3 min read.Updated: 18 Sep 2013, 02:47 PM ISTAmi Shah
Jignesh Shah had attempted to allay concerns of over potential trouble brewing at NSEL long before it plunged into crisis
Mumbai: Three weeks before the National Spot Exchange Ltd (NSEL) plunged into a crisis, promoter Jignesh Shah attempted to allay concerns of the regulator and the government over potential trouble brewing at the commodities exchange, according to documents seen by Mint.
The documents contradict the stand taken by Anjani Sinha, former managing director and chief executive officer (CEO) of NSEL, who last week took all the blame for the debacle onto himself and other former senior executives, and attempted to absolve the exchange’s governing board and its promoters.
Shah is the promoter of Financial Technologies (India) Ltd (FTIL), which owns NSEL.
Shah had made a powerpoint presentation to officials of the Forward Markets Commission (FMC) trying to allay regulatory concerns, according to an FMC official present at the 10 July meeting between NSEL officials and FMC. Sinha only changed the slides for the presentation, said the person, who didn’t want to be named. Mint has a copy of the presentation.
The presentation referred to long-dated contracts such as the T+90 settlement cycle offered by the London Metal Exchange to support NSEL’s own contracts with longer settlement cycles. NSEL’s long-dated settlement contracts have now proved to be at the root of the problem.
The meeting took place three weeks before NSEL plunged into a ₹ 5,732 crore payments crisis after suspending trading on all its forward contracts on 31 July. Documents pertaining to the meeting seem to reinforce the case that last week’s affidavit by Sinha was part of an attempt to shield the board of the exchange.
An FTIL spokesman said it was not Shah, but Sinha who addressed FMC and the department of consumer affairs on 10 July, but a communication dated 20 August from FMC to NSEL’s board mentioned that Shah had made the presentation.
In another FMC communication to Sinha, dated 16 August, the regulator referred to the presentation made by Sinha and Shah.
In the presentation, Shah had said: “...NSEL offers highest level of safety for the participants as the model has over 100% stock as collateral (managed by independent collateral manager), 10-20% as margin money and backed by 100% of post dated cheques from participants."
There were other alleged inconsistencies in the presentation made by Shah.
Documents reviewed by Mint had shown last month that the Maharashtra government suspended the licence of NSEL in December 2012. Deepak Taware, the current director of agricultural marketing, confirmed the development.
However, in the 10 July presentation, Shah indicated that NSEL held state-wide licences in nine states, including Maharashtra.
Analysts do not believe that Shah and the NSEL board were ignorant of the suspected wrongdoings at the exchange, given the depth of the troubles that have surfaced at the exchange.
“It’s unlikely that Jignesh Shah didn’t know much of what’s happening at NSEL and that he was misled completely by the exchange’s management team—especially given the way the FT group is structured and runs," Hirander Misra, co-founder and CEO of London-based Global Markets Exchange Group, told MintAsia earlier this month.
“Former exchange officials from the group have said that practically every budget proposal has to be signed by him," he said.
The presentation boasts that NSEL’s contribution to the nation was “channelizing household savings into most productive means of finance to support economic development" and, ironically, spends some time explaining short sales.
It claimed that the term short sale was not defined by the Securities and Exchange Board of India Act or any notification issued by FMC, and that the exchange had come up with its own definition of the term.
According to it, short sale means “any sale transaction without any intention to give delivery and with the intention to make profit from any price fall in near future".
It is now evident that selling members had no intention to give deliveries, and the transactions were not adequately backed by stocks.
Interestingly, NSEL had predicted in the presentation that if the existing notification to the spot exchange was withdrawn, there would be chaos because the money of thousands of market participants would be stake. That is just what happened after 31 July. The exchange has also not managed to stick to a payout plan it agreed to.
In his affidavit, Sinha accepted responsibility for the troubles at NSEL, and alleged that two other former senior executives—Amit Mukherjee and Jai Bahukhandi—were responsible for wrongdoings that landed the exchange in a crisis and led to losses for investors.
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