Oct. 09--MUMBAI -- The Forward Markets Commission (FMC) has accused the promoters and directors of National Spot Exchange Ltd (NSEL) of complicity in the cheating of investors.
While questioning their "fit and proper" status, the commodities market regulator has pressed, in a 40-page show-cause notice, multiple charges against NSEL directors, including Jignesh Shah, for allegedly perpetrating the Rs.5,600 crore settlement fraud and conspiring to cheat investors intentionally.
Mint has reviewed a copy of the show-cause notice. Click here to read the show-cause notice.
According to the show-cause notice served on NSEL's promoters and directors, despite repeated warnings from the spot exchange's internal auditors and continuing defaults by the exchange's borrowers, its board continued to lure investors with assured return schemes. They also helped defaulting members secure credit from banks by providing corporate guarantees.
The internal audit report of NSEL for six months between April and September 2011, by Mukesh P. Shah and Co., had observed that even though the exchange did not have the licence to operate as a non-banking finance company, it was exposing itself to a higher risk of credit default by funding transactions without any security.
"Such a callous approach and conduct on the part of an entity that called itself an exchange and ...boasts of a reputed listed company like FTIL as the controlling holding company... is highly reprehensible and makes an explicit portrayal of dishonesty and lack of integrity whose actions were driven by vested self interest without any regard for their duty towards thousands of investors...," the notice said.
Financial Technologies India Ltd (FTIL), promoted by Jignesh Shah, is the holding company of NSEL.
The notice suggested that NSEL's former managing director Anjani Sinha's 11 September affidavit claiming that the promoters and directors of NSEL were not aware of and responsible for the crisis is not correct.
An NSEL spokesperson said, "FMC has given a two week time to reply to the notice and we cannot comment on it now."
According to two persons familiar with the development, who asked not to be identified, NSEL has appointed Naik Naik & Co. as its lawyer to draft responses to the show-cause notice.
The settlement crisis at NSEL came to light on 31 July, when the exchange abruptly suspended trading in all but its e-series contracts (these were suspended a week later). The closure may have been prompted by an instruction from FMC to the exchange asking it not to offer futures contracts (which a spot exchange isn't supposed to, but NSEL was).
NSEL tried to implement the change but because its appeal was to investors and members who were not interested in spot trades, it eventually had to suspend all trading. All trading on NSEL, it later emerged, happened in paired contracts, with investors, through brokers, buying a spot contract and selling a futures one for the same commodity. They pocketed the difference -- around 18%.
The entities selling on spot and buying futures were planters or processors and members of the exchange. It turned out there were only 24 of them, and they used the paired contracts as a way to raise easy money.
When the trading was suspended, the investors were left holding contracts that the members couldn't buy because they didn't have the money to do so. On 14 August, NSEL proposed a payout plan, but it has been unable to stick to the schedule or even make one complete payout.
FMC, which has been recently authorized to monitor the settlement process of NSEL, blamed the exchange's board for deliberately allowing its members (or borrowers) to increase their exposure sharply despite the government's show-cause notice to it in April 2012.
It quoted Sinha as stating on 13 September that the exposure of the borrowing members went up from Rs.2,009 crore to Rs.6,762 crore between 30 March and 30 June.