The bigwig of Financial Technologies (FT), Jignesh Shah, has been arrested in connection with the massive Rs. 5,500 cr. scam of the National Spot Exchange Limited (NSEL) that unravelled in August 2013.

Capital Mind covered the scam extensively. We have a large number of posts on the topic, and an article that explains the entire NSEL scam.

In a nutshell, the exchange created forward contracts when it was not allowed to, as a spot exchange. And worse, it sold those forward contracts along with “spot” contracts as a pair, where in effect you pay money today to buy a commodity, and sell that very commodity back in a month, for a return of 15% a year. Except there was no commodity at all, it turns out. The 15,000 people who were on the pay-first part of the trade were being suckered into it on the promise of commodity-backed returns.

When the FMC eventually told the exchange to stop, the game had gotten too big. Just 24 companies were on the “sell-first” part of the trade – they got the money, kept it for a month, and returned it with 15% (p.a.) interest. But to return that money, they would borrow from someone else on a similar “paired” contract. Of course they maintained that for every borrowing they had sugar or castor seeds or some such commodity lying in their warehouse – which there wasn’t.

When they had to return the money and no fresh contracts could be issued, the ponzi scheme fell apart. The 24 borrowers couldn’t, or didn’t, return the money. The exchange which stood guarantee, as all exchanges should, didn’t have enough capital. A complicated scheme to return money to investors, apparently signed on by borrowers, has returned very little of the total money owed.

And the masterminds of the scheme turned out to be Anjani Sinha, the head of NSEL then, and his team. They’re under arrest. Most recently Sinha gave a statement to the police about Jignesh Shah’s involvement.

Financial Technologies, which had fallen to less than Rs. 115, had recovered to as high as Rs. 400 (half of it’s price before the big fall when the scam was revealed). Today it stands at Rs. 290, and after it has been found to be “not fit and proper” to run exchanges, faces a bleak future. Tomorrow the stock is likely to fall on Shah’s arrest.

Shah has been arrested along with Shreekant Javalgekar, who was supposedly involved as well with the scam.

Anjani Sinha’s statement is detailed and has accusations that could put Shah into prison if true. From tampering of evidence (destroying emails showing complicity) to quasi-trading on his own exchange and making the exchange pay for the losses, the allegations will require detailed investigation.

Till now the authorities have balked at the kind of detail one requires in an investigation. After all, if I, a distant party, could unravel the scheme sitting in my home through details available on the internet, there’s obviously a lot more that can be figured out by real information available on site – yet, it’s taken more than nine months to get to the big guys involved. And it will probably be years before all of them are eventually taken to prison.

Apparently, it’s time for the chickens to come home to roost.

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