The tangled web of NSEL

AARATI KRISHNAN | | Updated on: Jan 23, 2018


As the investigation into the scam gets labyrinthine and tedious, affected investors are left in the lurch

The problem with most financial fraud investigations in India is that they get caught up pursuing red herrings and debating tangential issues, to such an extent that the actual victims are finally left in the lurch. The National Spot Exchange Limited (NSEL) scam, which broke in July 2013, seems to be taking a similar course.Though multiple agencies, three investor action groups and the Centre have all been frenetically pursuing the case, sometimes at cross-purposes to each other, there is no material move towards its resolution.

So given all the claims and counter-claims, who is responsible for the scam? More importantly, what’s the way forward for investors?

The exchange

The NSEL is guilty of multiple acts of commission and omission that gave rise to this crisis. As a national ‘spot’ exchange, it had no business launching contracts that could be settled in 25 or 36 days (legally, any contract not settled in 11 days is a forward contract). That these contracts were ‘paired’ with 2-day contracts, shows many of the trades on the exchange were probably bogus.

When these trades were halted by the Forward Markets Commission (FMC), exchange members defaulted on payments to the tune of ₹5,600 crore. Any properly functioning exchange would immediately auction the assets of the defaulters and pay back investors. But NSEL obfuscated and promised to settle claims through a phased schedule, which it never adhered to. It came to light that the warehouse receipts on the basis of which the trades happened were worthless, as many of the warehouses did not have the claimed stocks of the commodity.

With hardly any assets to auction, NSEL was forced to turn to its settlement guarantee fund to settle dues. But contrary to its initial claims that the fund had ₹800 crore or so, its coffers were found to be nearly empty. The decision to launch forward contracts, fictitious trades and the lack of underlying commodities in warehouses, all point to the fact that the scam could not have occurred without NSEL’s top management’s complicity.

Meanwhile, after initially confessing to the scam, Anjani Sinha, the Managing Director of the exchange, has since retracted the confession to blame the company’s Board, parent firm Financial Technologies and its founder Jignesh Shah. The various investor action groups and brokers on the exchange also appear quite keen to prove that the entire scam was master-minded by Shah.

But there is so far limited evidence of this and investigations by the Economic Offences Wing of the Mumbai police as well as the Enforcement Directorate against NSEL top officials, as well as FT and Shah, are still on. Whether the scam was conceived and perpetrated by the NSEL management, or was directed by Shah will be known only when the case is concluded in the Courts.

In any case, this is of little concern to investors right now, as properties of both Shah and NSEL top management have already been attached by investigative agencies.


It was the FMC that blew the whistle on the scam in July 2013, by asking NSEL to halt its paired trades. But the question is why it acted so late to curb the actions of an exchange which was operational from 2008.

FMC’s stance is that, as the regulator for forward markets, it had no jurisdiction over a spot exchange. The exchange was supposed to be regulated by the Ministry of Consumer Affairs. While the FMC claims it did bring NSEL’s forward trades to the attention of the government, which didn’t take cognisance of them until it was too late.

While it is true that the NSEL was conceived as a spot exchange and exploited the loopholes in the FCR Act, the question is why FMC didn’t take more aggressive action against the exchange. If NSEL was functioning in a regulatory vacuum, could it not have cautioned the public or investors through public advertisements? After all, it was not just lay investors but also government agencies such as MMTC who traded on the exchange.

Cognizant of the need to strengthen the FMC’s hands in regulating the commodities market, the Centre has in the recent budget, proposed the merger of FMC with SEBI. SEBI has so far proved to be a proactive and strong regulator in acting on behalf of investors in the stock markets. But while this may protect the interests of future investors in commodities, it may not materially help NSEL scam victims.

The government

If it is individual operators, firms or traders perpetrating a scam on the public, the Centre can be excused for not being aware of it. But the NSEL scam involved an entire pan-India commodities exchange operating in a regulatory vacuum. Given that the NSEL carried on its operations for five years from 2008 and was a prominent bourse on agri commodities volumes, it is hard to digest the claim that the (UPA) government was unaware of the goings-on. This has led to allegations of possible political nexus between NSEL promoters and those in power at the UPA government.

UPA’s inaction seems to have spurred the BJP government to take particular interest in a speedy resolution. Pursuing a parallel course with the ongoing probes and using powers available to it under the Companies Act, the Centre has proposed the compulsory merger of NSEL with its parent, FTIL, in ‘public interest’ along with a move to supersede the Board of FTIL.

This move has met with stiff opposition from FTIL’s shareholders. The Centre has now sought additional time to pass to its final order on the issue. Even if passed, the merger will require the sanction of the Bombay High Court. Meanwhile, FTIL’s falling market value and its move to dispose of its key businesses, raise the question of whether a merger will really prove effective in in repaying NSEL investors, if eventually put through.

What’s ahead?

Given the convoluted course the case is taking, what’s the way forward for investors? How will they get refunds of the money lost?

Well, investors have recently been offered a ‘settlement deal’ by FTIL and the beleaguered exchange, where it has been proposed that the former would chip in with ₹500 crore (with brokers contributing the rest) to pay off the dues of small investors, with exposures of less than ₹10 lakh each, in the scam. But given NSEL’s dodgy record in keeping up past promises, the plan does not offer much hope.

Therefore, the best hope of refunds for investors seems to lie in the actions being taken by the Bombay High Court, which has appointed a special committee to oversee the attachment and liquidation of assets of the original defaulters on the bourse. Reports suggest that the Economic Offences Wing of the Mumbai police, under the directions of the court, has attached assets valued at anywhere between ₹4,000 crore and ₹6,000 crore.

For those directly affected by the NSEL scam, co-operating with the Court’s efforts to ascertain their identity offers the best bet for a speedy resolution.

Published on April 17, 2015
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