NSEL diverted investor funds, says Grant Thornton forensic audit

Suresh P. Iyengar Mumbai | Updated on March 12, 2018

Spot trouble: Anjani Sinha, former CEO and MD, NSEL. Aforensic audit has found that the exchange diverted marginmoney of clients and investors for its own business purposes.

Spot trouble: Jignesh Shah, founder of FinancialTechnologies, A forensic audit has found that the exchange diverted marginmoney of clients and investors for its own business purposes.

Blames crisis on complete lack of surveillance activities

The forensic audit of the beleaguered National Spot Exchange Ltd by tax and business consultancy firm Grant Thornton has found that the exchange diverted margin money of clients and investors for its own business purposes.

For instance, on March 28, the exchange withdrew Rs 236.5 crore from the settlement guarantee fund in order to finance its own business overdraft account.

The commodity markets regulator, Forward Markets Commission, had appointed Grant Thornton to conduct the audit after it found irregularities in the functioning of the exchange.

The exchange had suspended trading from August 1. It has been defaulting consistently on the Rs 5,600-crore settlement plan announced thereafter.

The audit report, seen by Business Line, indicates that Anjani Sinha, then Managing Director of NSEL, had used members’ money to repay HDFC Bank’s overdraft facility of Rs 236.5 crore in two tranches of Rs 160 crore and Rs 76.5 crore. There was a running deficit in the client money and settlement fund balances from April 2012 to June 2013, the report said.

Margin money

According to the Government regulation, the margin money deposited by clearing members from their constituent members and clients, in any form, should be accounted for and maintained separately in segregated accounts and used solely for the benefit of the respective constituent members and clients.

“While the books of accounts reflected the balance in the settlement fund, the actual cash as per the bank statement was much lower,” said the audit. The deficit ballooned from Rs 169 crore in April 2012 to Rs 311 crore in March 2013. The deficit narrowed in May to Rs 41 crore after NSEL received some payment from NAFED.

The margin money could have been used to meet exchange obligations for the defaulting members and financial obligations of other business, it said. Financial Technologies, the promoter of NSEL, had raised concerns over the utilisation of the margin money.


Based on the internal functional structure of the exchange, the audit said no formal processes and procedures were in place. While a trading and surveillance department was formed, it did not carry out any scrutiny. “The complete lack of surveillance and monitoring activities led to questionable business practices that went unnoticed and unreported,” the report said.

The exchange provided faster financing by being counter-guarantor to both the lender and the borrower. An analysis of trades indicated that the price of the underlying commodities in the forward contracts (T+33) was mostly higher by 25-30 per cent (gross) per annum compared with the short-term contracts (T+3). After providing for exchange charges and various taxes, the gains for investors were about 12 per cent.

The contracts facilitating financing were introduced in 2009-10. Only NK Proteins traded in the contract in the first year. Subsequently, more members started trading in the long-term contracts. The proportion of financing contract (long-term contract) as a percentage to the total trade increased from 25 per cent (Rs 648 crore) in 2009 to 99 per cent (Rs 38,204 crore) in April-July 2013.


Published on November 06, 2013

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