Who regulates NSEL, asks Bombay high court

Mumbai: The Bombay high court on Monday asked the central government, ministry of consumer affairs and commodities regulator Forward Markets Commission (FMC) to clarify by Friday the name of the agency that has the “power to supervise and regulate” the crisis-hit National Spot Exchange Ltd (NSEL), failing which it will pass an order on its own.

“We are surprised to know that there is a vacuum as far as regulating such entities is concerned. Who regulates NSEL?” asked Justice S.J. Vazifdar.

He was responding to the statement made by K. Setalvad, additional solicitor general, that FMC does not have powers to enforce settlement of contracts at NSEL, which is engulfed in a ₹ 5,574.35 crore settlements crisis. Setalvad is representing FMC in the Bombay high court in a case filed by Tarun Jain and Ketan Shah—two investors of NSEL who have asked the court to stay the settlement of the gold and silver e-series contracts of the exchange. They both want the e-series settlement to be clubbed with the other settlements.

Spot commodity markets have been mainly regulated by the states. A comprehensive regulation for spot exchanges will be ready in the next few months, following which all spot exchanges will have to seek permission from the FMC to launch any contract.

Earlier, the high court had asked FMC and the Economic Offences Wing (EOW) of Mumbai police to monitor the books of NSEL and its subsidiary Indian Bullion Market Association (IBMA) to verify each request for settlement received by the exchange under the e-series contracts. The court also prescribed the process of settlement of the contracts. The two investors also want FMC to verify the authenticity of the gold and silver stocks under e-series and ascertain whether these were purchased with investors’ money.

They also want the court to restrain NSEL from making payouts to preferred e-series investors. NSEL on 27 September announced a faster route to settle the dues of investors in e-series products by way of financial settlements from 3-9 October. E-series contracts are those in which retail investors can buy and sell commodities in demat form. They involve 33,000 investors and around ₹ 525 crore.

A senior official of the EOW on Monday said the agency had begun verification of assets of NSEL for attachment. “We will soon begin attatchment of the aasets,” he said on condition of anonymity.

On Monday, Setalvad said FMC did not find anything amiss in the e-series contracts. “The investigation is still going on but as of now we have not found anything wrong with the e-series contracts.”

However, the two investors who filed the case said they found that 99.5% of trades in the e-series contracts were carried out by NSEL’s subsidiary, IBMA.

NSEL holds around a 68% stake in IBMA.

“There is an inter-mingling of funds by NSEL and the settlement guarantee fund (SGF) has been used to pay off its ₹ 235 crore loan of HDFC Bank in April. In light of these events the court should stay the settlement of e-series contracts,” said Gaurav Joshi, the counsel representing Jain.

Joshi said that according to the forensic audit carried out by Grant Thornton, a consultancy firm, some portion of the SGF was given to SNP Designs—a company run by the wife of NSEL’s former managing director and CEO Anjani Sinha.

SNP, in turn, had carried out trades worth ₹ 40,000 crore on the Multi Commodity Exchange (MCX), alleged Joshi.

Both NSEL and MCX are units of Financial Technologies (India) Ltd, or FTIL, a company promoted by entrepreneur Jignesh Shah.

Till date, FMC has received 65 requests for rematerialization (converting electronic holdings into physical certificate format) or financial payouts in the e-series contracts. Out of this, six requests from IBMA and two requests from individuals have been accepted by the commodity regulator, according to court submissions. The remaining requests have been rejected by FMC for lack of proper documents. “One company Sahara Q Shop’s request for rematerialization of 177 kilos of gold has been rejected because Sebi (Securities and Exchange Board of India) wants to attach the property in another ongoing case,” said Joshi in his submissions.

A division bench of the Bombay high court, comprising Justices S.J. Vazifdar and K.R. Shriram, on Monday also adjourned the final hearing to 25 October and ordered NSEL to file a copy of the supplementary report of Grant Thornton in the court.

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 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.

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.

Meanwhile on Monday, Pankaj Saraf an investor, filed a complaint against EY and Deloitte Haskins and Sells with the EOW.

Deloitte is the statutory auditor of FTIL while EY had allegedly prepared a report on NSEL’s warehouses in 2012.