The Rs.5,600 crore settlement scam at the National Spot Exchange Ltd (NSEL), which came to light in July 2013, is back in the news.Shah arrested
On July 12, the Enforcement Directorate (ED) arrested Jignesh Shah on allegations related to non-cooperation with the authorities. This was the second time that Shah was arrested.
Shah had earlier been arrested by the Economic Offences Wing (EOW) of the Mumbai Police in May 2014 and spent about 100 days in custody before he was granted bail on August 22, 2014. He was one among more than 10 persons who were arrested in the scam.
Shah is the founder of FTIL, which owns 99.99 per cent in the now defunct NSEL, which, on July 31, 2013, suspended operations in most of the commodity contracts that it offered for trading. A week later, the e-series contracts in metals like gold, silver and some other base metals were also suspended thereby bringing to a complete halt all trading operations.Trading suspended
The abrupt suspension in trading activities was triggered by a government directive after it was found that the spot exchange was offering so-called paired contracts.
In the days to come it emerged that the exchange was in the midst of a huge settlement scam with hardly any commodity to settle the contracts.
Though there have been arrests made and properties have been attached and a host of agencies, including the erstwhile Forward Markets Commission (FMC), Securities and Exchange Board of India (SEBI), Income Tax (IT), Mumbai Police EOW, and ED have all done their separate probes, the entities who have lost money hardly got anything back. Regulatory probes revealed that only a handful of entities were trading in so-called paired contracts of commodities and were making money based on the difference between the buy and the sell price. In the process, around 13,000 investors are believed to have lost money in the fiasco.Who’s interested?
Currently, there are many interested parties in the case — FTIL, NSEL, investor associations, defaulters, brokerages along with the government and its probe agencies.
NSEL claims that it has already secured recoveries amounting to Rs.1,233.02 crore by way of decree on admission against five defaulters and through injunctions from a total of 18 defaulters with an outstanding of Rs.4,515.93 crore, according to a statement posted on NSEL website.
The Mumbai Police EOW has also attached assets worth around Rs.5,000 crore of the defaulting trading members.
Early this week, the EOW sent a notice to FTIL for freezing all its assets. FTIL has challenged the notice in the Mumbai high court but is yet to get a stay against it.
Meanwhile, FTIL provided a bridge loan of Rs.177 crore to NSEL in August 2013. Thereafter, full payment was made to 608 trading clients with an exposure of less than Rs.2 lakh. Further, around 6,445 clients got half of their dues as well.
Interestingly, while agencies are doing their bit of probing and securing the assets of the defaulters so that investors can be paid out, investor associations have focused their action around two legal battles aimed primarily at FTIL.NSEL-FTIL merger
The investor associations are well aware that recovering the money from the defaulters by way of court decrees and injunctions will be a long-drawn affair and so have smartly lobbied for the merger of the defunct exchange with its cash-rich parent entity FTIL.
Investors are aware that if the merger goes through, they would be able to stake claim to the large cash reserves of FTIL. As per FTIL’s annual report for the year 2014-15, it has cash reserves totalling Rs.1,975.59 crore, including investments in mutual funds and bonds.
The merger would force FTIL to assume all the liabilities of the Mumbai-based spot exchange. The merger would also make FTIL a party to the ongoing litigations involving NSEL.
Investor groups tasted success in October 2014 when the Ministry of Corporate Affairs (MCA) issued a draft order proposing to merge NSEL with FTIL. The final order was issued in February this year.
But, the merger is easily said than done. FTIL has challenged the forced merger order at the Mumbai High Court, questioning the rationale of “public interest” put forth by the government while invoking Section 396 of the Companies Act, 1956.
The government, on its part, feels that FTIL and NSEL should be looked upon as a single business entity and objections to the merger as stated by FTIL are “orchestrated.” It has based its case on facts like the minutes of the board meetings of NSEL were regularly tabled before FTIL’s board and also that FTIL’s income was directly based on the growth in the business of NSEL.
While the Mumbai high court is hearing the matter, in all probability the losing party will move the Supreme Court.
Investors also feel that while the government has been putting a lot of efforts to bring the culprits to book, the actual recovery of money will take time due to procedural and practical issues.
“Both, central and Maharashtra government, have been quite supportive and there is a lot that EOW and ED have done. But, selling of assets is what will get us our money back,” says Madhu Desai, Trustee, NSEL Aggrieved and Recovery Association (NARA), a group of investors who lost money in the scam.
“EOW has attached assets but those properties need to be properly valued and then disposed of. The state government should appoint 2-3 collector-level officers with a staff strength of between five and 10. Only then can assets worth thousands of crores can be disposed off. The Merger of NSEL with FTIL is just one part of the process. Actual recovery of money will only happen by selling off assets of defaulters,” Mr. Desai said.Supersede FTIL
The other case, which the investor associations are strongly pursuing, is about superseding the board of FTIL so that the government can appoint their own nominees to manage the company’s operations.
The case is being heard at the Company Law Board (CLB) in New Delhi. FTIL has been arguing that attempt to supersede the board is a clear sign that the government does not want any kind of opposition to FTIL-NSEL merger.
Though there have been significant rulings by the CLB during earlier hearings, there has been hardly any practical progress.
As is evident from the investor actions, the focus is clearly on the cash-rich FTIL. Not many are really paying attention to the attempts being put forth by NSEL to recover the money from defaulters. Also since FTIL is a listed entity, it is bound by the disclosure norms as laid down by SEBI and stock exchanges.