NSEL Fallout: FT and Jignesh Shah Found Unfit and Improper

6 comments Written on December 20th, 2013 by
Categories: FinanTech, MCX

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.

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  • 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.

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  • 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.
  • 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.”

  • An FT subsidiary, IBMA, was an active trader on the exchange with margin exemptions. This is a serious conflict of interest.

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.

     

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About the Author:
http://www.capitalmind.in
The man behind Capital Mind. Deepak is a co-founder at MarketVision, a financial knowledge company. Deepak also provides data research and consulting services, and now lives in Bangalore. Connect with him at deepakshenoy@gmail.com.

6 comments “NSEL Fallout: FT and Jignesh Shah Found Unfit and Improper”

The Gold ETF is another scheme designed to completely fool gold buyers (ahem…investors). Actual gold stocks are only a fraction of the ETFs issued against them. They only serve to depress current gold prices, since investors, instead of creating actual Gold demand, create a faux demand by buying ETFs (which the ETF sellers are only too happy to issue unbacked). There is nothing preventing multiple large institutional investors from being issued the same warehouse receipt for gold stocks over and over again. And since gold is not perishable, you can go to the warehouse and actually see ‘your’ stock happily as many times as you want!.
The ONLY way to invest in gold is to actually have the shiny metal IN YOUR HAND. Coins are the best whereas jewellery is a poor substitute. ETFs are merely paper…or in demat form, mere digital bits.
The Gold ETF scam is quite well hidden from the public and big-big govts support it, so it won’t come out soon. By buying Gold ETFs instead of actual physical gold, you are merely a speculator and not an investor in gold.

So Deepak – After all this (in the blog) the stock is climbing.
Did not see that coming, Your take?

Siddharth

Ha! Yes, of course. Even MCX is up big time. Sometimes markets work on different fundas :)

hehe u Bet!
May be its HDFC and Kotak’s belief in MCX (I guess they bought into them at ~INR 250).
But as I see people are trading less on MCX (Traded Contracts going down m-o-m) and hence trying as much as I can to keep away from buying into this since the crisis – Must tell very difficult to stay away from a stock like this .

Buy a little! Don’t worry about my analysis – lots of things can change…

No defn ! Your analysis is top of the range.
But Between MCX and Tech stock I go fully invested in that stock as a risk / reward ratio and fact that I am sleeping during Indian Trading hours (I am in US).