A broker is an individual or party (brokerage firm) that charges a fee or commission for executing buy and sell orders submitted by an investor. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. NSEL was an e-platform where Trading Clients through Brokers have bought and sold commodity contracts.
Brokers had large legal and compliance departments and traded in commodities on NSEL on behalf of Trading Clients. The NSEL model had brokers buying the chosen contract/commodity from a specific seller and selling it back to them ( or its affiliate ) as per the designated warehouse details mentioned in the contracts and the invoices issued.
On July 31, 2013 NSEL declared its inability to pay approximately Rs 5,600 crore to investors, leading to a payment crisis. Therefore most of the leading brokerage houses with decades of experience in the securities and commodities markets knew that on NSEL the associated collateral / payment risk exposure was concentrated on a single entity against whom they are trading which were relatively unknown.
Brokers misused and paired independent contracts thus unethically flouting norms of the Exchange. Brokers, having large legal and compliance departments – consciously selected counter parties. Brokers of Trading Clients are in receipt of VAT invoices from sellers of commodities.
Some of these brokers besides acting as C&F agents also undertook inspections of designated warehouses starting from 2012 onwards as part of their due diligence to safeguard their own and client interests. None of the brokers expressed any concerns in deficiency of the warehouse or non-availability of stocks either to the Exchange or FMC. The brokers attracted HNIs who had large surplus funds and could stay invested for a longer period of time. 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.
Conclusion:- Brokers besides acting as C&F agents undertook inspections of designated warehouses starting from 2012 as part of their due diligence to safeguard their own and client interests. According to Media Reports, 13,000 trading clients awaiting their dues 781 Ultra High Net Worth individuals have yet to receive close to Rs 3,605 crores.