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    The Nsel Scam

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    Sampada Venkatesh
    1. The NSEL scam involved fraudulent paired commodity contracts on the National Spot Exchange resulting in a Rs. 5600 crore fraud. Jignesh Shah and the directors of Financial Technologies are alleged to have known about the illegal contracts but did not take action to stop them. 2. It was discovered in July 2013 that the underlying commodities for many contracts did not exist, and NSEL did not have the funds to pay investors who had honored earlier contracts. Around 15,000 investors lost money in the scam. 3. Jignesh Shah was arrested in May 2014 as evidence indicated he knew about and approved the fraudulent contracts. Investors have filed lawsuits and complaints against NSEL and Shah over the losses from the

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    The Nsel Scam

    Uploaded by

    Sampada Venkatesh
    298 views6 pages
    1. The NSEL scam involved fraudulent paired commodity contracts on the National Spot Exchange resulting in a Rs. 5600 crore fraud. Jignesh Shah and the directors of Financial Technologies are alleged to have known about the illegal contracts but did not take action to stop them. 2. It was discovered in July 2013 that the underlying commodities for many contracts did not exist, and NSEL did not have the funds to pay investors who had honored earlier contracts. Around 15,000 investors lost money in the scam. 3. Jignesh Shah was arrested in May 2014 as evidence indicated he knew about and approved the fraudulent contracts. Investors have filed lawsuits and complaints against NSEL and Shah over the losses from the

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    ABT THE NSEL SCAM AND JIGNESH SHAH ARREST

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    1. The NSEL scam involved fraudulent paired commodity contracts on the National Spot Exchange resulting in a Rs. 5600 crore fraud. Jignesh Shah and the directors of Financial Technologies are alleged to have known about the illegal contracts but did not take action to stop them. 2. It was discovered in July 2013 that the underlying commodities for many contracts did not exist, and NSEL did not have the funds to pay investors who had honored earlier contracts. Around 15,000 investors lost money in the scam. 3. Jignesh Shah was arrested in May 2014 as evidence indicated he knew about and approved the fraudulent contracts. Investors have filed lawsuits and complaints against NSEL and Shah over the losses from the

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    298 views6 pages

    The Nsel Scam

    Uploaded by

    Sampada Venkatesh
    1. The NSEL scam involved fraudulent paired commodity contracts on the National Spot Exchange resulting in a Rs. 5600 crore fraud. Jignesh Shah and the directors of Financial Technologies are alleged to have known about the illegal contracts but did not take action to stop them. 2. It was discovered in July 2013 that the underlying commodities for many contracts did not exist, and NSEL did not have the funds to pay investors who had honored earlier contracts. Around 15,000 investors lost money in the scam. 3. Jignesh Shah was arrested in May 2014 as evidence indicated he knew about and approved the fraudulent contracts. Investors have filed lawsuits and complaints against NSEL and Shah over the losses from the

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    THE NSEL

    SCAM
    NAME: SAMPADA VENKATESH
    ROLL NO: 34
    CLASS: PGDM 2013-15

    ABOUT NSEL
    The NSEL scam or NSEL fraud is a systematic and premeditated fraud
    perpetrated in the commodity market on the National Spot Exchange that
    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). The NSEL scam 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 pair contracts after
    31 July 2013
    NSEL was promoted as a spot commodity exchange by FTIL and a 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.

    THE SCAM
    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 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 honoured 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-inlaw 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. 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 1213 weeks after the scam as a 'special office
    recovery' showing the collusion between the two.

    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.
    Jignesh Shah's arrest /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 whle actually it
    was found that Jignesh Shah approved all 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 is 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 1252 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.

    NSEL Investors' Action / Grievances


    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). NIAG has submitted a strong letter to
    the EOW Mumbai to investigate the role of Jignesh Shah and FTIL. Many
    writs, PILs, Suits have been filed in Mumbai HC against NSEL/FTIL and
    Jignesh Shah.

    NSEL - FTIL merger


    On 21 October 2014 the Ministry of Corporate affairs announced a draft
    order for merger of NSEL which is the subsidiary company with its holding
    company ,viz., FTIL. The govt by announcing this merger has exercised its
    power under sec. 396 of the Companies Act,1956. All stakeholders have
    been given 60 days to report to MCA and the order may get finalized after
    this. As of now FTIL has challenged this merger in Mumbai HC before the
    bench of Mr. V M Kanade.
    MCA's move to take over FTIL board
    On 28 February 2015,The ministry of corporate affairs convinced about
    FTIL's fraudulent activities, moved a CLB application to take over the
    board of FTIL and replace it with govt. nominated directors. This move is
    being contested by Jignesh Shah appointed FTIL board.
    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 companys
    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. Jignesh Shah was finally arrested by
    Mumbai EOW on 7 May 2014. FTIL has sold 15% stake of MCX to Kotak on
    20 July 2014. Subsequent to a High Court directive the FMC got a
    monitoring and Auction committee(MAC) formed to dispose-liquidate
    assets of NSEL and defaulting borrowers which had to be disbanded in
    September 2014 as NSEL was bereft of resources and could not recover
    anything substantial.

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