Mumbai: Anjani Sinha, the former chief executive of National Spot Exchange Ltd (NSEL), was arrested on Thursday by the Mumbai Police’s Economic Offences Wing (EOW) in connection with the Rs.5,574.35 crore payments crisis at the exchange, a senior police official said, speaking on condition of anonymity.
Sinha, who was sacked on 20 August along with six other top executives and has in a previous affidavit owned responsibility for the crisis, is the third person to be arrested in the case. The EOW had earlier arrested Jai Bahukhandi and Amit Mukherjee. Bahukhandi was a former assistant vice-president of warehousing at NSEL and Mukherjee a former assistant vice-president of business development.
Sinha will be produced before the metropolitan magistrate court on Friday.
EOW has also secured the permission of local authorities to seize the assets of the exchange under the Maharashtra Protection of Interest of Depositors Act that also allows it to seize the assets of all entities mentioned in its First Information Report, which includes Financial Technologies (India) Ltd, or FTIL, and its promoter Jignesh Shah. FTIL controls 99.99% of NSEL.
Investors still waiting to be paid the amount owed them believe this could speed up payments. “This is a big development and we hope our money is recovered soon,” said Ketan Shah, an investor in NSEL.
Meanwhile, documents accessed by Mint under the Right To Information Act show that a year before the crisis broke, in August last year, the National Commodity and Derivatives Exchange Ltd (NCDEX), a rival commodity exchange, had complained to the Forward Markets Commission (FMC) that NSEL was running an arbitrage scheme, comparable to the deposit-taking and lending operations of non-banking financial companies (NBFCs) in India.
FMC is the commodities options market regulator in India, but NSEL was not under its supervision at the time of the crisis, having been exempted since the exchange ostensibly only facilitated spot trades.
A 21 December 2012 office memorandum of the ministry of consumer affairs, food and public distribution said it had received a complaint from NCDEX in August that “an investment scheme in the nature of structured investment product promising assured returns to retail investors is being marketed by a member of NSEL”.
NCDEX alleged that in a promotional presentation of the product, the NSEL member said that the exchange would provide counter-guarantee in respect of quality of goods, weight and counter-party risk. Besides, NSEL marketed the product by saying that it was a “simple investment finance model, based on the interest rate differential which helps in locking the price difference”.
The memorandum does not name the NSEL member.
On 21 December, the ministry of consumer affairs referred the NCDEX complaint to the ministry of finance for examination. It said, “As the issue of NBFC type of operations without regulation does not fall under the purview of the FMC, ministry of finance is requested to advise this department whether the scheme is resulting into an illegal NBFC transaction and if so, the nature of action required to be taken”.
The ministry of finance, in January 2013, referred the case to the Reserve Bank of India (RBI) for examination.
An email sent to RBI on Wednesday did not elicit any response.
“We would not comment on your query but NSEL had issued appropriate circulars from time to time and even in February 2012 on such matters,” NSEL’s spokesman said.
In an emailed response to Mint’s query, NCDEX’s spokesman said, “The exchange does not comment on any communication with the regulator.”
NCDEX, in its complaint, alleged that many investors had invested in the NSEL product, with investments amounting to “hundreds of crore of rupee”.
“It is understood from the market that these contracts are designed to ensure that one party gets funding continuously. In other words, it would appear that a deposit taking and lending operation is run in the guise of a spot exchange transaction, without being regulated as an NBFC,” said the NCDEX complaint.
“Looking at the investor interest and the trust they placed while deploying their funds, it feels that had government approached the issue in a pro-active manner, it would have been a better option,” Deven Choksey, managing director and CEO of KR Choksey Shares and Securities Pvt. Ltd, said in a phone interview.
“Instead of the exchange shutting down operations, had the government taken the view to take over the operations of the exchange, there would have been a safe landing to investors’ money,” Choksey added.
The settlement crisis at NSEL came to light on 31 July, when the exchange abruptly suspended trading in all but its e-series contracts. These were suspended a week later.
The closure of trading may have been prompted by an instruction from FMC to the exchange asking it not to offer futures contracts. A spot exchange isn’t supposed to do so, but NSEL was doing that.
NSEL tried to implement the change but because its appeal was to investors and members who were not interested in spot trades, it eventually had to suspend all trading.
All trading on NSEL, it later emerged, happened in paired contracts, with investors, through brokers, buying a spot contract and selling a futures one for the same commodity. They pocketed the difference—around 18%.
The entities selling on spot and buying futures were planters or processors and members of the exchange.
It turned out there were only 24 of them, and they used the paired contracts as a way to raise easy money. When the trading was suspended, the investors were left holding contracts that the members couldn’t buy because they didn’t have the money to do so. On 14 August, NSEL proposed a payout plan, but it has been unable to stick to the schedule or even make one complete payout.
On Monday, the enforcement directorate (ED), which looks into foreign exchange violations and money laundering, registered a case against NSEL, its promoters, including Jignesh Shah, and directors, under the Prevention of Money Laundering Act.
Under this, ED can probe the spot exchange, along with other related parties mentioned in the FIR, for alleged money laundering and siphoning off funds abroad.
Meanwhile, FMC on Thursday approved the appointment of G. Anantharaman, a former member of the Securities and Exchange Board of India, and Pravir Vohra, former head of information technology at ICICI Bank Ltd as independent directors on the board of Multi-Commodity Exchange of India Ltd (MCX), owned by FTIL.