NSEL case

NSEL case or NSEL scam relates to a payment default at the National Spot Exchange that occurred in 2013. The case is under investigation with the spotlight on the involvement of brokers,^[1][2][3] defaulters,^[4][5] investors^[6][7] and key decision makers.^[8][9] NSEL was promoted by Financial Technologies India Ltd. The payment default took place when the then commodities market regulator, the Forward Markets Commission (FMC) directed NSEL to stop launching any fresh contracts leading to an abrupt closure of the Exchange in July 2013.^[10]

Background

Three spot exchanges, NSEL, NSPOT and National APMC, were exempted by the government under Section 27 of FCRA to conduct forward trading in one day contracts. This was done to boost volumes so that their economic viability improved. While Financial Technologies (India) promoted NSEL was granted general exemption on June 5, 2007, NSPOT and National APMC received exemptions under the same provisions on July 23, 2008 and August 11, 2010 respectively.^[11] On the flawed recommendations of the FMC, the Ministry of Consumer Affairs ordered NSEL to settle all existing contracts and not launch any fresh contracts, which led to the crisis.

Investigations led by Enforcement Directorate (ED) & Economic Offences Wing (EOW) revealed the role of brokers & defaulters in the NSEL case.^[12] The brokers mis-sold NSEL products to their clients by assuring them fixed returns. The defaulters hypothecated stocks and produced fake warehouse receipts and siphoned the entire default money.^[13][14]

Initially, it was projected that there were 13,000 trading clients affected by the NSEL crisis. The genuineness & entitlement of these 13,000 trading clients is questionable as NSEL & other authorities repeatedly asked its members/brokers to furnish the Know Your Customer (KYC) details of all 13,000 trading clients, but it has not been furnished. In fact, they vehemently opposed it. Even the high power committee of Mumbai High Court also suggested that brokers should furnish this data to NSEL in order to protect interest of genuine claimants. Considering this aspect, SFIO which is also investigating the case, has recently asked brokers & trading clients to provide various information in a specific format which also includes KYC related information.^[15][16]

Anjani Sinha, the sacked CEO and the MD of the company, owned up the entire responsibility of the crisis in his first affidavit.^[17] However, Anjani Sinha after arrest retracted his earlier affidavit. Subsequently, after his release, Sinha admitted to the contents of his first affidavit in his statement to the Enforcement Directorate.^[18]

History

Pursuant to the then Prime Minister’s vision to create a single market across the country for both manufactured and agricultural produce, NSEL (National Spot Exchange Limited) was conceptualized in the year 2004. According to the Economic Surveys of the government done in 2003-2006, 3 consecutive years of survey also recommended setting up a national-level, integrated market for agricultural products, as did the planning commission, which was aware of the benefits of the spot markets. This was followed by the Rangarajan Committee, which too sought a national spot market.^[19] Following the invitation from Ministry of Consumer Affairs (MCA), the Multi Commodities Exchange Ltd. (MCX) which was earlier a sister company of NSEL, submitted a project report for establishing a nationwide spot market for commodities. NSEL was set up as a company incorporated under the Companies Act, 1956 on 18 May 2005 with its registered office in the State of Maharashtra. NSEL was incorporated by MCX and the nominees of FTIL. Subsequently, in view of the regulatory concerns between regulated commodities exchanges holding equity shareholding in spot exchanges, the shareholding of MCX and nominees were transferred and consolidated later in 2005 with FTIL. On 5 June 2007, NSEL was approved as a Spot Exchange by Department of Consumer Affairs (DCA). National Spot Exchange Limited (NSEL), commenced live trading on October 15, 2008, and was the first commodity spot exchange of the country. Within a few years, as many as six state governments issued licences under the model Agricultural Produce Market Committees (APMC) Act to NSEL, because their own APMCs mostly short-changed the poor farmers. NSEL turned out to be a boon for such farmers because they could now sell their produce at competitive rates and make better profits. NSEL also led to transparent spot price discovery leading to the growth of electronic spot markets. The Exchange was also promoted by National Agricultural Cooperative Marketing Federation of India (NAFED). In August 2011, FMC was appointed as the ‘designated agency’ to fill the regulatory vacuum in the commodities market. A series of bizarre actions by the FMC spooked the market and as a result NSEL had to suspend the trading of all contracts on July 31, 2013 ^[20]

EOW Mumbai Police Action

The EOW (Economic Offences Wing) of Mumbai police is presently investigating this crisis and the Mumbai police has conducted various raids. ^[21] 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 payment crisis. ^[22] 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. The ED has attached properties of defaulters, worth around Rs. 800 crores in NSEL case. ^[23] 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. ^[24]

Arrests by EOW Mumbai

The Economic Offences Wing of Mumbai Police arrested Jignesh Shah and Shreekant Javalgekar on May 7, 2014 on charges of non-cooperation ^[25] Reports however suggested that Shah was fully cooperative with EOW and had gone to EOW office 21 times against being summoned 7 times. Not only that, in order to facilitate the probe, NSEL had also deployed server in EOW office.^[26] Jignesh Shah was released on bail on August 22, 2014 by the Hon. Bombay High Court. The court observed that “…the names of 25 different companies who are the defaulters have been mentioned in the FIR itself. Thus, though projected scam of Rs. 5,600 Cr, the ill-gotten amount has not gone to the applicant (Jignesh Shah), or for that matter, to NSEL.^[27] The Enforcement Directorate arrested Jignesh Shah on 12 July 2016 for assisting NSEL defaulters in money laundering.^[28] A special PMLA court granted bail to Shah terming the arrest by ED was ‘illegal’.^[29][30] After hearing both sides, Hon. Judge P.R. Bhavake, Special PMLA Court, Mumbai, ruled: “The learned counsel for the ED failed to satisfy me that this arrest is for a separate crime… I do not find any force in the contention that the ED wanted to file a supplementary complaint against the applicant (Shah) in respect of the investigation made against him as Chairman of FTIL. The ED has come with specific averments that the applicant is not arrested in special PMLA case no 04/2015 but in other Enforcement Case Information Report (ECIR). The ED has failed to satisfy the Court how the applicant’s arrest is legal in different ECIR…..”

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. ^{[31] [32]}

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. ^[33] Jignesh Shah and Joseph Massey have also been booked in this FIR.However investors have complained that CBI has taken no action against politicians/bureaucrats involved in this scam. The CBI conducted searches at 15 locations to unravel the conspiracy to get Project & Equipment Corporation (PEC), a PSU, to trade on NSEL. The fraud by a group of people resulted in an alleged loss of Rs. 120.75 crore to PEC, said the CBI in a press release on 13 March 2014. The CBI agency conducted simultaneous searches at 11 locations, including offices of brokers, PEC officials and traders in New Delhi and Karnal. The CBI also registered a case against certain officials of PEC on allegations that the accused were party to a criminal conspiracy to cheat PEC. ^[34]

Role of the Ministry of Consumer Affairs, FMC & the UPA Government

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. ^[35]

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. ^[36]

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. ^{[37] [38]}

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. ^{[39] [40]} 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. ^[41]

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. ^[42] 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. ^[43] “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. ^[44]

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. ^[45] 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.

More than 100 brokerage firms have come under Securities and Exchange Board of India’s (SEBI) scanner for allegedly defrauding investors of over ₹4,000 crore in the NSEL case. While proceedings are already under way against five brokers (Anand Rathi Commodities, Geofin Comtrade, Motilal Oswal Commodities Broker, Phillip Commodities India Pvt. Ltd. and India Infoline Commodities), the regulator has identified 111 other brokerage firms under its jurisdiction for further possible action for allegedly defaulting on payments on the erstwhile National Spot Exchange Ltd (NSEL) platform. Out of these, SEBI will first initiate inspection of the ten biggest players by appointing an auditor, while action against the remaining 101 entities registered as stock brokers with the capital markets regulator would be taken after receipt of digital forensic audit from the Mumbai Police’s Economic Offences Wing (EOW), which has been probing the NSEL case.^[46][47][48]

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. ^[49]

Anjani Sinha's contradictory statements

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. ^[50] 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. ^[51]

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. ^{[52] [53]}

MCA’s move to take over FTIL’s 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. ^[54] 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, the then regulator of commodities markets. ^[55]

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. ^[56]

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. ^{[57] [58]}

Court quashes allegations against MCX

A Metropolitan Court quashed allegations of a 900 Cr scam at MCX. ^[59] This is the latest update in response to an earlier FIR filed by Mumbai Police raising questions of insider trading at MCX. ^[60] 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.^[61]

Charge sheets 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. ^[62] The EOW of Mumbai police has also filed chargesheet against Jignesh Shah which lists out how Jignesh Shah cooked the books of NSEL ^[63]

References