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.