Home / Companies / News /  NSEL case: Mumbai Police arrests three top brokerage executives

Mumbai: The Economic Offences Wing (EOW) of Mumbai Police on Tuesday arrested three top executives from prominent commodities brokerages in connection with the 5,574.34 crore fraud at the National Spot Exchange Ltd (NSEL), extending its crackdown beyond NSEL officials, directors and defaulters.

The arrested executives were identified as Amit Rathi, managing director of Anand Rathi Financial Services Ltd; C.P. Krishnan, wholetime director of Geofin Comtrade Ltd; and Chintan Modi, vice-president of India Infoline Commodities Ltd.

The arrests were announced by Rajvardhan Sinha, additional commissioner of police (EOW). The three executives, arrested on charges of cheating, forgery, criminal conspiracy and misappropriation, will be produced before a court on Wednesday for being remanded to police custody.

EOW has now arrested a total of 24 suspects in connection with the fraud at NSEL, which emerged in July 2013 as a payments crisis. Rathi, Krishnan and Modi are the first people arrested outside the circle of NSEL executives, directors or defaulters who owe money to the commodities spot exchange.

Girish Dev, managing director of Geofin Comtrade, declined to comment.

India Infoline Commodities said its officials had been cooperating with the police in their investigation in the NSEL case and provided the documents, records and clarifications sought by the police.

“While our utmost cooperation continues in the investigation, at the same time we are taking all necessary legal remedies, to protect the interest of the organisation, our clients and the employees," it said. “We would like to once again clarify that India Infoline Commodities Ltd acted only as a broker for facilitating the execution of orders by the clients on NSEL platform and we did not have any proprietary position or funding positions towards NSEL contracts."

“Anand Rathi Commodities Limited and its directors, officials have fully cooperated with the agencies in the course of the investigations. We have submitted the requisite information/ documents as requested from time to time and clearly established that ARCL did not make any illegal profits/enrichment. We are disappointed at the turn of events and do not believe the arrest is appropriate in the circumstances," Anand Rathi Commodities said in a statement.

“Our counsels approached the Hon’ble Bombay High court to prevent any arrest late afternoon today. The Court was pleased to grant an order directing no arrest of officials till March 4, 2015, if not already arrested. On submission of the order we were informed that the arrest has already taken place," the statement added.

Additional commissioner Sinha said the three executives had been “evasive" and “non-cooperative" during the course of the investigation, prompting EOW to seek their custodial interrogation.

He added that the investigations found that the brokers gave “false assurances" to investors of NSEL along with “wrong and misleading statements" to entice the investors to trade on the spot exchange.

The EOW probe also found that the brokers assured investors that NSEL was a safe investment avenue with fixed returns and that it was regulated by the commodities market regulator Forward Markets Commission (FMC).

“Brokers also told investors that the exchange has adequate settlement guarantee fund (SGF)," said Sinha.

Every exchange has to maintain an SGF that is used to fulfil settlement obligations in the event of a default. Soon after news of the fraud broke, it was revealed that the exchange had made false claims related to the SGF balance and it did not have enough funds to honour all outstanding contracts.

NSEL is 99.99% owned by Financial Technologies (India) Ltd, which has been directed by the EOW to inform it before liquidating any of the company assets.

The fraud at NSEL came to light on 31 July 2013, when the exchange suspended trading in all but its e-series contracts. These, too, were suspended a week later. The suspension may have been prompted by an instruction from the ministry of consumer affairs to the exchange asking it not to offer futures contracts. A spot exchange isn’t supposed to do so, but NSEL was doing it.

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.

It later emerged that all trading on NSEL happened in paired contracts, with investors, through brokers, buying a spot contract and selling a futures one for the same commodity.

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.

Subsequent investigations highlighted the involvement of promoters.

On 14 August 2013, NSEL proposed a payout plan, but it has been unable to stick to the schedule and has not made a single successful payout.

According to EOW, 139 brokers traded on the NSEL. As per the police probe, Anand Rathi Financial has a total clientele of 12,900 and had conducted trades worth 19,130.2 crore on NSEL since the exchange became operational in 2008.

IIFL’s exposure was 19,183.48 crore and Geofin Comtrade’s 5,526.66 crore.

Apart from instances of false assurances, the police also found examples of circular trading, short selling and proprietary trading by brokers who even traded through client accounts without proper approvals.

“In one such case, trades worth 1,061 crore were done using a particular client account without his consent," said Sinha.

Investor groups representing entities who have lost money in the scam have repeatedly demanded the arrests of brokers, alleging that they acted in connivance with the exchange.

“This action by the EOW was long overdue. All the brokers guilty in the NSEL scam should be punished," said Ketan Shah, president, NSEL Investors’ Action Group.

The EOW probe has also found instances of conflict of interest between brokers and the exchange. In some cases, the contact details of certain employees of brokerages were listed on the NSEL website, said Sinha.

As part of their attempts to capture a larger market share, brokers also engaged in client code modification and extended loans to their employees and their relatives to trade on NSEL, he added. Client code modification helps brokers to move a particular trade from one client account to another.

Sinha added that the probe against brokers would continue as it has also revealed certain fictitious transactions between brokers and investors that raised suspicions related to illegal gratification.

Ami Shah contributed to this story.

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