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NSEL fiasco: Brokers & investors raise voice againstJignesh ShahET Bureau Aug 14, 2013, 10.05AM IST

(The market intermediaries)

MUMBAI: Time could be running out for Jignesh Shah, the man behind the crisis-ridden National SpotExchange (NSEL). Leading brokers, who rarely antagonise exchange authorities, came on air onTuesday to openly badmouth Shah and the exchange's alleged failure to safeguard commoditystocks and repay thousands of investors on time.

At a packed press conference, the market intermediaries and a few investors claimed that commoditystocks - against which crores of rupees were lent through the exchange platform - were missing in certainwarehouses, and also alleged that fake warehouse receipts could have been generated. The conferencewas addressed by Nirmal Jain of India Infoline, and MotilalOswal and AnandRathi of their eponymousbrokerages. They were joined by a few investors.

Most startlingly, ArunDalmia, an investor, alleged that Mohan India - the borrower with the highestliability of Rs 952 crore - did not own any sugar stocks in warehouses in Delhi, as was claimed byNSEL . The exchange had earlier said the company had deposited sugar stocks worth over Rs 1,000crore . The investor claimed that JagmohanGarg, a veteran realtor and promoter of Mohan India,had told him that the company was in fact owed Rs 150 crore by NSEL!

The conference was tactically timed a day before Shah is to provide a plan to repay Rs 5,500 crore to13,000 investors. On Wednesday, the Forward Markets Commission, the commodities market regulatorthat had alerted the government in April 2012 on NSEL's violations, is expected to issue a press release.

Only Rs 50 cr in Escrow Account On Tuesday, panic gripped market participants as word spread that only Rs 50 crore was lying in theescrow account that the exchange has opened to deposit dues recovered from borrowers.

Shah met FMC Chairman Ramesh Abhishek on Tuesday to plead his case while NSEL MD AnjaniSinha,in a press issued late on Tuesday, said that in case of default "payment obligation will be dealt as perlegal default proceedings".
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The NSEL Investors Forum, comprising investors in NSEL contracts that stand suspended since July 31for alleged violation of spot exchange norms, said it would file a criminal complaint against Shah forfraud in case the NSEL promoter failed to repay investor dues amounting to Rs 5,500 crore.

Nirmal Jain, the promoter and CMD of IIFL, created a flutter with his claim that stocks of paddy, sugar andwool did not tally with the exchange records in certain locations and were far short of the declared amountin warehouse receipts, raising the possibility of fake warehouse receipts being generated.

However, some brokers who were not part of the conference later called up the media to contest theseclaims. They asked how an investor or a broker could accurately ascertain without proper audit theamount of stock in a warehouse. One of them stated that NSEL on Monday night provided all the brokersan electronic file of payout obligations to clients and asked them to confirm if it was accurate.

In Delhi, Consumer Affairs Minister KV Thomas said FMC was fully empowered to handle the situationand there was no need to worry. He added that officials from the finance ministry, Sebi and FMC were co-

ordinating and reviewing the situation at daily meetings.

Meanwhile, a senior government official said on the condition of anonymity that FinancialTechnologies, the owner of NSEL, is putting pressure on the government to take over the troubledexchange. He, however, refused to elaborate. SharadSaraf, an investor in NSEL and the convenor ofNSEL Investors Forum - formed on Tuesday with the intent of protecting the interests of over 15,000investors in NSEL, said forum members were in consultations with Zia Mody, partner at law firm AZBPartners, and criminal lawyer Rizwan Merchant on their further course of action if the NSEL promoterfailed to repay investors.

Saraf also said the forum would request the government to take over NSEL, MCX and MCX-SX in theevent of a default, a la Satyam. However, the investors would wait for a day to see what plan of

repayment Shah brings to the table.

Some of the important questions raised by the forum include: Why have NSEL and Jignesh Shahbeen so slow in making public details of the progress of payments and checking of stocks? Whyare authorities not making public the money trail; that is, in which accounts were investors'money, running into Rs 5,500 crore, transferred and where has the money gone from thoseaccounts?

They have also demanded an explanation on how the trade guarantee fund of Rs 800 crore shrank to Rs65 crore, and now stands at just Rs 5 crore. Who all did the margin money belong to, and where has itbeen appropriated?

Why has all the information with regard to collections in the escrow account and status of payments byborrowers not been made available transparently. NSEL had stated on August 4 that borrowers withdues of Rs 2,181 crore will pay on time. The exchange also said that the balance will be paid in 20weekly instalments of 5% each.

Hence, by now, Rs 800 crore should have been collected. What is the status of these collections, andwhat is the explanation for delays? Have authorities summoned the 24 borrowers and confirmed theirliabilities? In case they have not appeared before FMC and the government, have they used their


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executive powers to get them to explain their position? What is the action plan of FMC and thegovernment to bring these to book?

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Fit and proper. These three words have come back to haunt the chairman and chief executiveofficer of Financial Technologies , Jignesh Shah , twice in less than three years.

On Monday, the Forwards Market Commission's (FMC ) harshly-worded letter to the NationalSpot Exchange ( NSEL ) on the Rs 5,600-crore scam said: "Non-settlement of outstanding tradeon NSEL seriously reflects on your credibility and reputation which is a key ingredient inmeeting the criteria for a fit and proper' person. In the eventuality of you losing your status as a"fit and proper" person, you cannot continue to hold directorship or share holding in any of therecognised futures commodity exchange."

In September 2010, the Securities and Exchange Board of India's (Sebi ) wholetime director, K MAbraham, had used the very same "fit-and-proper" criterion while rejecting the application ofMCX-SX for opening a stock exchange: "I am of the considered opinion that the applicant hasfailed to adhere to fair and reasonable standards of honesty that should be expected of a stockexchange."

That time, Shah was accused for not complying with Sebi's MIMPS (Manner of Increasing andMaintaining Public Shareholding in Recognised Stock Exchanges) guidelines. However, Shahlater approached the courts and got the licence to launch the equity exchange.

Things are much more serious this time. NSEL has been accused of a series of frauds. Theseinclude allowing companies like Ark Industries, N K Protein and others with little or no networth or commodity stocks to have exposure of hundreds of crores. Shah, who was at theforefront in the battle for the stock exchange, has been strangely silent.

Shah's aggressive nature is legendary. Then, you don't launch nine exchanges and a slew of otherrelated businesses in warehousing and information management in just 12 years by being slowand steady.

When he was fighting a court battle over his stock exchange licence, he used a billboard at theentry of the BandraKurla Complex, which houses the headquarters of Sebi and National StockExchange, to constantly remind the top officials of the regulator and the country's premierexchange that MCX-SX and Shah were for real - it was the same billboard that Shah leased overseven years back to fight with the National Commodities and Derivatives Exchange (NCDEX) ata time when he could not even afford an office at the complex. At the launch of the stockexchange, he was famously quoted as saying: "BSE is no competition. It is only moving closer toa museum."

Things are very different now. The board of NSEL, which includes Shah, has removed CEO &Managing Director AnjaniSinha, CFO ShashidharKotian and five others from their respective

positions and made them part of a "special recovery team" led by former Sebi veteran P R
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Ramesh.

But FMC is unwilling to play passing-the-buck. In its letter on Monday, it accused Shah ofdoublespeak. In July, he had said that NSEL's systems were foolproof but cast serious doubts onthe availability of commodities in August.

Most of his businesses are going through a bad phase now. For example, the Dubai Gold andCommodity Exchange (DGCX) whose plans are in trouble as the Dubai Multi CommoditiesCentre has replaced the Financial Technologies platform with that of Cinnober, anotherexchange technology provider. There are reports that Financial Technologies and MCX, whichtogether have a 44 per cent stake in DGCX, are looking to sell the stake. Then, the volumes ofMCX are down due to the imposition of the commodities transaction tax. Currency volumes aresuffering due to the Reserve Bank of India's decision to ban banks from indulging in proprietarytrading.

All these have led to the share prices of Financial Technologies and MCX falling by 86 per cent

and 75 per cent, respectively, since January. Financial Technologies and MCX's market caps aredown to Rs 609 and Rs 1,419 crore, respectively. So, it would be quite difficult for him to pledgehis stake with banks or other lenders to raise Rs 5,600 crore.

With the regulator, brokers and investors gunning for his head, this will be a long-drawn battle.Just a year back, Shah held elaborate press conferences in all the leading Indian cities tocelebrate the launch of his stock exchange, MCX-SX. Only time will tell, if the 'Shah' ofexchanges will walk out of this battlefield unscathed.

nsel fiasco (2)

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