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Mumbai: Financial Technologies (India) Ltd (FTIL) has proposed a settlement plan to meet payment obligations arising out of the 5,574.34 crore fraud at the National Spot Exchange Ltd (NSEL), in which the former holds a 99.99% stake. It got an initial thumbs down from brokers and investors.

Broadly, the plan unveiled on Tuesday involves FTIL and brokers bringing in 500 crore each to clear the dues, either partly or fully, of a majority of investors.

The remaining dues, as per the proposal, can be paid after the attached assets of the defaulting entities are auctioned by agencies such as the Enforcement Directorate and the Economic Offences Wing of Mumbai Police that are investigating the fraud.

FTIL estimates that the auction of such assets would bring at least 2,679.50 crore.

The settlement plan, which needs a significant contribution from the brokers, has been proposed by FTIL without consulting with the broking entities or trading clients. Brokers also need to contribute as the so-called privity of contract of the trading clients is with their brokers, said a statement by FTIL.

Privity of contract is a legal doctrine which states that a contract confers rights and imposes liabilities only on the contracting parties.

The brokers fraternity has rejected the proposal, saying that NSEL and the defaulting entities are the perpetrators of the payment fraud, said Alok Churiwala, vice-chairman of the BSE Brokers Forum.

India Infoline Commodities Ltd and Anand Rathi Commodities Ltd, which have a large outstanding exposure on behalf of clients in the NSEL scam, did not respond to email queries seeking views on the settlement plan.

Investor bodies have also said that any settlement plan which does not include 100% payment to all entities would be rejected.

“The offer is unfair, unjust and inequitable. It should only be looked upon as an admission of guilt by FTIL and a last-ditch attempt by the company to thwart its merger with NSEL," said Ketan Shah, a member of the NSEL Investors Forum, a party to the various legal cases against the spot exchange, FTIL and the defaulters.

The Centre has proposed merging FTIL and NSEL, which would mean FTIL assuming all the liabilities of the commodites bourse and becoming a party to all agreements entered into by NSEL.

According to the plan proposed by Jignesh Shah-promoted FTIL, small claimants with outstanding dues of less than 10 lakh will be paid 100% of their claim, while those with dues between 10 lakh and 1 crore will be paid 50% of their dues. The 781 high networth individuals with dues of over 1 crore will also be paid 50% of their dues.

Public sector units will be compensated 100% of their claims, said the statement released by FTIL on BSE. “FTIL through its legal advisors, Amarchand Mangaldas and Suresh C. Shroff and Co. has submitted a ‘without prejudice’ proposal to the ministry of finance, Government of India, on 13th March 2015. The proposal is made in the spirit of being fair, equitable and just to all parties and in the interest of 63,000+ shareholders of the FTIL. The proposal is subject to the approval by not just all the parties but also FTIL’s board and shareholders," it said.

As per FTIL, the settlement proposal will lead to 94% of the investors getting between 50% and 100% of their dues within three-four weeks and the balance receiving their claims within three-four months, based on the amount recovered from the defaulters.

FTIL’s contribution in this settlement proposal will be 500 crore, but the listed entity will have to bring in only 320 crore since it extended a bridge loan of 180 crore to NSEL in August 2013.

The bridge loan was extended to the spot exchange to settle and clear the dues of trading clients with dues up to 2 lakh and 50% of those with dues between above 2 lakh and 10 lakh.

A draft government order on 21 October had suggested merging NSEL and FTIL in public interest. The merger was recommended by commodities market regulator Forward Markets Commission (FMC) and was also a long-standing demand of investors affected by the fraud at NSEL. The government is expected to pass a final order on the merger by 5 April.

FMC is of the view that the workforce and financial strength of NSEL has been depleted and so it is “financially and physically incapable of effecting any substantial recovery from the defaulting members".

On 5 February, the Bombay high court directed the government to hear all the parties and their contentions within 30 days and pass the final order within four weeks of the hearing. The court further said that the government’s final order, once it is passed, will be kept in abeyance till the court hears the case and the final order will be subject to the court’s clearance.

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. 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 NSEL members.

It turned out there were only 24 of them, and they used the paired contracts as a way to raise easy money. Subsequent probes highlighted the suspected involvement of promoters. On 14 August 2013, NSEL proposed a payout plan, but it has been unable to stick to the schedule and make a single payout.

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