well diversified including 17% from NCDs, 5% from sub-debt, 40% from bank term loans and refinance, 27% from sold down assets and 12% from CP. The company have a positive ALM mismatch across all buckets and comfortable liquidity position

Analysts here added, “With ample liquidity and future growth prospects, we continue to remain positive on the company over medium and longer term perspective and maintain our BUY rating on the stock with a revised target price of Rs.798 per share.”

Hence, according to Anand Rathi one can still continue buying IIFL stocks.