Living Dangerously

Despite the National Spot Exchange (NSEL) scam running into a whopping Rs 5,600 crore, and its details out in the open, the authorities seem reluctant to act. While arrests have been made in all major scams—from Hawala to 2G to Coalgate—Jignesh Shah, the alleged kingpin behind the multi-crore NSEL scam, continues to roam freely. After the gfiles story in June 2013, NSEL operations were halted. But investigations began only after the gfiles cover story in September 2013. Still, Jignesh Shah roams scot-free. Sources disclose that Shah has engaged some of the best lawyers in the country to pre-empt any government move to arrest him. Is the law for scamsters or for exposing the truth? Neeraj Mahajan analyses the scam and brings the latest updates on the developments taking place in the law enforcement agencies and the Ministry of Consumer Affairs. NEERAJ MAHAJAN
Enter Vol.

Jignesh-Shah-NSELTHERE is a saying in Gujarati that if your mother is serving and even if you are way behind in the queue – the least you can expect is an extra ladoo (sweets) in your plate. This explains why both Jignesh Shah and Ketan Parekh are managing to hoodwink the law even after committing grave financial crimes. Unlike Harshad Mehta, Hasan Ali and A R Telgi, Shah and Parekh have managed to evade the law because of their political connections.

“NSEL fraud makes the Harshad Mehta scam look like child’s play. Mehta, at best, cheated a few banks, while NSEL has eroded the confidence of the entire nation in electronic commodity or stock exchange platforms,” quipped a commodity broker.

Jignesh Shah managed to retain his position by convincing the MCX board to allow him to stay on for some time? Till the last minute, it was expected that Shah would step down owning moral responsibility for all that has happened. But, till date, there is no sign of Shah’s arrest or ban on the unlawful trading activities in La Fin, FTIL, MCX, MCX-SX, NSEL and other companies in his group. So far, only those who owe him money or those to whom he owes money seem to be feeling the heat of the investigations. The only aberration to this rule has been how Shah, Joseph Massey (MD MCX-SX) and Shreekant Javalgekar (MD MCX) were forced to resign from the board of MCX-SX a fortnight ago.

Frankly, would you call a person or company that has been accused of being ‘dishonest’, involved in insider trading, making false claims, holding unproven deposits in client account, unaccounted brokerage income, unexplained cash and jewellery, ’fit and proper’ to run commodity or equity exchanges?

Looking at it purely from a management or governance perspective, does the promoter, who appoints people to run his company, have no responsibility towards the stakeholders that he took the right decision by selecting and monitoring the right people? Similarly, what would you call a company whose Managing Director, Assistant Vice-President, Business Development, and Assistant Vice-President, Warehousing, are cooling their heels behind bars for allegedly defrauding some 13,000 investors?

PRELIMINARY investigations by the Income Tax authorities seem to suggest severe lapses, mismanagement, cheating, criminal breach of trust, conspiracy and forgery at NSEL. It was not functioning as a spot exchange as it was supposed to be. “If the NSEL management and Board of Directors say that they failed to see piles of bounced cheque and forged warehouse receipt right on top of their table, they are either incompetent or impractical,” says a broker.

A few other instances of misdemeanours of the company are:

  • NSEL was offering future contracts, even though spot exchanges are not supposed to do so.
  • The FTIL software, being used at its own exchanges, has been found to be rigged.
  • NSEL seemed to be making false claims about highest safety with 100 per cent stock collateral, 10-20 per cent margin money and post-dated cheques. These were empty promises.
  • NSEL was making false claims about holding licenses to operate in nine States, including Maharashtra. The fact is that Maharashtra Agriculture Department cancelled NSEL’s direct marketing license on December 26, 2012. · What else do you call a company that announced a payout plan on August 14, but was unable to stick to schedule even once and defaulted on payment schedule ten times in a row. That’s when NSEL holds over 90 per cent market share of National Bulk Handling Corp Ltd, which runs the nation’s largest warehousing facilities.
  • A handful or tradeers inside NSEL were cornering all the paired contracts. They were just paying the difference in prices between the spot and futures contract for the same commodity.
  • According to an FTIL official, who resigned in 2005, the mandatory margin money was not being collected from all those using the MCX and NSEL platforms. Apart from this, positions of some of the investors were being revealed to others, giving them an unfair business advantage. This has been corroborated by the fact that Anjani Sinha’s wife, Shalini Sinha’s company, SNP Designs, was allowed to trade worth Rs 40,000 crore on MCX without paying any margin. The heavy losses were written off. Apparently, SNP also had business relations with Mohan India, one of NSEL’s largest debtors.

SO far as the High Networth Individual (HNI) investors are concerned, the moot question is: are they as sinned against as they claim? Why did they take advantage of the corrupt system till the going was good, and are complaining now when they lost money?

“They were using NSEL as a private club. HNI investors all along knew what they were getting into when they started trading in these unregulated exchanges. If the exchange was functioning without the oversight of an independent board of directors, the brokers were party to it. Why are they complaining now?” asks Shriram Subramanian, MD, InGovern, a corporate governance research firm.

So far as the High Networth Individual (HNI) investors are concerned, the moot question is: are they as sinned against as they claim? Why did they take advantage of the corrupt system till the going was good, and are complaining now when they lost money?

Another big question is what happens to the money. The NSEL Investor’s Forum officials say that they are working with the Economic Offences Wing (EOW) and others to recover the money. They are sadly mistaken if they think that the EOW and the Income Tax authority’s job is to recover money at their behest and hand it to them. First, in a white collar crime, money recovered becomes the case property which needs to be produced as evidence. It cannot be handed over, even to the rightful owner, till the case is finally disposed off or the court orders to do so. Second, criminal investigation wing of the Mumbai Income Tax department is asking investors to produce evidence about the source of their funds and whether they paid tax on the income from commodity trading. Some of the other details being sought are about brokerage and commissions’ transactions for investments in the spot exchange. This is proving to be a booby trap, as failure to provide the details sought can lead to fine of up to Rs 10,000 under Section 272 (1) (c) of the I-T Act.

“Law enforcement agencies are not recovery agents to recover money from defaulters of defaulters. Tomorrow, if Dawood gives you a list of people who owe money to him, you may not allow him to go free till the last of his borrowers has paid him his due. Jignesh Shah too should not be allowed to go free. You are setting a wrong precedent,” said a senior Delhi Police officer.

Significantly, this is not the first time FTIL promoters or employees have been accused of serious penal offenses. Immediately after MCX became the first exchange in India to initiate evening sessions to coincide trading with Tokyo, Shanghai, London, New York exchanges, the Central Board of Excise and Customs (CBEC) issued a notice under section 15 of the central Excise Act, 1944. The case is still pending. This apart, as many as three criminal cases are pending against Joseph Massey and one against C Subramanian, one of the longest serving Non-Executive Director and shareholder of FTIL, who initially promoted a company called Worldwide Technologies. The company€™s latter avatar is today called Financial Technologies.

Anil Lal Chetta filed a criminal case (No. 1909/02) against Subhash Dalal (Director) and Joseph Massey (Executive Director), Vadodara Stock Exchange, for illegally declaring him “defaulter” and auctioning his membership. The case is pending before the Chief Judicial Magistrate in Vadodara.

In another case, the Government Labour Officer, Vadodara, filed a criminal case (No. 1831/97) against Joseph Massey and Vadodara Stock Exchange for noncompliance of Minimum Wages Act and non-filing of annual returns. This case is also pending before the Judicial Magistrate, First Class, Vadodara.

Similarly, Harish Chand Jain filed a criminal case (No. 1288/2003), alleging that Joseph Massey, the then Managing Director of the Inter-connected Stock Exchange of India, and other officials were refusing to refund the admission fees and connectivity charges paid by him at the time of membership. This case is pending before the Chief Judicial Magistrate, Agra.

In yet another instance, the CBI reportedly filed a criminal case against C Subramaniam (No. 16/2001) under the negotiable Instruments Act, 1871, for attempting to defraud Central Bank of India, Janpath branch. The case is being considered by the CBI Special Court, Tis Hazari, New Delhi.

Apparently, one of the reasons why Shah has not been touched so far is reportedly because of an understanding between the Congress at the Centre and Sharad Pawarâ’s Nationalist Congress Party (NCP) in Maharashtra.

“Someone close to Pawar is believed to have invested lot of money in Jignesh Shahâ’s company, which he suddenly withdrew and this may be the reason why MCX’s settlement guarantee fund suddenly shrunk in size,” sources said.

Board-Of-DirectorsANOTHER twist in the tale is how former MD and CEO of NSEL Anjani Sinha denied the August 14 affidavit and claimed to have “filed it under duress.” Sinha is now saying that he was made to sign the old affidavit by the NSEL board, in the office of the exchange.

This seems to coincide with the version of former NSEL Assistant Vice-President, Business Development, Amit Mukherjee’s claim that he and others were made scapegoats to save Shah and other “influential people” who were involved. Both Mukherjee and Jai Bahukhandi are in police custody and have agreed to become prosecution witnesses.

Meanwhile, the EOW arrested Nilesh Patel, the son-inlaw of Shankarlal Guru, who resigned as the chairman of NSEL. Patel is the managing director of NK Proteins Limited, the biggest of the 24 borrowers of National Spot Exchange Ltd (NSEL). Patel’s company allegedly raised funds from NSEL on the pretext of a castor seed contract, without depositing any collateral in the warehouses. This money was allegedly siphoned off to fund a joint venture for export of castor oil with a Gujarat-based industrial house. NK Proteins, which owes around Rs 930 crore to NSEL, apparently had no intensions of returning the money, sources said.

Meanwhile, enquiries by the Forward Markets Commission (FMC) have revealed over 2,000 instances of mismanagement in the exchange over the past few years. This is bad news for Shah, whose name figures among the key management personnel of the spot exchange between FY06 and FY12 and was only dropped in 2012-13. He was the key management personnel in 2009 when the decision was taken to go ahead with “paired contracts”—against the rules for spot exchanges was taken. Interestingly, this list kept shrinking every year and Anjani Sinha was the only person in the list in 2012-13. It is reliably learnt that in 2007 some highly placed IRS officers observed instances of bungling in the Jignesh Shah empire. Based on their tip-off, an Income Tax “™search and seizure”™ operation was conducted on Shah, FTIL, MCX, their other directors and brokers on June 19, 2007.

Based on a tip-off, an Income Tax ’search and seizure’ operation was conducted on Shah, FTIL, MCX, their other directors and brokers on June 19, 2007

FOLLOWING the raid, MS Sahoo, the then Director (Securities) in the Finance Ministry, wrote a confidential DO to MS Roy, ED of SEBI, enclosing documents received from the Central Board of Direct Taxes. “Though the above documents do not provide final findings, these provide adequate basis to conclude prima facie that Financial Technologies, MCX and Jignesh Shah are not fit and proper to acquire shares in stock exchanges.” He was referring to a bid by Shah to acquire 5 per cent stake in the Delhi and Vadodara stock exchanges.

“Sebi is advised to defer any proposal to acquire shares in stock exchanges by these entities, until CBDT issues a show cause notice to them or clears them of any tax liability,” he advised further

Strangely, one of the annexures in Sahoo’s note was a letter dated from SSN Moorthy, Director-General Income Tax (Investigation), addressed to the Member Investigation, Central Board of Direct Taxes, giving details of the amount or assets seized from FTIL, C Subramanium (Director, FTIL), Reymount Commodities (commodity broker), AM Futures (commodity broker) and RJ Commodities (commodity broker).

Curiously, SEBI chief general manager D Ravikumar, while overruling Sahoo’s concerns, wrote, “initiation of an enquiry may not by itself disqualify the concerned entity from being considered as fit and proper, especially when the outcome of such an enquiry is not known”.

Advisory-BoardAccording to reliable sources, the 2007 income tax raid itself was stage-managed. The main purpose of the raid was not to recover money and assets, but to trouble Shah enough to make him arrive at an unofficial settlement. One of the officers behind the raid is an informal “economic trouble-shooter”™ for Shah while another is holding an important post in SEBI today, sources said.

Though the raid was targeted on FTIL, MCX and Shah, no undisclosed income was claimed to be recovered from them. Only Rs 1 crore was claimed to be seized from FTIL and Rs 1.15 crore from C Subramanium, in addition to Rs 17 lakh from AM Futures and Rs 38 lakh from RJ Commodities.

On its part, FTIL was charged with withdrawing a bogus claim of Rs 18 crore in depreciation, while Reymount Commodities, owned by a Dubaibased NRI businessman, was accused of accepting unproven cash deposits of Rs 15 crore from 856 people across the country whose “identity and creditworthiness” could not be proved.

Interestingly, one of the entities under the income tax scanner in 2007 was also found to be involved in the Kochi IPL fiasco. But Reymount Commodities, having its registered office in Chennai and another office opposite the Police Commissioner’s Office in Pune, deserves a special mention. Though the company, promoted by Muhammed Abdul Kareem Faisal PV, PV Shamusudeen and K Satya Prasad, was suspended on July 7, 2007, “for various violations/ irregularities”, its website still claims to be “a prime member in MCX India”. According to sources in the Intelligence Bureau, the company is allegedly involved in helping banned Islamic terrorist outfits like SIMI and Indian Mujahideen to regroup and form a combined base in Kerala. With such dubious friends and associates, Shah can be anything but fit and proper.

But the issue is, who will pierce the corporate veil. Technically, though FTIL holds almost 100 per cent in NSEL, both are different companies and the promoters of NSEL and FTIL are common. But, since the promoters are common, they should at least be held accountable for their lapses. gfiles end logo

COVER STORY / scam / nsel

VOL. 7 | ISSUE 8 | NOVEMBER 2013


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