SEBI Cancels Registrations of Kaynet Capital, Kaynet Commodities and Kaynet Finance Ltd. as Stock Brokers

SEBI Cancels Registrations of Kaynet Capital, Kaynet Commodities and Kaynet Finance Ltd. as Stock Brokers

The Securities Exchange Board of India (in short SEBI) in three separate orders, cancelled the registration of three stock broker entities- Kaynet Capital, Kaynet Commodities and Kaynet Finance for not complying with the conditions mandated under intermediary rules.

Kaynet Commodities was a registered broker in SEBI and a member of Multi Commodity Exchange of India (in short MCX). After a joint inspection by SEBI and MCX, the broker was declared as defaulter by the exchange, with the Board ordering further investigation in the matter. SEBI then issued a show cause notice (for short SCN) to Kaynet Commodities.

Sanjay Shah, director of Kaynet Commodities defended that the company has already been awarded the maximum punishment of termination from the membership by the MCX and hence any further proceedings by SEBI would lead to double jeopardy. He argued that cancelling the broker license under SEBI is against constitutional doctrines.

The SEBI further cancelled depository participant registration of Kaynet Capital. The market regulator ruled that, notwithstanding the cancellation of certificate of registration, the three entities would continue to be responsible for payment of unpaid fees or dues to SEBI.

Three separate orders were passed by the SEBI Executive Director Sujit Prasad (for short ED) who noted that the entities were not members of any stock exchange. The present orders were passed after enquiry proceedings were conducted against the entities and were found to have collectively violated the Securities Exchange Board of India (Intermediaries) Regulations 2008 (hereinafter referred to as "Intermediaries Regulations").

Among various conditions, one of the conditions stipulated under Regulation 35 of the Securities Securities and Exchange Board of India (Depositories and Participants) Regulations, 2018 (hereinafter referred to as "DP Regulations") is that the applicant is eligible to be admitted as a member of a stock exchange through which it has made the application to SEBI. Since the membership of the entities had been terminated, they no longer fulfilled the conditions stipulated under Regulation 35(b) of the DP Regulations, by which the Certificate of Registration was granted to the entities.

The ED, highlighted that membership given by the stock exchange is a prerequisite to the registration given by SEBI. The Board also remarked that as per Securities and Exchange Board of India (Investment Advisers) Regulations, 2008 (for short IA Regulations) a stock broker is liable for any action including suspension or cancellation of its certificate of registration as a stockbroker if it ceases to be a member of a stock exchange. "Kaynet Commodities has been declared defaulter by a stock exchange and not re-admitted as a member within a period of six months," ED stated in its order.

Additionally, in the case of Kaynet Financial, a joint inspection was carried out MCX, SEBI, Bombay Stock Exchange, National Stock Exchange (NSE), and Central Depository Service Ltd (CDSL). Kaynet Finance was a member of NSE and a registered stockbroker under SEBI. After the joint inspection, NSE recommended declaring the entity as a defaulter.

However, SEBI dismissed the allegation as held that based on the IA regulations 2008 and its relevant sections which state that a stockbroker shall be liable for any action including suspension or cancellation of its certificate of registration as a stockbroker if it ceases to be a member of a stock exchange; or has been declared defaulter by a stock exchange and not re-admitted as a member within a period of six months.

Lastly, in his order, the ED directed that, "in exercise of the powers conferred upon me in terms of Section 12(3) read with Section 19 of the SEBI Act, 1992 and Regulation 27 of the Intermediaries Regulations, hereby cancel the certificate of registration of Kaynet Finance Limited, Kaynet Commodities Private Limited and Kaynet Capital Limited as Stock Broker."