NSEL
scam
The NSEL scam is a systematic and
premeditated fraud perpetrated in the commodity market of the National Spot
Exchange that is
based Mumbai,
India The NSEL is
a company promoted by the Financial
Technologies India Ltd and the NAFED.
The NSEL
scam is estimated to be a Rs. 5600 crore (around US$ 0.9 billion) fraud that
came out to light after the National Spot
Exchange failed to
pay its investors in commodity pair contracts after 31 July 2013. .
It was
subsequently concluded that most of the underlying commodities never did exist,
and the buying and the selling of commodities like steel, paddy, sugar,
ferrochrome etc. was being only conducted only on paper. The pair trades in
various commodities were offered in one-day forward contracts of T+2 and T+25 (sometimes even T + 35)
payment terms (bought and sold at the same time).
Such pair
trades offered an arbitrage opportunity of about 12-15% return per annum. The
investors, who honored the T+2 payment obligation, found that the National Spot
Exchange neither had the money, nor the commodities, to honor their T+25 dues.
Around 24 borrowers were given the funds by the NSEL, without any underlying
commodity deposited by those borrowers. One of those borrowers who borrowed
around Rs. 1000 Crores is a company named NK Protein Ltd., and is owned by the
son-in-law of the former Chairman Shankarlal Guru of NSEL.
An estimated
number of 15000 investors, along with public sector units like MMTC and PEC,
were victims of this NSEL scam. The ROC report on NSEL fraud has come down
heavily on the promoters and the FTIL, as it was found that a majority of
minutes of meetings of the NSEL board were fabricated, as cell phone location
data of the said board members did not match to the meetings’ locations.
Some of the
warehouses mentioned on the NSEL website were found to be physically
non-existent, and the SGF (Settlement Guarantee Fund) – of around Rs 839 Crores
(about US $140 Million), as on 29 July 2013, vanished into thin air.
Anjani
Sinha, the sacked CEO and the MD of the company, attempted to take the blame
for the fraud in order to exonerate other promoters, and filed an affidavit. Mr. Anjani Sinha's wife,
Shalini Sinha, though being a related party, traded on MCX for about Rs. 40000 Crores in
one year through her company SNP Designs P Ltd. However Anjani Sinha after
arrest retracted his earlier affidavit and filed a fresh affidavit pinning the
blame on the board of NSEL stating that they fully knew what was going on at
NSEL.
EOW Mumbai
Police action
The EOW (Economic Offences Wing) of Mumbai police is presently
investigating this fraud and the Mumbai police has conducted various raids. An
FIR (First Information Report) has been filed against the directors of the
NSEL, and the directors of their promoters i.e. Financial Technologies India
Ltd, along with various other brokers allegedly involved in the fraud. On 9
October 2013, Amit Mukherjee, the Assistant Vice-President (Business
Development) of NSEL, was arrested by the EOW of the Mumbai police marking the
first arrest in the scam. Subsequently,
a day later on 10 October 2013, the EOW of Mumbai Police arrested Jai
Bahukhandi, the former Assistant Vice-President of NSEL. Former CEO and MD, Mr.
Anjani Sinha, was the third arrest in the case; he was arrested a week later on
17 October 2013. The EOW has since invoked the MPID (Maharashtra Protection of
Investors Deposit) Act, under which it can attach properties and assets of the
accused, for the interest of the investors. Mr. Nilesh Patel of NK Protiens
Ltd., the biggest borrower from the NSEL, was arrested on 22 October 2013 who
got out on bail subsequently. Mr. Surinder Gupta of PD Agroprocessors who owns
Dunar brand rice has been arrested by EOW on 5th March 2014. Mr. Gupta tried
various delaying tactics with EOW , NSEL and investors.
Soon after the news of the scam broke, FTIL claimed that the server that
housed sensitive data related to the company has crashed. The EOW was, however,
able to access the mirror server on which forensic and investigative tests are
being conducted.
CBI Action
India's premier investigation agency The Central
Bureau of Investigation raided
various NSEL and borrowers' offices as well as the residence of Jignesh Shah
and booked an FIR under prevention of corruption act for the funds that MMTC
and PEC -two public sector units were made to invest in NSEL. Jignesh Shah and Jospeh Massey
have also been booked in this FIR.
Role of the
Ministry of Consumer Affairs, FMC & the Government
In a show cause notice, on 27 April 2012, based on the data provided by
the Forward
Markets Commission (India), the Ministry of Consumer Affairs asked
the NSEL to answer why legal proceedings should not be carried out against the
company given it was conducting illegal trades, and that there the company did
not provide any apparent mechanism to verify commodity stocks. However, until 12 July 2013, that is
close to 15 months after the show cause notice, no action was taken by the
Ministry. The lack of early government intervention allowed the scam amount to
balloon to Rs. 5600 crores.
It has been claimed that some political maneuvering was done by various
government entities to keep this SCN in abeyance and that cost the investors
their hard-earned money. Interestingly, a committee headed by Shri Arvind
Mayaram suggested that the entire system was an 'unregulated exchange' and the
HNIs (High Net-worth Individuals) invested with open eyes, pointing out the
scam was the fault of the investors. However, the committee ruled so ignoring
the role of FMC - the designated agency to supervise NSEL from early 2012.
Apparently, FMC was aware of 'NBFC like activities' going on at NSEL and it is
also claimed that FMC declined to file FIR against NSEL in spite of being aware
of SGS finding that there were not enough commodities in the NSEL warehouses.
A panel of high-level officials, and headed by the Economic Affairs
Secretary Arvind Mayaram, submitted to the Finance Minister P. Chidambaram its report on the alleged
irregularities at the NSEL. However, the report did not reveal key shortcomings
and acts of omission and commission by the bureaucrats of DCA and FMC was
claimed to be more of a cover up.
Forensic audits
by Grant Thornton ,Choksi and Choksi and PWC
At the behest of the Forward Markets Commission (FMC), the NSEL asked
Grant Thornton to conduct a forensic audit of the books of NSEL. The report,
though not complete and with insufficient cooperation from NSEL, brought out
various glaring irregularities. On the basis of the Grant Thornton report, the
FMC served a show cause notice to the promoters of NSEL about their 'fit and
proper' status to run exchanges.
There are still wide differences between the books of the NSEL, and
those of the most borrowers. The Grant Thornton report also pointed out how Mr.
Anjani Sinha wrote an internal email to stop using IBMA for rigging MCX prices,
and to use SNP Designs P Ltd (his wife Shalini Sinha's company) to conduct
proprietary speculative trades on the exchange.
As an inference, it was clear that the whole group NSEL/IBMA/MCX and the
FT were working in tandem. Grant Thornton has also been asked to conduct a
forensic audit of MCX. Subsequent to a court petition by some investors of
NSEL, FMC has been directed by the Mumbai High Court to conduct a forensic
audit of Eseries bullion contracts of NSEL.
After petitions from certain NSEL pair trade investors, the Bombay high
court directed the FMC to appoint a forensic audit of Eseries products of NSEL.
An audit firm by the name of Choksi and Choksi was given this assignment and
their audit report has damning revelations against the promoters and FT group.
The FMC also asked PWC to conduct an audit of MCX where after the audit
a lot of related party trades and other deviations were found which raised
serious questions about the integrity and functioning of the FT group.It was
learnt that MCX paid Rs 17.76 crore either as donations or as professional
charges to entities to which Sunil Daga Khairnar — former director of NBHC and NSEL.
The role of the
Promoters
The EOW Wing of Mumbai police filed an FIR against all the directors of
the NSEL and the FTIL including Jignesh Shah, Joseph Massey and Shreekant
Javalgekar. The Grant Thornton forensic audit report also indicted the board of
directors/promoters including Mr. Jignesh Shah who were present in all the
crucial meetings, including the ones where fraudulent pair trade contracts were
introduced, and money was allowed to be sanctioned to NK Protein Ltd. It is
worthy to note that the owner of NK protein Ltd is also the son-in-law of the
then Chairman Shri Shankarlal Guru. It has also come to light in forensic audit
that FT the promoter company had conducted a system/process audit of NSEL in
2011-2012 but the report was never finalized even after finding high risk irregularities.
The FMC in their show cause notice, and the Registrar of Companies (ROC)
in their interim report, have held the promoters including Mr. Jignesh Shah,
squarely responsible for the fraud. Jignesh Shah also came on TV on 5 August
2013, and promised a financial settlement. Interestingly, he said, "What
will investors do with commodities, that's why we have decided to go for
financial settlement" – which made people believe that he knew there were
no underlying commodities in the NSEL warehouses, contrary to what was shown on
the NSEL website. Mr. Jignesh Shah also promised a committee of three to look
into the scam. The committee was to include the retired police commissioner
Sivanandan, but it was was never formed. Various
forensic audits by Grant Thornton, PWC, Chokshi and Choksi confirmed the
involvement of the board of NSEL in the scam and dubious role of Financial
Technologies Group
It seems most exchanges being run and promoted by FT group have been
mired in mismanagement ,fraud and deceit. The
fact that the parent company Financial Technologies India Ltd (FTIL)which owns
99.998% of NSEL had conducted an audit of NSEL systems/processes and did
nothing even after knowing about NSEL shortcomings confirms the fact that the
board of NSEL and FTIL knew much more about the scam then what is being made
out.
The role of
Brokers
The economic offences wing (EOW) of Mumbai Police has found evidence of
irregularities on the part of the brokers in the National Spot Exchange Ltd
(NSEL) fraud.An interim report on the police's forensic audit had thrown up
evidence of hawala transactions, benami trades and illegal code changes. The
interim report also states some of the directors (of broking firms)were aware
of the impending danger at NSEL; the EOW found volumes of the spot exchange saw
a sudden fall in April and May 20113.The report mentions evidence of illegal
and unauthorised changes at the back-end of NSEL severs. The names of clients
on NSEL servers were found to be different from those in brokers' ones.
Effect of the
fraud
As an effect of the NSEL fraud, the share prices of its promoter company
FTIL crashed by 60-70% resulting in massive erosion in the company’s market
cap. The share prices of the sister company MCX (Multi Commodity Exchange Ltd) also
took a beating.
The FMC has already issued an order on FTIL, Jignesh Shah, Joseph Massey
etc. that they are not fit and proper to run any exchange in India. Jignesh
Shah and Joseph Massey on 9 October 2013, had to resign from the board of
MCX-SX stock Exchange. Jignesh Shah was also compelled to resign from MCX on 31
October 2013.
References:
- http://www.outlookindia.com/article.aspx?287699
- https://www.youtube.com/watch?v=YVVxA3rr99I9
- http://www.business-standard.com/article/markets/nsel-anatomy-of-a-trade-gone-sour-113082600402_1.html
- http://www.slideshare.net/deepakshenoy/affidavit-anjani-sinha
- http://www.livemint.com/Politics/lbhgkRlDFmtByuRnowvTRM/NSEL-exCEO-Sinha-to-be-in-police-custody-till-31-October.html
- http://www.livemint.com/Companies/TqvjpRhV0kBDckHP7HhgoK/NSEL-crisis-Search-operations-at-Jignesh-Shahs-residence.html
- http://www.thehindubusinessline.com/industry-and-economy/agri-biz/nsel-case-mumbai-police-makes-first-arrest/article5218258.ece
- http://articles.economictimes.indiatimes.com/2014-03-14/news/48222151_1_jignesh-shah-nsel-scam-ceo-anjani-sinha
- http://articles.economictimes.indiatimes.com/2013-10-03/news/42664713_1_nsel-investor-e-series-nsel-fiasco
- http://governancenow.com/news/regular-story/story-nsel-cover-cover
- http://articles.economictimes.indiatimes.com/2014-02-24/news/47635734_1_shreekant-javalgekar-year-mcx-ftil-group
- http://www.ndtv.com/video/player/news/financial-tech-promoter-jignesh-shah-on-nsel-payment-crisis/285683
- http://www.internationalpolicydigest.org/2014/02/25/jignesh-shah-anatomy-crumbling-titan/
- http://www.business-standard.com/article/current-affairs/evidence-of-hawala-benami-trades-in-nsel-says-interim-eow-report-114030800033_1.html
