Home >Market >Stock-market-news >NSEL buyers may have been fronts to siphon off money: FMC

Mumbai: The commodity futures markets regulator, which has oversight of National Spot Exchange Ltd (NSEL), has written to the government that it suspects the 24 buyer-members who figured in the payments crisis at the exchange may have been used as fronts to siphon off most of the 5,574.35 crore they owe to about 13,000 investors.

The Forward Markets Commission (FMC) asked the ministry of consumer affairs, food and public distribution to refer the matter to the ministry of law and justice, and indicated that NSEL promoters may have to eventually bear the responsibility of paying investors, given that they own almost 100% of the spot exchange.

Financial Technologies (India) Ltd, promoted by entrepreneur Jignesh Shah, controls 99.99% of NSEL, where the settlement crisis surfaced on 31 July, when the exchange abruptly suspended trading in all but its e-series contracts. These were suspended a week later.

FMC’s letter to the ministry throws more light on the state of affairs at NSEL.

It also brings a degree of clarity about who would foot the bill for reimbursing investors on the exchange, given that the government has recently ruled out an entity nominated by the centre taking over NSEL, or the government itself taking the responsibility of paying investors what they are owed.

In the 21 August letter to D.C. Devgune, under secretary (internal trade), ministry of consumer affairs, FMC, citing findings by the income tax authority, said “most of the liability of 5,574.35 crore in which the exchange is a guarantor as counter party, appears to have been siphoned off to other activities using these companies (24 buyer-members) as fronts".

Mint has reviewed a copy of the letter.

“We would not be in a position to comment on inter-departmental communications between FMC and the ministry," NSEL’s spokesperson said when reached for comment.

The income tax probe is yet to be concluded but FMC, which has recently been given the power to regulate spot exchanges, referred to some preliminary findings by tax authorities that suggested severe lapses in the functioning of NSEL.

In its letter, FMC has not named the entities who may have used the 24 buyer-members as fronts but explained how several lapses took place and the promoters and directors of NSEL kept quiet about them until the government raised the red flag.

“The income tax report indicates that cheating, criminal breach of trust, criminal conspiracy and possible forgery has been committed at the level of most of the warehouses resulting in much less quantity of commodities (compared to declared) being available for recovery of shortfall in payment," said the FMC letter.

The closure of trading on NSEL that brought the crisis to light may have been prompted by an instruction from FMC to the exchange asking it not to offer futures contracts. A spot exchange is not supposed to do so but NSEL was doing that.

NSEL tried to implement the change but it eventually had to suspend 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.

The income tax authority also found that NSEL did not do due diligence of buyers and transferred “huge amount of (investor) funds to them without care for risk management", according to the FMC’s letter.

The letter disclosed that post-dated cheques worth 523.85 crore deposited by NSEL’s 24 buyer members were dishonoured by Axis Bank Ltd, where NSEL had opened an escrow account to settle the dues through weekly payouts.

The bouncing of cheques, coupled with likely warehouse fraud and forged warehouse receipts, indicate complicity of NSEL, its management and board in the alleged fraud, FMC said.

“....this is buttressed by the fact that their figures have frequently changed and their assurance of getting 2,181 crore out of 5,574.35 crore of liability on time and getting bank guarantees from buyers have not been fulfilled at all," said the FMC letter, quoting the income tax department’s report.

While the income tax department is yet to come out with a final report on NSEL and its related entities that allegedly played a role in the settlement crisis, FMC suggested in a separate communication to the ministry of consumer affairs that the role of promoters of FTIL should be probed in connection with the payment crisis.

The FMC letter said, “Since FTIL holds almost 100% in NSEL and the promoters of NSEL and FTIL are common, the role of promoters should be examined as to why they cannot be held accountable for the lapses at NSEL."

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