NSEL case

The NSEL (National spot Exchange Ltd) scam or NSEL fraud is a systematic fraud perpetrated in the commodity market on Jignesh Shah owned National Spot Exchange (NSEL) which is based in Mumbai, India.^[1] The NSEL is a company promoted by Financial Technologies India Ltd and the NAFED (only 100 shares given for misusing the NAFED brand who were touted as a co-promoter). The NSEL scam was a Ponzi scheme and is estimated to be a Rs. 5600 crore (around US$0.95 billion) fraud that came out to light after the National Spot Exchange failed to pay its investors in commodity paired contracts after 31 July 2013. ^[2] 13000 investors from India lost about Indian Rupees 5600 Crores when the fraud was discovered and it was found that NSEL had neither the money nor the stocks to pay them back.

Background

The Forward Markets Commission in July 2013 asked NSEL to stop all trades extending 11 days settlement (which were illegal). This led to less interest form investors and renewing their contract and the wheel of roll-over trades came to a halt as NSEL could not raise fresh investor funds to pay old investors whose funds were maturing. It was discovered after the exchange defaulted on 31 July 2013 that most of the underlying commodities did not exist and the buying and the selling of commodities like steel, paddy, sugar, ferrochrome etc. was being conducted only on paper. The pair trades in various commodities were offered in one-day forward contracts of T+2 and T+25^[3] (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 13000 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.^[4] 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.^[5] Anjani Sinha in his police statement however claimed that his wife Shalini Sinha is a small garment designer and the trades done by IBMA under the name SNP Designs were actually speculative trades done on MCX by Jignesh Shah himself. He also claimed there was no financial dealing between IBMA and SNP designs whatsoever. Surprisingly Anjani Sinha whom the promoters blamed as the main culprit was kept with NSEL by Jignesh Shah for almost 12–13 weeks after the scam as a 'special office recovery' showing the collusion between the two.

History

NSEL was promoted as a spot commodity exchange by FTIL and only token 100 shares were given to NAFED so that the brand of NAFED can be used and the exchange could be touted as a 'farmer's market'. Even before NSEL commenced business it was given a specific exemption from Forward Contracts Regulation Act (FCRA) 1952 by ministry of Consumer affairs in 2007 headed by Shri Sharad Pawar.This exemption was only for all one day forward contracts up to 11 days. Mr.Paul Joseph who signed this exemption later was known to have joined the FTIL group. The business between 2007-2009 was lackluster and that is when NSEL with full knowledge of Jignesh Shah and other board members introduced fraudulent 'paired contracts' where investors could buy short duration contract and sell a long duration contract at the same time (usually T+2 and T+25). NSEL in 2010 applied to FMC for registration of these NTSD (Non Transferable Specific Delivery ) paired contracts exceeding 11 days under section 14A of FCRA. The FMC did not approve or reject this application till the scam broke out in 2013. Without waiting for the FMC regulation approval or registration, NSEL went ahead and sold these contracts rampantly through brokers. The FMC-Ministry of consumer affairs fully knowing these contracts were illegal (they were collecting NSEL data from early 2012) did not stop them and let the scam balloon into an astronomical amount.

In early 2012 the FMC was appointed as 'designated agency' to collect data from NSEL and protect investors' interest. In April 2012 the Ministry of Consumer affairs issued a show cause notice to NSEL that it was violating the conditions of 2007 exemption like 'no short sale', 'no stock verification mechanism' and ' conducting trades beyond 11 days'. So from early 2012- July 2013 the FMC knew about fraudulent NTSD contracts rampantly being conducted without registration under section 14A-14B of FCRA but for reasons unknown did not act. NSEL kept operating outside the realms of law and in March 2012, it notched up a mind-numbing Rs. 45,500 crore (about 7.5 Billion USD) turnover, the highest ever monthly average.

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.^[6] 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.^[7] 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 Proteins 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 5 March 2014. Mr. Gupta tried various delaying tactics with EOW, NSEL and investors.

The EOW also arrested Rajesh Mehta of Swastik Overseas Ahmedabad who was one of the borrowers on 1 April 2014.

On 6 January 2014, the EOW of Mumbai's crime branch submitted its first chargesheet in connection with NSEL payment crisis. The chargesheet mentions the names of the following five accused:

• Amit Mukherjee (Former VP, Business Development at NSEL)
• Jay Bahukhandi (former AVP at NSEL)
• Anjani Sinha (Former Chief Executive of NSEL)
• Nilesh Patel (MD of NK Proteins)
• Arunkumar Sharma (Promoter & Director of Lotus Refineries)

In October 2013, EOW registered a case under the MPID Act in the NSEL scam. In the process, EOW attached defaulters' properties worth close to Rs. 4,500 crore across the country, and the MPID court initiated procedures to liquidate them so as to recover dues of depositors.^[8]

"The scope of the probe is huge.It has been going on since October last year. There have been numerous complaints from investors that the accused are moving around scot-free. We want to conduct the probe in the manner of the 26/11 case, and hence have formed a special investigation team. We have increased the number of investigators, compartmentalized responsibilities, and given them a target of four months," Maria said.^[9]

The EOW arrested defaulter borrowers Nilesh Patel (NK Proteins), Arun Sharma (Lotus Refineries), Surinder Gupta (PD Agro) and Indrajit Namdhari (Namdhari Foods). On 11 August 2014, the EOW recently arrested the following officials from six defaulting companies on NSEL.

• Kailash Aggarwal (Ark Imports)
• Narayanam Nageswara Rao (NCS Sugar)
• B V H Prasad (Juggernaut Projects)
• Varun Gupta (Vimladevi Agrotech)
• Chandra Mohan Singhal (Vimladevi Agrotech)
• Ghantakameshwar Rao (Spin-cot Textiles)
• Prashant Boorugu (Metcore Steel & Alloys)

Rajvardhan Sinha, ACP, EOW of Mumbai Police said in an interview that the defaulters were not forthcoming with information pertaining to certain money flows, etc. The investigating official felt that custodial interrogation would help in tracing the fund flow. "The maximum money has been invested in immovable properties, some money has been used for payment of previous debt and some has just disappeared in a sense that it has been spent. Rs. 5,600 crore is gone. But most of the amount has been turned into assets," Rajvardhan added.^[10]

Jignesh Shah's arrest by EOW Mumbai/involvement in the scam

The Economic Offences wing of Mumbai police finally arrested Jignesh Shah along with his trusted lieutenant Shreekant Javalgekar who were all along believed to be the masterminds of the scam on 7 May 2014.^[11] As per Mumbai police the arrests were required as Jignesh Shah and Javalgekar did not cooperate in interrogations. They diverted questions and always laid the responsibility on the former NSEL CEO although it was found that Jignesh Shah approved all the fraudulent contracts. The immediate cause of arrest of Jignesh Shah was his knowledge of various dealings of Indian Bullion Markets Association (IBMA)a subsidiary of NSEL which was predominantly used in money laundering and bogus trades. The investors' counsel on 16 June 2014 produced before MPID court hard evidence of involvement of Jignesh Shah in the scam. Various emails sent among Anjani Sinha, Shreekant Javalgekar and Jignesh Shah were produced before the court where there was a talk about dehiring NSEL warehouses to remove cost burden, profit adjustment and bogus profits received from NK protein -one of the key borrowers at NSEL.

in the charge-sheet filed by Mumbai police it was confirmed that Jignesh Shah knew about the scam and was actually the mastermind of it. It was also found that a group of companies called 'Rawal group' led by 'Dynamatic Developers Limited' traded on NSEL for 1352 crores and withdrew all investments before June 2013 just before the scam. La-Fin Financial Services Pvt Ltd (owned by Jignesh and the promoter of FTIL) had about 90% stake in Dynamatic Developers Ltd at one time. Another company Tezas Trading Limited also gave a 5 crore loan to NBHC (National Bulk Handling Corporation Ltd). The EOW I.O. confirmed in court that all these Rawal group companies were bogus with no genuine business.

In a fresh FIR filed in Delhi it is proven that Jignesh Shah and his brother Manjay Shah were a part of the NSEL conspiracy where along with dodgy borrowers (Mr. Jagmohan Garg of Mohan India here) they deceived investors into putting money in NSEL sugar showing bogus warehouses and warehouse receipts.^[12]

Allegation on investigative agencies

The investors of NSEL formed an organization by the name of NIF in the month of August 2013. However investors who were dissatisfied with brokers’ role in NIF formed a pure investors’ organization by the name of NIAG (NSEL Investors Action Group). The NIAG has written multiple letters to Enforcement Directorate and CBI alleging lax and compromised investigation.

Suspected foul play in detecting NSEL-FTIL email data/severs

There are serious allegations on Mumbai Police EOW of tampering with NSEL-FTIL email servers. While earlier it was confirmed by Rajvardhan Sinha of Mumbai EOW that the mail server of NSEL/FTIL has crashed and has been sent to Bangalore for investigation. Ketan Shah the man leading NSEL investors' association NIAG has leveled charges on the investigating agencies of misleading the court. The EOW of Mumbai Police has appointed Mahindra Defence Arm as the digital forensic auditor to probe the NSEL crisis. ^{[13] [14]}

CBI Action

In a show cause notice dated April 27, 2012, the Ministry of Consumer Affairs asked NSEL certain clarifications regarding the trades. NSEL promptly replied to this notice but for a year and half after the show cause notice, no action was taken by the Ministry. Instead, merely on the recommendation of the FMC, it ordered sudden and abrupt closure of NSEL on July 12, 2013. Shockingly enough, the same FMC did a U-turn, and on July 19, 2013 wrote to Department of Consumer Affairs (DCA) stating that the exemption notification was silent on whether the exemption was applicable to all or specific provisions of the FCR Act. As per the orders of the DCA, NSEL suspended trading on July 31, 2013. This sudden and abrupt closure of the Exchange market led to the payment default of Rs 5600 crore. ^[15]

In fact, NSPOT did not even reply to the show cause notice sent to it by the DCA. Still, no action was taken against it. On the other hand, unlike at NSEL which was directed on 12 July 2013 to close the running contracts on their maturity, and not to launch any fresh contracts, NSPOT was allowed a gradual closure over the next year and half. Had similar long-term arrangement been provided to NSEL, the payments crisis would not have occurred. ^[16]

Forensic audits by Choksi and Choksi

After petition by certain investors who wanted to derail the Eseries settlement by NSEL, the Bombay High Court directed the FMC to appoint a forensic auditor for Eseries products of NSEL. An audit firm by the name of Choksi and Choksi was given this assignment and their audit report had given a clean chit regarding the Eseries contracts on NSEL, which made the FMC give a NOC for Eseries settlement and over 40,000 genuine claimants of Eseries benefitted eventually. ^{[17] [18]}

The role of the Promoters/FTIL/Jignesh Shah

Various courts including the Bombay High Court and investigative agencies probing the case have stated that no money trail has been traced to NSEL, FTIL or its promoters. The entire default amount has gone to the 24 defaulters/borrowers. ^{[19] [20]} Jignesh Shah also came on TV on 5 August 2013, and promised a financial settlement. Mr. Jignesh Shah also promised a committee of three to look into the scam. ^[21]

The role of Brokers/Arrests

SEBI has issued show-cause notices to the top five brokers namely Anand Rathi Commodities, India Infoline Commodities (IIFL), Geofin Comtrade, Motilal Oswal Commodities, and Phillip Commodities, on charges of mis-selling NSEL contracts by promising assured returns without ensuring delivery. ^[22] Since the brokers have also been accused of indulging in massive manipulation of client KYCs, large-scale modification of client codes for doing multiple deals and infusion of unaccounted money through their NBFCs, SEBI has asked them as to why they should not be declared not “fit and proper” since they were found to have violated securities regulations. In the notice, SEBI, has conveyed to these errant brokers that ‘it is alleged that your continuance as a market intermediary in the securities market is detrimental to the interest of this market…’ In the first show-cause notice, the allegations include several irregularities/violations such as false assurances to investors, wrong and misleading statements, arbitrage products sold with assured returns and as risk-free products, funding of clients and client code modification for those trading on NSEL. ^[23] “For grant of certificate of registration, the application has to be a fit and proper person in terms of regulation of the Stock Brokers Regulations, read with Schedule II of the SEBI (Intermediaries) Regulations, 2008. Further, the conditions stipulate that the stock broker shall at all times abide by the rules, regulation, byelaws of the stock exchange and code of conduct as specified in Schedule II of the stock exchange regulations...it is alleged that your continuance as a market intermediary in the securities market is detrimental to the interest of this market," the SCN states. “Therefore, it is alleged that you are no longer a ‘fit and proper' person for holding the certificate of registration in the securities market." In the second show-cause notice, media reports said, SEBI sent notices to five broker firms, as it was not satisfied with the explanation offered by them on allegations of mis-selling. The SEBI officers have formed an opinion that the brokers should not be granted licences for commodity business. ^[24]

The Economic Offences Wing (EOW) of Mumbai Police also found evidence of large scale irregularities on the part of these brokers in the NSEL case. A forensic audit by the EOW also revealed hawala transactions, benami trades and client code modifications by these brokers. The NSEL Investors' Action Group (NIAG) – a forum of NSEL investors requested the EOW to take strict action against these brokers who “falsely sold NSEL as an 'arbitrage product.' Several key brokers including Motilal Oswal undertook Power of Attorney to buy/sell/receive/deliver NSEL commodities on behalf of the investors and also opened DMAT (dematerialized) accounts to handle warehouse receipts of commodities in electronic form. “These brokers have also been accused of criminal breach of trust for parting with investors' monies without securing warehouse receipts as promised," the NSEL investors said in a letter to the Commissioner of Mumbai Police. The Hon. Bombay High Court in its judgment dated August 22, 2014 also observed that "…brokers do have their own legal team and a full knowledge of how the market operates. The legalities of the transactions were quite expected to be known to the brokers … the brokers being quite experienced, and the investors being informed persons, it is apparent that the issue of illegality of the transactions raised by them is not out of their concern to adhere to legalities, but in order to project the applicant (Mr Jignesh Shah) as the main offender, rather than the defaulting parties. ^[25] On March 3, 2015, the EOW, Mumbai arrested 3 top brokers in the NSEL case. Those arrested were Amit Rathi, managing director of Anand Rathi Financial Services Ltd; C P Krishnan of Geojit Comtrade Ltd; and Chintan Modi of India Infoline Ltd (IIFL).The three were charged with mis-selling NSEL products, cheating, forgery and criminal conspiracy, among other charges.

Role of auditors/Mukesh P Shah

Mukesh P Shah who is a maternal uncle of Jignesh Shah has been internal as well as external auditor of NSEL from time to time. Mumbai police while opposing his anticipatory bail confirmed that he was doing insider-trading in FTIL shares and by virtue of possession of FTIL shares alone he should have been disqualified as an auditor. Besides,Mumbai police has confirmed that most companies of 'Rawal Group' where La Fin Financial Services P. Ltd. (promoter of FTIL) had a stake were registered at NSEL at the address of Mukesh Shah and Mukesh Shah was the auditor of all these companies which traded on NSEL to the tune of 1352 Crores and moved out in May–June 2013 without losing a penny showing their knowledge of the scam. ^[26]

Anjani Sinha's custodial statement

Anjani Sinha, the sacked CEO and the MD of the company, confessed and owned up the entire responsibility of the crisis in his first affidavit. However, after his arrest, he did a complete U-turn retracting his earlier affidavit. In his custodial statement to the EOW authorities, Anjani Sinha squarely blamed Jignesh Shah and even called him ‘mastermind’ of the entire crisis. Sinha also claimed that Shah forcibly took away the passports belonging to him and his wife and made them sign confessional statements which were allegedly drafted by FTIL. ^[27] However, later on, in a statement to the Enforcement Directorate, Sinha disowned his custodial statement to the EOW and admitted to the contents of his first affidavit. ^[28]

NSEL–FTIL merger

On 21 October 2014, invoking Sec. 396 of the Companies Act, 1956, the Ministry of Corporate affairs announced a draft order for merger of NSEL, a subsidiary of FTIL. All stakeholders were given 60 days to report to MCA. FTIL challenged this merger in Bombay HC. Hearing an application filed by the government, the Bench comprising Justices SC Dharmadhikari and BP Colabawala granted the govt time till 15 February 2016. On 12 February 2016, the MCA passed the final order of merger between FTIL and NSEL. This order has been challenged by FTIL in Bombay High Court and it is stayed till the arguments will be heard on merit. Based on MCA’s own circular dated April 20, 2011, it is a known fact that for any merger to materialize, permission of 100% shareholders and 90% creditors needs to be obtained. By forcing the merger on 63,000 shareholders of FTIL without so much as giving them a chance to consent/object to the amalgamation, MCA not only went against its own circular but also against Article 14 of the Constitution. The forced merger violates the sacrosanct concept of ‘limited liability’ and is not in public interest. Third, the “corporate veil” between NSEL and FTIL cannot be lifted until the so-called “parental fraud” by FTIL is proven in a court of law. The issue is currently sub judice. ^{[29] [30]}

MCA's move to take over FTIL board

On 28 February 2015, even as the MCA had gone ahead with its idea of forced merger, it moved a petition before the Company Law Board now known as the National Company Law Tribunal (NCLT) to take over the board of FTIL and replace it with govt. nominated directors. FTIL challenged this, too. On 30 June 2015, the NCLT barred FTIL from selling its assets which was promptly stayed by the Madras High Court on appeal by FTIL. However, on 19 April, the Supreme Court reversed this stay and froze all assets of FTIL barring day to day expenses. ^[31] It is noteworthy that it is unlawful to takeover and regulate the affairs of a listed Company based on erroneous assumptions, that too, after almost 20 months without ascertaining the alleged ‘oppression’ and ‘mismanagement’ under Sec 397 & 398 of the Companies Act, 1956. The MCA also invoked Sections 401, 402 and 408 requesting NCLT for takeover or dissolution of FTIL Board. Interestingly, the Union Ministry of Law and Justice, in its opinion dated June 4, 2014, clarified that the said sections are not applicable to FTIL-NSEL case. Sharing his legal opinion with the MCA, the deputy legal advisor in the Ministry of Law and Justice, said that “Section 397 might not apply as NSEL which is (almost) wholly owned subsidiary of FTIL and NSEL’s majority shareholders (i.e. FTIL) have never acted in any manner which could be termed as ‘oppressive’ against the minority shareholder of the company. Section 398 might also not be applicable as fraud and acts and mismanagements were allegedly done by the key officials and employees of NSEL and not FTIL and different statutory auditors have issued clearances to them.” NSEL also made necessary changes in its management and board after the crisis came to light. Despite this, the MCA has sought to replace the reconstituted Board of FTIL when no wrongdoing is found. This is seen as a clear attempt to suppress / destroy the evidence against the errant brokers and FMC, then then regulator of commodities markets. ^[32]

Financial Intelligence Unit (FIU)'s Observation

FIU (under Finance Ministry) held that NSEL came under the purview of Forward Contracts (Regulation) Act (FCRA) and therefore guilty of failing in several of these obligations under the law. The black money watchdog has slapped a penalty of Rs 1.66 crore for several counts of violating the provisions of Prevention of Money Laundering Act (PMLA) on NSEL. The watch dog further held that failures is deliberate and willful and hence, invite penalties. NSEL is fined Rs.1 lac for each failure and the collective fine was Rs.1.66 crore. ^[33]

Action by Enforcement Directorate (ED)

The ED has attached properties worth around 800 crores in NSEL scam. On 13 July 2016 the ED arrested Jignesh Shah under PMLA (Prevention of Money Laundering act). The ED attached shares of businessman Jagmohan Garg worth Rs 201 crore in Hotel Radisson Blu Hotel in Delhi. ^[34]

SFIO Probe

The Government of India ordered SFIO (Serious Fraud Investigation Office) probe on FTIL and its 18 associates, brokers and defaulters pertaining to irregularities on NSEL. SFIO has sent a 6-page questionnaire to all the trading clients in NSEL demanding to know whether brokers played a role in ‘inducing’ them to trade in the commodities. The SFIO has also queried trading clients on alleged non-payment of value-added tax at the time of trading. ^{[35] [36]}

Court quashes allegations against MCX

A Metropolitan Court quashed allegations of a 900 Cr scam at MCX. ^[37] This is the latest update in response to an earlier FIR filed by Mumbai Police raising questions of insider trading at MCX. ^[38] The court in its findings cited an audit report conducted by PWC, ruling that it was based on hearsay and dismissed the protest petition. It however accepted the C-summary report filed by the investigating officer.

Sucheta Dalal's knowledge of NSEL scam

It was discovered that even 15 months before the NSEL scam went public, India's leading financial journalist Sucheta Dalal knew all major aspects of the fraud.An email dated 8 May 2012 from Sucheta to Jignesh Shah, Anjani Shah etc. came in public domain which revealed that Sucheta knew about illegality and lack of safety of NSEL product. A complaint has been filed with Mumbai police by NSEL Investors' Action Group to investigate Sucheta Dalal's role. Sucheta knew about illegality of contracts, role of IBMA and the fact that the warehouses were in so called borrowers' own premises.^[39]

Chargesheets by Agencies in NSEL case

The CBI has filed a charge sheet against FTIL, Jignesh Shah, NSEL and various shell companies in NSEL scam matter. ^[40] The EOW of Mumbai police has also filed chargesheet against Jignesh Shah which lists out how Jignesh Shah cooked the books of NSEL ^[41]

References