nsel spot exchange scam

ITM - EMBA (Finance) Group 2 - Batch 34

NSEL Spot Exchange Scam..


Group No 2 (EMBA – Finance) Batch 34

• Prashant Mirgule – Roll No. 52• Karunakar Niwate – Roll No. 53• Theresa Tumkur – Roll No. 100• Shital Pawar – Roll No. 105• Sahezad Sakharkar – Roll No. 23• Rinki Haldar – Roll No. 14


About NSEL

• National Spot Exchange Limited (NSEL) is the national –level, institutionalized, electronic, transparent spot trading platform for commodities.

• It is a structured market place, set-up to transform the commodity market by way of reducing the cost of intermediation and thereby improving marketing efficiency.

• NSEL provides customized solution to farmers, traders, processors, exporters, importers, arbitrageurs, investors and other stakeholders pertaining to commodity procurement, storage, marketing, warehouse receipt financing, etc.


Background• It was discovered after the exchange defaulted on 31 July 2013 that

most of the underlying commodities did not exist and the buying and the selling of commodities like steel, paddy, sugar, ferrochrome etc. was being only conducted only on paper.

• The pair trades in various commodities were offered in one day forward contracts of T+2 and T+25 but, The investors, who honored the T+2 payment obligation, found that the National Spot Exchange neither had the money, nor the commodities, to honor their T+25 dues.

• Around 24 borrowers were given the funds by the NSEL, without any underlying commodity deposited by those borrowers.

• An estimated number of 15000 investors, along with public sector units like MMTC and PEC, were victims of this NSEL scam.


Background (cont)

• The ROC report on NSEL fraud has come down heavily on the promoters and the FTIL, as it was found that a majority of minutes of meetings of the NSEL board were fabricated, as cell phone location data of the said board members did not match to the meetings’ locations.


The Beginning of Black Hit..• NSEL was promoted as a spot commodity exchange by FTIL and a token

100 shares were given to NAFED so that the brand of NAFED can be used and the exchange could be touted as a 'farmer's market'.

• The business between 2007-2009 was lackluster and that is when NSEL with full knowledge of Jignesh Shah and other board members introduced fraudulent 'paired contracts' where investors could buy short duration contract and sell a long duration contract at the same time (usually T+2 and T+25).

• NSEL in 2010 applied to FMC for registration of these NTSD (Non Transferable Specific Delivery ) paired contracts exceeding 11 days under section 14A of FCRA. The FMC did not approve or reject this application till the scam broke out in 2013.

• Without waiting for the FMC regulation approval or registration, NSEL went ahead and sold these contracts rampantly through brokers.


The Beginning of Black Hit..(contd)• In early 2012 the FMC was appointed as 'designated agency'

to collect data from NSEL and protect investors' interest.• In April 2012 the Ministry of Consumer affairs issued a show

cause notice to NSEL that it was violating the conditions of 2007 exemption like 'no short sale' , 'no stock verification mechanism' and conducting trades beyond 11 days'.

• So from early 2012 - July 2013 the FMC knew about fraudulent NTSD contracts rampantly being conducted without registration under section 14A14B of FCRA but for reasons unknown did not act.


Light on the Issue..• The NSEL scam or NSEL fraud is a systematic and

premeditated fraud perpetrated in the commodity market on the National Spot Exchange that is based in Mumbai, India.

• The NSEL is a company promoted by Financial Technologies India Ltd and the NAFED (only 100 shares given for misusing the NAFED brand.)

• The NSEL scam is estimated to be a Rs. 5600 crore (around US$0.95 billion) fraud that came out to light after the National Spot Exchange failed to pay its investors in commodity pair contracts after 31 July 2013.


Allegations and Actions Taken on Issue• Mumbai police is presently investigating this fraud and the

Mumbai police has conducted various raids.• An FIR (First Information Report) has been filed against the

directors of the NSEL, and the directors of their promoters i.e. Financial Technologies India Ltd, along with various other brokers allegedly involved in the fraud.

• On 9 October 2013, Amit Mukherjee, the Assistant Vice President (Business Development) of NSEL, was arrested by the EOW of the Mumbai police marking the first arrest in the scam.

• Finally, Mumbai police finally arrested Jignesh Shah along with his trusted lieutenant Shreekant Javalgekar who were all along believed to be the masterminds of the scam on 7 May 2014.

Article Economics Times in June 2014 reported below


Allegation On Investigative Agencies

• The NSEL investors association has alleged slow investigation by Mumbai police , purposely going slow on FTIL group,Auditors of NSEL, defaulting borrowers and brokers who sold the ponzi scheme. It is being alleged that the data of crashed email server of FTIL-NSEL was not purposely being recovered by Mumbai police.


CBI Action• India's premier investigation agency The Central Bureau of

Investigation raided various NSEL and borrowers' offices as well as the residence of Jignesh Shah and booked an FIR under prevention of corruption act for the funds that MMTC and PEC two public sector units were made to invest in NSEL.

• However investors have complained that CBI has taken no action against politicians/bureaucrats involved in this scam and FTIL group.

• The CBI conducted searches at 15 locations to unravel the conspiracy to get Project & Equipment Corporation (PEC), a PSU, to trade on NSEL. The fraud by a group of people resulted in an alleged loss of Rs. 120.75 crore to PEC, said the CBI in a press release on 13 March 2014.


Major Changes after Issue..

• On 21 October 2014 the Ministry of Corporate affairs announced a draft order for merger of NSEL which is the subsidiary company with its holding company ,viz., FTIL.

• On 28 February 2015,The ministry of corporate affairs convinced about FTIL's fraudulent activities, moved a CLB application to take over the board of FTIL and replace it with govt. nominated directors. This move is being contested by Jignesh Shah appointed FTIL board.


Effect of NSEL Fraud…• As an effect of the NSEL fraud, the share prices of its promoter company

FTIL crashed by 60-70% resulting in massive erosion in the company’s market cap.

• The share prices of the sister company MCX (Multi Commodity Exchange Ltd) also took a beating.

• The FMC has already issued an order on FTIL, Jignesh Shah, Joseph Massey etc. that they are not fit and proper to run any exchange in India.

• Jignesh Shah and Joseph Massey on 9 October 2013, had to resign from the board of MCX-SX stock Exchange.

• FTIL has sold 15% stake of MCX to Kotak on 20 July 2014.• Subsequent to a High Court directive the FMC got a monitoring and

Auction committee(MAC) formed to dispose liquidate assets of NSEL


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nsel spot exchange scam

Economy & Finance