Mumbai: A lawyer for investors hit by the 5,574.34 crore payment crisis at National Spot Exchange Ltd (NSEL) has claimed that Jignesh Shah, promoter and chief executive officer (CEO) of Financial Technologies (India) Ltd (FTIL) and chief financial officer (CFO) Shreekant Javalgekar, were aware of decisions taken at the commodity spot exchange in the run-up to the crisis.

Sandeep Karnik, who is representing the investors in a Mumbai sessions court, submitted a string of emails between Anjani Sinha, former CEO of NSEL, Shah and Javalgekar, which were part of the annexures to a forensic audit report being prepared for the economic offences wing (EOW) of Mumbai Police. The forensic audit report itself has not been submitted to the court or made public by the EOW.

“Shah and Javalgekar cannot claim that they were unaware of the unfolding crisis at NSEL," Karnik said in court. He said he had requested the court to direct the EOW to submit the forensic report.

Shah and Javalgeklar have been in custody since 9 May. Mint has reviewed a copy of the emails submitted to the court.

In an email written on 5 April 2011, Sinha raised concerns about a new software agreement between NSEL and FTIL discussed in October 2010.

“In October 2010, the alternative model was discussed with a clear idea that during current year the cost burden should reduce, but in future, FTIL may realize higher revenue through revenue sharing. But the fact is that there is no reduction in burden during the year and hence we need to review the alternative arrangement," stated the email.

The same email goes on to say that “a major of chunk of transaction fee (paid to FTIL) is on account of market making done by IBMA (Indian Bullion Markets Association), which is actually not an income from outside, because NSEL and IBMA are one and the same." FTIL holds a 99.99% stake in NSEL, which holds a 60.88% stake in IBMA.

Sinha further said that “we do not have any problem in sharing 20% transaction fee with FTIL, provided that the transaction fee pertaining to IBMA is not considered for this purpose."

Forwarding Sinha’s mail to Jignesh Shah on 7 April 2011, Javalgekar wrote, “Anjani has not signed the revised technology agreement with FTIL which is effective from Oct 1, 2010 & has raised new issues in his mail. I have told him several times that this was agreed by him long time back and we can not re-open issues that are discussed & settled. A firm message from you SHOULD GO TO HIM. Only after that we can think about compensating 1.5 crore towards losses incurred on MCX AGRI COMMODITIES."

A spokesperson for Multi Commodity Exchange of India Ltd (MCX) declined comment on the issue. An email sent to FTIL remained unanswered.

Sinha’s email also speaks of 1.5 crore in dues from MCX to IBMA “regarding services on account of agri commodities futures for 6 months in 2010." Subsequent emails dated 04 May show that Sinha and Javalgekar discussed the accounting treatment of these dues with Sinha suggesting that the “IBMA can raise a bill directly on FTIL for 1.5 crore on account of providing domain knowledge..." In response, Javalgekar said that “MCX should account for this in April & pay. FTIL should not be involved at all."

Shah was marked on each of these emails.

Mahesh Jethmalani, senior counsel representing Shah and Javalgekar in court, said that none of the emails proved that both of them were involved in the payment crisis at NSEL. “Anjani Sinha was actively suppressing facts," said Jethmalani.

On Monday, the court adjourned a hearing on Shah and Javalgekar’s bail application till 18 June.

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, too, were suspended a week later. The closure of trading 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 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. 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.

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 and has not made a single complete payout since.

Titiksha Mohanty and Nikita Abhyankar contributed to this story.

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