NSEL Brokers In Probe Net

The Rs 5,574.35-crore payment crisis at the National Spot Exchange (NSEL) has taken an intriguing turn, with the government directing the Securities and Exchange Board of India (Sebi) to examine and take necessary action against defaulting brokers involved. In a written reply to a Lok Sabha question, finance minister Arun Jaitley has said that Sebi will act against defaulting brokers of NSEL.

Earlier, in its interim order passed on 31 March, 2016, the Bombay high court-appointed committee had highlighted discrepancies on part of the brokers in the NSEL crisis and had directed audits of leading brokerage firms such as Anand Rathi Commodities, India Infoline Commodities, Geofin Commtrade, Phillip Commodities and Motilal Oswal Commodities, in connection with genuinity of their trading clients’ claims.

An investigation into the role of brokers in the NSEL case was warranted as it was not the only entity responsible for the payment crisis; brokers too were part of this narrative. Hence, their role needs to be probed to carry out a threadbare investigation into the entire fiasco.

Apart from Sebi, which is also the regulator of commodity markets after the merger with Forward Markets Commission, the corporate affairs ministry, the Economic Offences Wing of Mumbai Police and the Enforcement Directorate are also investigating the NSEL case. The government too now wants to investigate it thoroughly.

On the other hand, the Bombay high court has extended a stay on the merger of Financial Technologies India (FTIL) with its subsidiary NSEL till 15 June, 2016, after the central government asked for time to examine and file an appropriate reply on the submission filed by FTIL. The Jignesh Shah-led FTIL has challenged the constitutional validity of Section 396 of the Companies Act, 1956, under which the government merged the two private entities.

It’s the first time the government has forced a merger between two private entities, using a provision of the Companies Act that allows it do so in public interest. The forcible merger has set a dangerous precedent as it destroys the concept of limited liability, which is the fulcrum of corporate jurisprudence. Notably, the objective of a subsidiary is to ensure that liabilities are properly managed and to limit the liability of the parent corporation in its subsidiary.

The manner in which the merger of NSEL with FTIL was crafted is an indication for India Inc that the clause of limited liability can be suspended arbitrarily under the pretext of the public interest through an executive fiat, which may adversely affect the flow of foreign direct investments into the country. Last but not the least, the forcible merger is bad for law and policy in the liberal economy and particularly when India is harping on reform agenda, globalisation of domestic economy and foreign direct investment.