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Business News/ Market / Stock-market-news/  NSEL: Hints of money laundering surface in investigation
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NSEL: Hints of money laundering surface in investigation

The discovery, and an imminent investigation, could further complicate matters for the promoters of NSEL

FTIL owns 99.99% of NSEL, which slipped into a payments crisis after it suspended trading of forward contracts on 31 July without specifying any reason. Photo: Ramesh Pathania/Mint (Ramesh Pathania/Mint)Premium
FTIL owns 99.99% of NSEL, which slipped into a payments crisis after it suspended trading of forward contracts on 31 July without specifying any reason. Photo: Ramesh Pathania/Mint
(Ramesh Pathania/Mint)

Mumbai: The Enforcement Directorate (ED) and the economic offences wing (EOW) of the Mumbai Police found possible indications of money laundering while probing the 5,600 crore settlement crisis at the National Spot Exchange Ltd (NSEL), said two government officials familiar with the matter, who did not want to be identified.

The discovery, and an imminent investigation, could further complicate matters for the promoters of NSEL, whose credentials to run the exchange are already being reviewed by the Forward Markets Commission (FMC), the regulator of commodities futures trading that has oversight of NSEL.

An adverse ruling by FMC could have far-reaching implications for the entire Financial Technologies group promoted by Jignesh Shah that runs, apart from NSEL, commodities exchange Multi Commodity Exchange of India Ltd (MCX) and stock exchange MCX Stock Exchange Ltd. The stock exchange’s licence to operate was renewed by stock market regulator Securities and Exchange Board of India on 11 September.

On Tuesday, NSEL missed, for the sixth week in a row, a repayment schedule it had agreed on to settle 5,600 crore owed to about 13,000 investors who had invested through 148 members/brokers.

According to the two government officials cited above, preliminary investigations by ED, which looks at foreign exchange violations, and EOW have highlighted some gaps in how NSEL worked, and raised the possibility of money laundering.

The two agencies mentioned this in their report submitted to a committee headed by Arvind Mayaram, secretary, department of economic affairs in the ministry of finance. An investigation based on the report’s content is imminent, according to the two officials.

“We are not privy to the report hence we would not like to comment on it," an NSEL spokesperson said.

Calls and messages to Rajvardhan Sinha, additional commissioner of police (EOW), remained unanswered.

“The report recommends actions in line with Prevention of Money Laundering Act. A first information report (FIR) against the involved entities is likely to be lodged with the Mumbai Police any time," said one of the two government officials. This person said he had viewed a copy of the report from ED and EOW.

The second official added that EOW has already registered a preliminary enquiry, which could be converted into an FIR, which will start a police investigation into the matter. This person added that ED would also try and ascertain if the promoters diverted “outside the country" the money from “the settlement guarantee fund".

Until the payout crisis at the exchange was discovered, NSEL had maintained that it had a settlement guarantee fund of 800 crore. Later, the exchange’s management disclosed to FMC that the fund corpus had dwindled to 65 crore.

On 31 July NSEL abruptly suspended trading of all contracts without offering a clear reason for doing so, although it subsequently emerged that the action may have been brought about by the fear of imminent government action. That resulted in the settlement crisis.

Following this, FMC was given the duty of regulating all spot exchanges and ensuring that the settlement process at NSEL was completed. The commodities market regulator was also asked to investigate the matter to figure out what led to the crisis. While monitoring the situation, FMC questioned the “fit and proper" status of NSEL’s promoters and directors, and warned them that their fitness status could be under threat if they didn’t settle up.

Since NSEL hasn’t met even a single payout obligation, because the members who owe it money have, in turn, not paid up, FMC is re-examining if the exchange’s promoters can still be considered “fit and proper" to run an exchange. Meanwhile, ED, EOW, the income- tax department, and the Reserve Bank of India (RBI) were asked by the government to probe the crisis.

In an 11 September affidavit, NSEL’s former managing director Anjani Sinha blamed himself and the exchange’s management for the crisis and disclosed that some of the executives under him were bribed without his knowledge to bring in dubious buyer-members and misrepresent facts and stock positions.

The working group under RBI recommended in its report to the Mayaram committee a clear segregation of ownership, governance and management of Financial Technologies from that of the exchanges promoted by the company, including NSEL.

Financial Technologies (India) Ltd (FTIL), the flagship firm of Financial Technologies group, owns 99.99% of NSEL.

FTIL suffered another blow as its auditor withdrew its report on the company for the last fiscal year against the backdrop of the payments crisis at NSEL.

The auditor on 23 September communicated to FTIL that the stand-alone and consolidated financial statements of the company for the year-ended 31 March “should no longer be relied upon", FTIL said in a filing to BSE. Deloitte Haskins and Sells is the statutory auditor of the company.

The audited accounts were to be placed at FTIL’s annual shareholder meeting on Wednesday in Chennai.

FTIL said it would defer some items on its agenda at the shareholders’ meeting— consideration and adoption of the audited balance sheet and the profit and loss account for the last fiscal year, ratification of the payment of interim dividend and declaration of final dividend, and the reappointment of Deloitte Haskins and Sells as its auditor.

In a related development, income-tax officers searched the offices of Anand Rathi Securities in connection with the NSEL settlement crisis. Anand Rathi Financial Services Ltd is one of the 148 members through whom investors had invested on NSEL.

Confirming the search, a senior tax official who spoke on condition of anonymity said the department would take a couple of days to compile its findings.

Despite repeated attempts, the Anand Rathi spokesperson could not be reached for a comment. The brokerage firm has been in focus owing to its exposure of around 641 crore to NSEL.

Lisa Pallavi Barbora, Sunil B.S.and Ami Shah, and PTI contributed to this story.

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ABOUT THE AUTHOR
Anirudh Laskar
Anirudh reports on significant corporate matters including large mergers and acquisitions, India's emerging e-commerce sector and regulatory issues in the corporate and financial services industry. Over the past 17 years, he has covered many beats including banking, NBFCs, aviation, automobile, insurance, markets, SEBI, IRDAI, mutual funds, investment banking, private equity, deals, and conglomerates.
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Published: 25 Sep 2013, 01:26 AM IST
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