Financial Technologies and it’s founder Jignesh Shah, along with two key people (Joseph Massey and Shreekant Javalgekar) have been declared “not fit and proper” by the Forward Markets Commission (FMC). This is with respect to the mega-5,000+ cr. default at NSEL, which has lost money for over 13,000 shareholders via a financing scheme that was disguised as a valid commodity exchange transaction.
The detailed 80-page order has enough, according to FMC, to nail Shah and others as people who knew and therefore owned responsibility for their acts. Among the wrong doings:
- NSEL entered into T+25 contracts despite the regulation not allowing them to do so.
- NSEL showed “assured” returns, as shown by paired contracts executed simultaneously (one short-term and one long-term). It is fairly obvious that this was eventually the only thing the exchange did. The management knew but actively denied this allegation.
- They lied about the Settlement Guarantee Fund. We now know that there was no SGF of any real sort, but they first said there’s enough money. Then they said Rs. 800 cr. Then they eventually said there’s just Rs. 5 cr.
- They defaulted. They didn’t pay the amount they said they would pay, even though NSEL was the counterparty to all investors.
- Warehousing: NSEL didn’t verify stocks, the quality or the quantity. They did not do any seller verification, and didn’t use a proper information technology system in all warehouses. Because of that the forensic team couldn’t even backtrack and see the movement of goods. This part they get really pissed off about:
These are not isolated cases of poor governance but a deliberate ploy by a technology driven parent company (FTIL) to facilitate these wrong-doings with full knowledge of directors, promoters and the holding companies.
- They lied about warehouse sizes. In one case in Kadi, Gujarat, NSEL claimed nearly 100,000 tonnes of capacity for castor seeds. When the forensic auditor went there, they found storage of just 15,000 tonnes.
- They lied about warehouse holdings. Even though NSEL stated that they had Rs. 2400 cr. of stock in 16 warehouses, but the forensic audit team found only Rs. 368 cr. worth stocks. In Ludhiana, where the Income Tax department had raided the warehouse of ARK Imports, which was supposed to have 11,700 tonnes of Raw Wool, they found just 3,100 tonnes, and that too of inconsistent quality.
- Members (“Sellers”) were allowed to increase their exposures inspite of repeated defaults and continue to trade. In many cases, margin shortfalls were allowed to happen as well.
- An FT subsidiary, IBMA, was an active trader on the exchange with margin exemptions. This is a serious conflict of interest.
Lotus Refineries had defaulted, as per the Rules of the NSEL, on 198 days during the fifteen month period of 1 April 2012 and 30 July 2013.”
There’s a lot more in the order.
The net effect is that Financial Technologies and three people: Jignesh Shah, Joseph Massey and Shreekant Javalgekar are declared not fit and proper. This means they have to get out of the MCX board and shareholding. (The individuals are already out of the board)
FT holds 26% of MCX and it must cut that stake to 2% or less.
My view: This is a good thing. I don’t know about appeals and whether it will stand the test of the judicial system, which in our country largely means that if you’re rich you are probably not guilty and even if you serve a jail term you can get parole to visit your wife who is sick from attending too many parties the previous night.
But an order, however small, is good to retain some confidence. However, unless we see people go behind bars, and are not allowed parole, it’s only then that justice will be served. How do we know this kind of scam will not happen - or is not happening - with other exchanges? How do banks know that the warehouses they finance actually have goods that they say they do? A large part of the system is still based on the trust of management, an auditor or such.
At this point, I am jittery even about my Gold ETF, even though there hasn’t been much doubt about that. The seeds of doubt that have been created will never really go away. The fit-and-proper is a start, and it prevents these people from participating in some kind of exchanges. But things must go to their logical end - a judgement and a prison sentence for the parties involved, who may be these or others.