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In one of the biggest jolts to the Jignesh Shah-led FTIL group, the commodity markets regulator, forward markets commission (FMC) has held Shah and his group unfit to run a bourse. FMC’s order follows an investigation into the affairs of the FTIL-promoted spot exchange, NSEL, which has been unable to settle dues for over four months now.

Officials of the Securities and Exchange Board of India (Sebi), the capital markets regulator, have told Mint that Sebi will take action against FTIL, which also runs the stock and currency bourse, MCX-SX. Despite the greater autonomy it enjoys and the wider resources at its disposal, Sebi’s role in the NSEL saga has been reactive rather than proactive so far. This belated promise of action by Sebi, welcome as it is, should have been taken much earlier. There were plenty of signs along the path that this case merited closer regulatory oversight.

The NSEL saga has not only raised a stink on the operations of FTIL, one of India’s most prominent market infrastructure groups, but has also exposed the wide gaps in the regulatory framework governing Indian finance. FTIL, which now has to lower its stake in the commodity bourse MCX, has a lot to answer for, the latest order by FMC shows. But the other regulators and senior public officials, who have been involved in key decisions related to the group, must also be made accountable for their acts of omissions and commissions.

The 5,500-crore payment crisis at NSEL has landed nearly 13,000 investors in a lurch, and imparted a body blow to the integrity of the Indian financial system. A group of 24 borrowers have defaulted on payments, after the exchange was forced to shut in July in the wake of regulatory orders, triggering the crisis. Even as multiple government agencies began probing the bourse almost immediately after the crisis erupted, there has been little sign of any resolution so far.

The exchange’s promoters led by Shah and FTIL outright denied any knowledge of wrongdoing but as the FMC order shows, such claims do not appear to be tenable. The managers and promoters of the bourse have also provided contradictory and misleading statements to FMC about the affairs of the bourse during the course of the investigation, the FMC order says. Investors who seem to have been taken for a ride by the bourse in collusion with a clutch of traders have meanwhile been left in the cold, without seeing any light at the end of the tunnel. FMC’s order should hopefully speed up matters now.

Which brings us back to the role of Sebi in this matter. The reactive stance of Sebi is ironic as it was the first regulatory agency to deem FTIL and MCX unfit to run an exchange in 2010 under the earlier dispensation led by Sebi chief C.B. Bhave. In 2010, Sebi ruled that the FTIL group was not “fit and proper" to run an equity exchange because “they had not adhered to fair and reasonable standards of honesty that should be expected of a recognized stock exchange".

K.M. Abraham, who issued that order, wrote a letter to Prime Minister Manmohan Singh in 2011 alleging there was pressure from then finance minister Pranab Mukherjee to look at a compromise solution to the MCX-SX application. Abraham had also alleged that U.K. Sinha, Sebi’s current chief who succeeded Bhave, was sympathetic to the finance ministry’s cause.

The finance ministry made its own set of charges against Abraham but he was subsequently cleared by the Prime Minister’s Office. It is still not known what action was taken based on Abraham’s allegations. Abraham’s order was overruled by the Bombay high court after MCX-SX challenged the order. Even though Sebi initially challenged the verdict in the Supreme Court, in its affidavit to the apex court, it agreed to take a relook into MCX-SX’s application after revising its guidelines for stock exchanges, and later granted it the required approval.

As this newspaper has argued earlier, the course of events involving senior public officials and the FTIL group suggests the need for a comprehensive inquiry by an independent agency into what exactly went wrong. There seems to be much more than what meets the eye in the meteoric rise and the equally dramatic fall of one of India’s most ambitious financial entrepreneurs, Jignesh Shah.

At a broader level, the FTIL saga underlines the folly of relying on the caveat emptor (or buyer beware) approach to financial regulations in a country such as India, where financial illiteracy is widespread. Scams related to unregulated chit funds such as the Saradha scam earlier this year, or to loosely regulated entities such as NSEL wreak havoc on unwitting investors. But they cause greater damage to the integrity of the financial system by eroding trust in financial instruments and in the sanctity of formal contracts.

Do Indian exchanges need tougher regulation? Tell us at views@livemint.com

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