The commodity derivatives market has been the focus area of the Securities and Exchange Board of India, ever since it took over regulatory responsibility of this segment in 2015. The move, decided at Friday’s board meeting, to permit mutual funds and portfolio managers to transact in commodity exchanges is yet another attempt to improve participation in this segment. But the endeavour to cleanse this segment of the negative fallout from the National Spot Exchange scam that occurred more than five years ago, appears to be a work in progress. The recent SEBI order against four commodity brokers — Motilal Oswal Commodities Broker, Indian Infoline Commodities, Geofin Comtrade and Anand Rathi Commodities — who operated on the NSEL, is definitely welcome, with the regulator now acknowledging the wrongdoings of these intermediaries. The SEBI investigation found that the brokers had facilitated transactions in illegal paired contracts on the NSEL platform and allowed themselves to become a channel for promoting these contracts among clients. It was held that the reputation, fairness, honesty, integrity and character of the brokers had been seriously eroded; hence they were not fit to be allowed to operate as commodity derivatives brokers, either directly or indirectly. But its ban order needs to be effectively enforced.

SEBI has rejected their applications to offer commodity broking services. Such an important order should have caused disruption in the commodity derivatives market; but that hasn’t happened. While volumes on commodity exchanges have not been impacted at all, other group companies belonging to these brokers have been issuing statements that they are not particularly affected. The SEBI’s directive has been rendered impotent because the commodity broking operations of the brokers indicted in the order are being carried out through other entities. Even as the regulator was investigating the malpractices of the commodity broking entities, their operations had been wound down and the stock broking arms of the same groups had begun offering commodity broking services, too. The regulator needs to evaluate the operations of the entire group of companies to ascertain whether the order is being followed in spirit. Allowing the commodity broking operations to continue in another garb seems meaningless.

Another question that arises from the investigation is whether the entities named in the order can be allowed to continue their operations in other segments such as stock broking and mutual funds, where they handle the savings of small investors. SEBI’s investigations unearthed transgressions by these intermediaries, such as making false and misleading representations to investors, modifying client codes, trading in clients’ names and failing to report suspicious transactions to the Financial Intelligence Unit. The regulator needs to consider whether allowing investors to transact through such entities for other financial services is a sound idea.

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