Governance

NSEL, the endgame and guinea pigs

More twists have emerged in the Rs. 5,600-crore NSEL scam. Fresh evidence suggests that many companies and organisations like Apian and IBMA were used as fronts to launder money in the scam GOVERNANCE / NSEL / scam / by Neeraj Mahajan
Vol. 13 | ISSUE 10 | JANUARY 2020

NSEL-VICTIMA fresh round of evidence indicates how the masterminds behind the Rs. 5,600-crore NSEL scam allegedly manipulated fronts like the Apian Finance and Investments Limited (Apian) and Indian Bullion Market Association (IBMA)—a consortium of leading bullion and jewellery merchants—as guinea pigs to maximise their own profits. The outcome was that while FTIL/NSEL raked in profits worth crores is a short spell of time, Apian, IBMA and a number of such companies were deliberately left high and dry.

Officers investigating the case are in particular intrigued at the manner in which the NSEL management ensured that NSEL held 49 per cent shares in IBMA but did not cross 50 per cent, lest IBMA became a subsidiary company of NSEL. This was to ensure that IBMA remained a separate company.

The modus-operandi for this was to make shareholders of IBMA sell their shares to NSEL without mentioning it in black and white. NSEL retained the shares without transferring them in its favour and resold such shares in favour of another prospective buyer (PB). Since shares purchase by NSEL and resold to PB did not attract any provisions of companies Act, its holding did not go above 50 per cent as long as shares were not transferred in its favour. Strictly in legal terms NSEL did not become a holding company till the shares were not transferred in its name. However, this involved fudging of NSEL’s books of accounts to disguise NSEL’s role in purchase and sale of IBMA shares. This was as per the path suggested by Naishad Desai and NSEL chartered accountant Mukesh Shah.
The detailed strategy behind this was elaborated in an email message dated July 26, 2011, sent by National Spot Exchange Ltd Chief Financial Officer Shashidhar Kotian to Devendra Agrawal and copied to Anjani Sinha and Financial Technologies (India) Ltd Director Finance ShreekantJavalgekar.
As per financial whirlpool worked out by them in consultation with each other:

  1. NSEL paid Rs. 2 crore to FTIL towards repayment of loan
  2. FTIL paid Rs. 2 crores to Apian as Capital
  3. Apian paid Rs. 2 crore to Mukesh Shah’s company as loan
  4. Mukesh Shah’s company paid Rs. 2 crore to NSEL for buying 20 lakh shares of IBMA at Rs. 10 each
  5. NSEL bought Rs. 2 crore worth of shares of IBMA from bullion dealers

THE overall game plan behind all this was to buy stake in IBMA using entities like auditor MP Shah’s company and avoid going over the 49 per cent shareholding in IBMA. It is worth mentioning that out of the total Rs. 5,600 crore due to the NSEL investors, IBMA’s liability amounted to approximately 20 per cent. i.e. Rs. 1,170 crore.

InvestigationThere are a number of issues which suggest an unholy alliance between IBMA and NSEL. The biggest proof that something shady was going on between the two is the manner in which NSEL went out of the way and desperately to arrange an Rs. 100-crore loan for IBMA a day before it was asked to close down the exchange. The purpose of the loan is not known but it is evident that IBMA also needed these funds desperately to meet its obligations.

Investigations also reveal that NSEL had a login ID in the name of IBMA which it itself used to trade on its own exchange (see box). IBMA reportedly used the login and password of Shiv Sahai for trading on MCX/NSEL. IBMA traded at Kadi for farmers where terminal was operated by NSEL. The motive behind all these was to generate ‘unaccounted’ income. This wasn’t a foolproof option and often back-fired, for instance NSEL incurred heavy losses when it made cash payments to farmers to purchase of agriproducts through IBMA. IBMA had a VAT registration, which many brokers do not have; hence they used IBMA to trade on NSEL exchange.

According to sources NSEL acting
as a quasi NBFC and funded IBMA to settle its own payment obligations. IBMA received funds from defaulters without any justified service rendered. For instance:

  • LOIL paid Rs. 22.50 crore as consultancy fees
  • Mohan Infracon paid Rs. 10 crore to camouflage the involvement of M/s SNP Designs Private Limited (a company in which Anjani Sinha’s wife was a Director)

Likewise Apian an NBFC was allegedly used for funding IBMA and NSEL investors. Allegedly Jignesh Shah, ShreekantJawalgekar and Devendra Agrawal were among the key strategists who devised the plan. Agrawal was a director of Apian.

From: Arpan Jain/NSEL/Business Development
Sent: Saturday, September 19, 2009 2:59 PM
To: Ramalingam M/MCX/Market Operations
Cc: Anjani Sinha/NSEL/CEO; Dipak Shah/MCX/Market
Operations; Lamon R/MCX/MD & CEO
Subject: FW: Trade details of MCX
Dear Sir,
As you are aware that IBMA is our group company only.
IBMA has taken one user ID from oneof the prestigious
member of MCX. Please provide the trade details of the
following user IDsince 26th August, 2009 to till date.
Please note that this User ID belong to IBMA.
Member ID: 10170
USER ID: 18767
Thanking you for your kind cooperation.
Arpan Jain
Assistant Manager – Business Developement
National Spot Exchange Ltd.
Phone: +91 – 22 – 67619900 Ext.: 9991
Fax: +91 – 22 – 67619931
Mobile: +91 9930267952
E-mail: arpan.jain@nationalspotexchange.com
URL: www.nationalspotexchange.com

According to sources, Apian was used as a conduit to increase NSEL’s shareholding in IBMA and give out loans to NSEL directors Jo-seph Massey and Sunil Khairnar (Rs. 4.5 crore). Khairnar states that he was a director for a short term. He also claims that he was never in-volved in the deals of NSEL.

It is pertinent that fictitious trading was being performed at the exchange using e-trader software. Even Jignesh Shah was aware of the use of ATF software for both agri and other commodities. “Fictitious trading should be stopped, once the software is installed at 10 loca-tions. Instead, IBMA software for hedging accumulated position on MCX should be activated. Hence, this software will create a pipe to distribute money among clients and brokers, extracting the same from MCX,” Anjani Sinha wrote in an email to Amit Mukherjee, Arpan Jain, and others on June 28, 2010.
The manner in which fictitious trading used to take place include:

  • Creating inflated artificial revenues from NK Proteins in the form of delivery charges and pricing mark ups for trading
  • Backdating of documentation to support artificial revenue
  • Falsification of minutes: although the auditors were not present in a meeting held on May 26, 2010, they were not only marked present but still the minutes of meeting attributed some statements to have been made by them in course of the meeting
  • Settlement Guarantee Fund (SGF) inadequacy was not disclosed in the statements from financial year 2010 to 2012. Neither the management nor the auditors (both internal and statutory) disclosed or reported the inadequacy which was a mandatory requirement as per law
  • Inadequacy of stocks in warehouse was being reported internally to Anjani Sinha regularly. The NSEL management was fully aware of the huge exposure of NK Proteins right from 2011 but did not take any action
Officers investigating the case are in particular intrigued at the manner in which the NSEL management ensured that NSEL held 49 per cent shares in IBMA but did not cross 50 per cent, lest IBMA became a subsidiary company of NSEL. This was to ensure that IBMA remained a separate company

NSEL/IBMA funded a third party called Sunil Pareek, a friend of Arpan Jain, an NSEL employee, to trade on MCX. This was a dead loss and still no action was taken. Pareek’s KYC reference indicated Jain’s cell numbers as his contact number.

In yet another instance, IBMA incurred losses in the sale of gold through another employee Dinesh Pareek and his brother. But despite the case being known to Jignesh Shah, no action was taken. FTIL allegedly wrote off Rs. 9 crore recoverable from Apian, while Apian wrote off Rs. 4.5 crore from a company called DSRM Embedded Technologies Private limited in FY 2015-16.

On July 20, 2011, NK Proteins transferred Rs. 2 crore in IBMA’s client account number 00600340050070. The same day an amount of Rs. 1,51,43,239.57 was paid to NSEL against settlement obligation (IBMA’s settlement account no. 00990680015779).

THE available evidence clearly shows that Mukesh Shah, Anjani Sinha, ShreekantJawalgekar and Jignesh Shah were aware of the irregularities but preferred to remain silent. As per Jai Bahukhandi’s statement before the Internal NSEL Inquiry Committee after the exchange closure, two sets of stock records were maintained, one contained actual figures and the other with inflated figures to entice investors to invest in NSEL. This was corroborated by Anjani Sinha’s email dated May 13, 2011, which clearly mentioned that NSEL suppressed losses, manipulated financial statements and year-end profits. Obviously the intent behind all this was to provide incorrect, inflated and misleading periodic market-related information to FMC and the investors. There were several instances when the volume shown in the reports was higher than the trade data.

NSEL’s intention was to use all ethical or unethical practices, to ensure that huge trading took place at any cost and suppress any losses which might prompt investors to leave the exchange.

The total amount shown as due to IBMA included a sum of Rs. 15.6 crore on account of dubious payments made by IBMA to NSEL investors without any details of the payee, documentary evidence of the dues, and the person who authorised these payments. Likewise, Rs. 12 crore ‘idle funds’ placed by Sahara Group with IBMA cannot be placed at par with the liability of NSEL towards all investors for trades on the exchange.

JosephSimilarly a group of investors called ‘the Raval’ Group traded to the extent of Rs. 1,352 crore approximately on the exchange. Some of the circular dealings between NKP Group, and Raval Group suggestively appear to be suspicious transactions that may attract the provisions of the Prevention of Money Laundering Act, 2002.

La Fin Financial Services Private limited, a company owned by Jignesh Shah, had an investment of Rs. 5 crore in M/s Dynamatic Developers Limited in the year 2005, which got diluted to M/s Rupasi Traders Private Limited in January 2014. One of the group companies M/s Tezas Trading Company Limited held shares in NBHC (a subsidiary of FTIL) which was subsequently acquired by Paras Ajmera (a senior executive in FTIL). Mukesh Shah was the common auditor between NSEL, IBMA and other group companies. His office was also the registered office of the Raval Group. This group stopped trading just before the exchange closed down and did not have any outstanding dues on July 31, 2013. V Hariharana, NSEL director, was a beneficiary and had taken a loan from one of the group companies of Raval Group.

Significantly, when NSEL commenced its trading operations in FY 2008-09 a bulk of the trading on the exchange was carried out by NK Proteins (who became eventually the largest defaulter on July 31, 2013, Rs. 969 crore approximately). Subsequently, over a period of 4 years, other sellers started trading on the exchange. According to informed sources a majority of these sellers were starved of finance and were probably not getting finance anywhere else. When these sellers were permitted to trade, they got a chance to get finance on the exchange and were therefore willing to pay steep interest rates. The exchange permitted them to trade without adequate stocks, at times without adequate margins merely to generate trading volumes. As the volumes grew, more investors were lured into trading through brokers.

According to sources, Apian was used as a conduit to increase NSEL’s shareholding in IBMA and give out loans to NSEL directors. One of the Directors Sunil Khairnar states that he was a director for a short term. He also claims that he was never involved in the deals of NSEL

Because of the financial stress and lack of resources, many sellers were unable to meet their commitments on T+25 (or T +36) dates, but the exchange permitted them to roll over their transactions by having fresh trades whereby they used the money from the fresh trades to offset the earlier trade commitments. Thus their exposures started creeping up and gradually snowballed into huge proportions.

The NSEL exchange did not build up the minimum required corpus (as required by bye laws) for investor protection called (Settlement Guarantee Fund, SGF). Since the margins were also not forthcoming as needed, and adequate stocks were also not kept as security, the trading activity was always vulnerable. Thus what happened on July 31, 2013, was bound to happen.

However, it was not just an open and shut case of reckless trading and misjudgement of sellers’ credentials. Available evidence suggests active connivance and collusion of the NSEL management with the defaulters. For instance, NSEL MD & CEO Anjani Sinha’s bank statements reveal that he was hand in glove with NK Proteins Limited Group which transferred huge amounts in his account. He was the principle architect and decision maker regarding all exchange operations—right from commencement of trading without adequate SGF, permitting sellers to trade with poor diligence, margin waivers, inadequacy of stock and other such matters. Scrutiny of his Bank Account No 02271050005815 HDFC Bank, Vile Parle East, Mumbai branch, reveals an entry of Rs. 35 lakh vide Cheque No. 487790. While the NKP group claims that this was a personal loan, this does not dilute his role and suggests a serious conflict of interest.

In his statements to the investigators Anjani Sinha blames Amit Mukherjee and a few other officials for the conspiracy. According to him Mohan India Pvt Ltd purportedly paid Rs. 18 lakh (dated 11 Feb and 22 March) to NSEL’s AVP business development Amit Mukherjee and his wife Bonhi Mukherjee. Sinha also disclosed in his affidavit that Jai Shrivastava, a director of Mohan India paid Rs. 35 crore to Amit Mukherjee,in a meeting in Delhi on September 7, partly in cash and partly by cheque. “I also came to know that in course of visits to Del-hi, Amit Mukherjee was using high-end cars like Bentley, Porsche, etc, and would stay at the Hotel Radisson Blue (owned by Mohan India),” he alleged.

NSEL/IBMA funded a third party called Sunil Pareek, a friend of Arpan Jain, an NSEL employee, to trade on MCX. This was a dead loss and still no action was taken. Sunil Pareek’s KYC reference indicated Arpan Jain’s cell numbers as his contact number

Amit Mukherjee happens to be the first NSEL employee to be arrested by the EOW for his involvement in the scam. Mukherjee allegedly was on the payroll of NK Proteins, and played a part in backdating/ fudging of official documents, as well as generation of pre-decided trades. His bank account contains deposits in cash of Rs. 50,000 at ‘Kadi’ which is NK warehouse location. He is also believed to have received cash amounts from Prakash Bhalotia, a trader on NSEL who had also been a member of the Magadh Stock Exchange (MSE).

THIS is where the story takes an interesting turn as Sinha was at one point of time the Chief General Manager and Chief Executive of MSE, which was one of the 25 regional stock exchanges in India and closed down under mysterious circumstances after several complaints of irregularities in the dealings of physical shares.

Jignesh-shahSinha, who was at the helm of affairs of MSE, apparently did not take any action against defaulting traders who were found to be using stolen, forged and fake shares. As a result, the MSE also faced a massive payment crisis and collapsed. Though Sebi superseded the board of the exchange, and despite legal proceedings initiated by brokers against him, Sinha was allowed to walk away.

It is not a mere coincidence that Sinha also happened to occupy the top seat at the Ahmedabad Stock exchange which too suffered a physical shares-induced payment crisis during his tenure. As usual, SEBI superseded the Ahmedabad Stock exchange’s board, but not before the money was lost and all the investors were left with just papers.
However, just a few months after the Ahmedabad fiasco, Sinha resurfaced – this time on the board of the Multi Commodity Exchange (MCX) and Financial Technologies before being handed over complete control as the MD & CEO of NSEL and Director, of MCX.

Jai Bahukhandi played a part in maintaining dual stock records for personal enrichment. As per his statements before the investigators he maintained dual records of NSEL, one of which depicted the figures of ‘actual’ stock and another with inflated stock entries.

ANOTHER dramatis personae in the NSEL scam, Shashidhar Kotian facilitated manipulation of accounts, fictitious invoices and billings. Being the CFO of NSEL he was involved in every act or omission relating to manipulation of accounts. All the emails relating to exposure, stocks, dealings with NK Proteins were known to him.

It is worth mentioning that Late Shankarlal Guru, chairman of NSEL’s Board of Directors, was the father-in-law of Nilesh Patel, Director of NK Proteins. This was one of the reasons why Sinha offered him a borrower advance to trade on the NSEL platform.

NK Proteins and its auditors helped NSEL in suppressing losses and showing greater profits. The auditors of NSEL and NK Proteins offered no resistance and in a way supported the conspiracy by taking a soft stand. It is relevant to mention here that the auditors of N K Proteins and NSEL were SR Batliboi and Co, and SV Ghatalia and Associates, group concerns of E&Y, a global accounting firm. Allegedly they allowed manipulations of profits for showing a healthier financial position and facilitated suppression of huge exposures and stock shortages.

Mukesh Shah allegedly issued a bogus certificate of fund utilization to ICICI bank to support NSEL’s loan application for purchasing cotton seed wash oil on behalf of NK Proteins. ICICI bank supposedly turned down the request because the supporting audit documentation was incomplete and unsatisfactory. It is highly unlikely that Mukesh Shah, a relative of Jignesh Shah and a qualified Chartered Accountant, did not know how to prepare the documents to support purchase bills for fund utilisation, stock statement as well as their movement and location details.

Arguably Mukesh possibly had the widest and most prominent role, not just in the FTIL group but also in Raval group of investors, in which he was the internal auditor, external auditor, tax auditor, and financial advisor. Apart from this, he provided certification services for enabling finance and loans for NSEL. Mukesh Shah’s wife and his CA partner Ketan Shah’s wife owned a company called Subras Software Private Limited (Subras), which provided investment broking services to NSEL.

According to sources he was also the auditor of Abhishek Bansal’s Abans Group of Companies. In fact, Sunil Sagar Pawar, one of his ex-employees, is now a shareholder and Director in certain companies owned by directors of NSEL/FTIL and is absconding.

According to sources, till the last minute before the exchange was formally asked to close down and exposure had gone over Rs. 5,600 crore, the NSEL management kept trying to make arrangements to get loans for the defaulters from third parties. This only substantiates NSEL’s personal interest and collusion with all the sellers since NSEL being an independent party had no reason to go into loan requirements of external parties. This also indicates NSEL’s full awareness about the poor credibility of the sellers.gfiles end logo

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