In a severe indictment, commodity market regulator Forward Markets Commission (FMC) has said Jignesh Shah and his company Financial Technologies India Ltd (FTIL) are not ‘fit and proper’ to run any exchange in the country, and charged him of being the ‘highest beneficiary’ in the NSEL scam.
Mr. Shah founded Multi-Commodity Exchange or MCX in November, 2003, and then went on to set up a stock exchange this year. He is now the Chairman of FTIL, which owns and runs the National Spot Exchange Ltd. (NSEL) where a Rs.5,500-crore payment crisis is being probed by multiple agencies.
In an 80-page order, the FMC, which went into the running of NSEL following payment defaults, held that FTIL is not ‘fit and proper’ to hold anything more than 2 per cent shareholding in MCX.
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FTIL has now 26 per cent stake in MCX, the country’s largest commodity exchange, and will need to cut its stake following the FMC order.
Mr. Shah on October 9 quit as Vice-Chairman and shareholder director of MCX-SX, the third major stock exchange in the country. Few weeks later, he also resigned as Vice-Chairman of MCX.
Noting that Mr. Shah was “practically the highest beneficiary of the fraud perpetrated at the NSEL Exchange,” the FMC ordered that “Shri Jignesh P. Shah is not a ‘fit and proper’ person to hold any position in the management and the board of any exchange recognised or registered by the Government of India/Forward Markets Commission under the FCRA, 1952.’’
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Joseph Massey and Shreekant Javalgekar, former directors of MCX, are also not ‘fit and proper’ persons to hold any position in the management and the board of any exchange, the FMC order said.
“The Commission is of the view that the general reputation and character, record of fairness, honesty and integrity of Shri Jignesh Shah has been substantially eroded in view of his role in the affairs of NSEL as its Vice-Chairman and Director and also as the Chairman of the holding company of NSEL,” the order said.
It further directed that neither Mr. Shah individually, nor through any company/entity controlled by him, either directly or indirectly, should hold any shares in any association/exchange in excess of the threshold limit of the total paid-up equity capital as prescribed under the FMC guidelines.
The FMC said that because of the huge profit of Rs.125 crore (approx) earned by NSEL during 2012-13, the value of the shares of Jignesh Shah in FTIL shot up manifold, giving him the benefit of a spectacular market capitalisation of his investment in FTIL running into thousands of crores of rupees.
“Shri Jignesh Shah, as the promoter of FTIL and NSEL has misused his position to create a confidence in the minds of the participants regarding the legitimacy of the business and its operations in the exchange platform of NSEL,” the order said.
“Shri Shah consciously used his position to represent to the public at large , while taking no steps to introduce any effective governance mechanism, including risk management, due diligence, assured collaterals etc., to ensure the legitimacy of his claims and to prevent frauds,” it added.
About FTIL, the regulator said the company could not seek to take refuge behind the corporate veil so as to unjustifiably isolate itself from the fraudulent actions that took place at NSEL.
The fraud involved settlement crisis of Rs.5,500 crore owed to over 13,000 sellers/investors on the trading platform of NSEL.
Reacting on the FMC order, an FTIL spokesperson said: “Our lawyers are examining the order and we will revert.”
However, sources said the company was likely to challenge the order in the Bombay High Court in the next few days. When contacted, Mr. Shah did not respond. Despite the FMC order, shares of MCX rose by 8.29 per cent to close at Rs.421.35 on the BSE on Wednesday.