Mumbai: Market regulator Securities and Exchange Board of India (SEBI) has declared the commodity broking arms of Motilal Oswal and India Infoline (IIFL) as not “fit and proper”, as part of the action taken in the NSEL case.

SEBI is probing as many as 300 brokers for violation of rules colluding with the National Spot Exchange Ltd (NSEL) to defraud investors. In fact, the regulator has named brokerage firms in a first information report (FIR).

What this meant was that NSEL did not maintain sufficient underlying stock on trades it allowed even as brokers sold lucrative contracts to investors.

This builds defaults and resulted in the exchange denying payments worth Rs 5,600 crore in 2013.

“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’ to be an intermediary in the securities market,” the designated authorities said in the report submitted to SEBI.

In an order uploaded on its website on February 22, SEBI said that the brokers had a close association with NSEL and allowed themselves to “become a channel”.

“Thus the noticee is not a fit and proper person to be granted registration/to operate as a commodity derivatives broker,” the order said.

SEBI has also ordered both Motilal Oswal and IIFL to transfer securities of all their clients and allow withdrawal within 45 days of the order.

Failing this, “the noticee shall transfer its balance clients with their corresponding securities and funds to another person, holding a valid certificate of registration to carry on such activity, within a further period of 30 days”, the order said.

Also such a person should not be related to the entities being declared not fit and proper person.

While the SEBI order deals with commodity trading arms of the two brokerage firms, under regulators unified licence regime, most firms have moved their commodity operations under the same unit that operates stock broking. It needs to be seen what it would mean for the unified broking business of the Motilal Oswal and IIFL.