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A national level spot market in commodities trading through an electronic and transparent platform

Promoted by FTIL (99.99% holding) and NAFED (100 shares)

Participants: (i) Investors (ii) Mill Owners/Planters/ Processors/ Commodities Importers

Functions of NSEL: Electronic trading platform where identity of Buyers and Sellers is

not known at the time of trading Guaranteeing all trades executed on the NSEL platform Providing Clearing House functions in settlement of all trades Establishment of warehouses, monitoring functioning at

warehouses, issuance of Warehouse Receipts (WRs) evidencing ownership of underlying commodity and certifying each of the above, in terms of quality, quantity, etc.

Managing and controlling a network of 84 warehouses

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MCA through Gazette Notification on 5th June 2007, exempted all forward contracts of one day duration for the sale and purchase of commodities traded on the National Spot Exchange Ltd under Section 27 of the Forward Contracts (Regulation) Act, 1952, subject to 6 conditions, one of which is “no short sale”.

MCA has issued Gazette Notification dated 6th February, 2012 to appoint FMC as the designated agency.

As per the NSEL Bye-laws, NSEL is responsible for issuance of

‘Certified WRs’ evidencing ownership of underlying commodity. Therefore, WDRA is the relevant authority.

NSEL has obtained licenses of State Governments under the respective APMC Act to deal into notified agricultural products.

NSEL operated through a combination of Bye-laws, Rules, Circulars and Press Releases issued by NSEL from time to time.

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An order driven screen based trading system.

Automatic order matching.

Seller/Miller has to deposit in advance commodity to the Exchange designated warehouse and obtain scanned WR

At the time of trading, identity of the participants undisclosed.

Delivery Logic = Compulsory

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Description Day

Investor buys and Miller sells commodity with T + 2 delivery cycle

T

Investor sells and Millers buys commodity with T + 25 delivery cycle

T

Investor pays against purchase of commodities and Miller receives funds against sale of commodities

T + 2

Investor receives warehouse allocation receipt against purchase obligation and Miller delivers scanned WR against sales obligation, to the designated Exchange warehouse

T + 2

Pre pay-in of the commodity through WR against sale obligation and commodity remains with the Exchange designated warehouse throughout till T + 25 as an standing instruction

T + 2

Miller pays against purchase of commodities and Investor receives funds against sale of commodities, All traded through WR

T + 25

Difference of Sell & Buy Value is the Investor’s profit T + 25

Simultaneous Transactions

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Trade Day (T+0)

Investor (Buy) / Miller (Sell) (T+2)

Investor Investor (Sell) / Miller (Buy) T+25) Miller

Trade Day (T+2)

Miller gives scanned WR to Exchange designated warehouse & Investor Pay Fund

Investor Investor receives the allocation letter against the commodity payout & commodity remains with the warehouse till T + 25

Settlement Day (T+25)

Miller pays funds & NSEL delivers WR

Investor Investor receives the fund Miller

Miller delivers commodity to Exchange designated warehouse and obtains scanned WR

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Before T

NSEL unilaterally announced on 31st July 2013 that all pay-in and pay-out obligations are merged and deferred till 15 days since Millers could not honor their payment obligations.

NSEL cited the reasons as the Directive from the Department of Consumer Affairs (DCA) on July 12, 2013 along with loss of trading interest in the market due to underlying uncertainties causing trade in-equilibrium.

When the Millers could not honor their payment obligations, there were no commodity in the NSEL Warehouses which could be liquidated to satisfy such payment obligations.

‘Certified WRs’ issued by NSEL appear to have been issued without the backup of actual commodities in the NSEL warehouses.

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April 27, 2012: Show Cause Notice to NSEL from the Ministry of Consumer Affairs regarding certain violations of the conditions of the exemption Notification dated June 5, 2007

October 3, 2012: Press Release by NSEL suppressing the details of the Show Cause Notice and stating that the Government had merely sought comments

Investors continued to invest in NSEL not knowing that the Government is investigating NSEL operations

It now emerges as follows: Breach of fundamental condition of the 2007 exemption Notification that

‘no short sale’ on the Exchange NSEL failed to exercise supervision over the NSEL designated warehouses

and deliberately continued issuance of WRs without ensuring that underlying commodity are maintained in the NSEL warehouses

Commodity were stored in the premises of the Defaulting Members and given the colour of independent warehouses

NSEL created the appearance of adequate risk management systems and made Investors wrongly believe that they were trading in commodities evidenced by Certified WRs, when in fact there were no underlying commodity

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There are 39 defaulting clients and 24 defaulting members Each of the 24 defaulting members also traded on NSEL on their own

account and therefore, were also defaulting clients Top 5 defaulting members account for approx. Rs. 3900 crores N.K. Proteins, one of the defaulting members, was promoter by the son-

in-law of the NSEL Chairman Mohan India, which owes approx. Rs. 952 crores, has a share capital of

Rs. 17 lakhs. NSEL has granted clearing member status to Mohan India. Out of the 24 defaulting members, atleast 6 entities set up in last 3

years; atleast 5 entities with share capital below Rs. 1 crore; another 4 companies with share capital in the range of Rs. 1 crore to 1.5, collectively owe approx. Rs. 1420 crores. NSEL knew these issues.

NSEL used the premises of defaulting members and gave it an appearance of warehousing.

NSEL issued ‘Certified WRs’ against commodity lying in the premises of these Defaulting Members

These 24 Defaulting Members accounted for an overwhelming majority of all trades on NSEL

All of the above facts were known to NSEL and not to the public

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Gross revenue increased from Rs 81 Cr in FY 12 to Rs 472 Cr in FY 2013

NSEL started trading in goods and major revenue of Rs 292 Cr accrued under this head and it appears that majority of dealing is with Co Promoter NAFED, NSEL has to recover Rs 277 Crores from them as on FY 2013

NSEL has diverted Rs 700 crores of Margin /SGF from members to trading of goods for meagre profit of Rs.12 crores (Rs 75 Cr. due over 6 Months) and other current assets, in serious violation to bye laws.

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Exchange vs. Borrower:

One of the largest borrowers (approx. Rs. 930 crores), N.K Proteins promoted by the son-in-law of the NSEL Chairman, Mr. Shankarlal Guru.

Promoter vs. Auditor:

In 2012, reputed auditing firm S.V. Ghatalia & Associates (E & Y) was replaced by the CA firm, Mukesh P. Shah & Co. , where the partner Mukesh P. Shah is the close relative of Jignesh Shah

Indian Bullion Market Association (IBMA)

IBMA is held 61% by NSEL.

IBMA is clearing and trading member of NSEL and clears around 20% of total trades of NSEL.

IBMA is also a trading member, dealing for direct Investors/clients.

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REPRESENTATION FACT

Settlement Guarantee Fund

NSEL Bye-law No. 12.2.4: SGF comprises of security deposit + additional deposit maintained by CM

BS of March 2013: SGF is nil, significant amounts shown as members’ liabilities, which are in fact margin payments to be paid by the members

July 29, 2013: NSEL declares SGF of approx. Rs. 840 crores July 10, 2013: NSEL informs FMC - 100% stock as collateral (managed by independent collateral manager), 10-20% as margin money and 100% PDCs

August 4, 2013: Mr. Jignesh Shah states that SGF is approx. Rs. 65 crores

Suppression of Key Data

October 3, 2012: NSEL Press Release on the ET article which revealed that the Central Government is investigating NSEL operations – states that letter dated April 27, 2012 was received from the Govt. asking NSEL for “comments”

August 6, 2013: It emerged that the said letter dated April 27, 2012 was in fact a Show Cause Notice was

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REPRESENTATION FACT

Commodity in NSEL warehouses

July 10, 2013: NSEL informs FMC - 100% stock as collateral (managed by independent collateral manager) August 6, 2013: NSEL declared that the stock position in NSEL warehouses is approx. Rs. 6,052.46 crores

Press Reports and indications from the forensic audit of NSEL stock, it is reported that only 10-20% commodity are maintained as collateral

NSEL Bye-law No. 2.18: ‘Certified Warehouses’ approved and designated by the Exchange Quality and Quantity of commodities in NSEL warehouses monitored by NSEL

NSEL warehouses were not independent properties but designated areas within the premises of the Defaulting Members with no verification process

NSEL guarantees settlement

NSEL Bye-law Nos. 5.26, 7.9.1, 7.9.2, 9.6, 12.2.3: NSEL guarantees settlement of net financial obligations

August 14, 2013: NSEL states that the settlement plan and payments are conditional on the amounts recovered

No short selling

Govt. Notification of June 5, 2007: “No short sale” allowed on the Exchange

Given the low level of commodity maintained in the NSEL warehouses, effectively Sellers were allowed to sell without underlying commodity 13

NSEL, its management and board of directors FTIL

Promoter of NSEL, holding a controlling stake of 99.99% in NSEL Common directors, namely Mr. Jignesh Shah and Mr. R. Devarajan (now

removed) NSEL contributed around 65% of FTIL profits including business support

charges FTIL’s track record in domestic as well as foreign exchanges was marketed

by FTIL and its promoter Mr. Jignesh Shah, as the basis for obtaining more Investors for NSEL

Mr. Jignesh Shah Controlling and directing mind behind NSEL operations Promoter of FTIL, which holds 99.99% of NSEL Vice-Chairman of NSEL; Chairman and MD of FTIL His profile and experience marketed to obtain Investors for NSEL

24 defaulting members Defaulters accounted for an overwhelming majority of all trades executed

on NSEL – fact which only NSEL knew, not genuine investors Several defaulters recently incorporated, thinly capitalised entities Majority of the “NSEL certified warehouses” were not independent

properties but designated areas within the premises of the very same defaulters under leasing arrangements.

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Violation of condition on short selling since prima facie it appears that no commodity in warehouses (Gazette Notification dated June 5, 2007)

WDRA Act, 2007 – Issuance of WR without verification of underlying commodity (Section 23)

IPC – There were clear representations by NSEL to Investors as to the affairs of the Exchange on the basis of which the Investors invested in NSEL. It now appears that NSEL has been trading with substantially inadequate underlying commodity (Sections107,120A,403,405,407,415,418,420,421,422,424,463,464,467)

PMLA - Section 3 read with Part B of the Schedule (arising out of the IPC violations)

Operating an Exchange without underlying commodity resulting in potential violation of Deposit/ Collective Investment Scheme laws (The issue would not have arisen if the Exchange had maintained the required underlying commodity)

NSEL is a limited company and the actions of its Promoters have resulted in mismanagement and mis-governance of its affairs in a manner which is prejudicial to public interest

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Prima Facie case of fraud perpetrated by NSEL, its management, its Promoter FTIL and Mr. Jignesh Shah

NSEL is commenced its operations as an Exchange under the auspices of a conditional exemption granted by the Central Government under the Notification dated June 5, 2007

Exemption was strictly subject to conditions set out in the Notification

It appears that the specific conditions have gone unsupervised

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Central Government may approach CLB under Sections 397, 398, 401, 402, 408 of the Companies Act, 1956 to:

Replace existing management of NSEL with Central Government

nominees

Under Section 542 of Schedule XI read with Rule 44 of the CLB Rules,

attach the properties of FTIL in India and outside India and directors of NSEL and also attach the assets of the Promoters of the 24 Defaulting Members and also direct them not to dispose material assets (they should be allowed to operate in the ordinary course)

Under the overall supervision of the CLB, have a 20-30 week payment

schedule drawn out for which NSEL, FTIL and the 24 Defaulting Members/Clients have to be liable.

Appoint a special investigation team comprising officials from various

ministries or the SFIO to conduct an investigation and take action in CLB on the basis of such report.

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