In an order, the commodities market regulator declared Jignesh Shah-led FTIL as ‘not fit and proper’ to hold more than 2% stake in MCX
Commodities market regulator Forward Markets Commission (FMC), has termed Jignesh Shah, Financial Technologies (India) Ltd (FTIL) and two other directors, Joseph Massey and Shreekant Javalgekar as 'unfit' to run Multi Commodity Exchange of India Ltd (MCX), the country's largest commodity exchange.
In an order, the commodity market regulator said, FTIL is unfit to hold more than 2% stake in MCX, promoted by the Jignesh Shah-led company. “In the public interest and in the interest of the commodities derivatives market, the Commission holds that FTIL is not a ‘fit and proper person’ to continue to be a shareholder of 2% or more of the paid-up equity capital of MCX as prescribed under the guidelines issued by the Government of India for capital structure of commodity exchanges post 5-years of operation," FMC said in its order.
The commodity market regulator also held FTIL and its directors, Shah, Joseph Massey and Shreekant Javalgekar responsible for Rs5,500 crore payment crisis at National Spot Exchange Ltd (NSEL).
Jignesh Shah 'highest beneficiary' of NSEL fraud
FMC said, Jignesh Shah was practically the 'highest beneficiary' of the fraud perpetrated at the NSEL Exchange. "It is because of the huge profit of Rs125 crore (approx.) earned by NSEL during FY 2012-13 that the value of the shares of Jignesh Shah in FTIL shot up manifold giving him the benefit of a spectacular market capitalization of his investment in FTIL running into thousands of crore of rupees. Jignesh Shah, as the promoter of FTIL and NSEL has misused his position to create a confidence in the minds of the participants regarding the legitimacy of the business and its operations in the exchange platform of NSEL. Shah consciously used his position to represent to the public at large about the attractive features of the contracts being traded on NSEL platform while taking no steps to introduce any effective governance mechanism including risk management, due diligence, assured collaterals etc., to ensure the legitimacy of his claims and to prevent frauds," the Commission said in the order.
Here are notable facts about the mismanagement and poor governance of NSEL mentioned by FMC…
i. NSEL conducted its business not in accordance with the conditions stipulated in the notification dated 5 June 2007 granting it exemption from the operation of FCRA, 1952, with regard to the one-day forward contracts to be traded on its exchange platform. As noted in the show cause notice (SCN), the condition of ‘no short-sell’ and ‘compulsory delivery of outstanding position at the end of the day’ stipulated in the notification were violated by NSEL.
ii. NSEL Board allowed launching of paired back-to-back contracts on its exchange platform comprising a short-term buy contract (T+2 settlement) and a long-term sell contract (T+25 settlement) with pre-determined price and profit for the buyer and seller, which violated the very concept of spot market of commodities and the transactions ultimately were in the nature of financial transactions.
iii. The Directorate of Marketing, Government of Maharashtra passed an order on 26 December 2012 suspending the private market licence issued to NSEL with directions to them to ensure transparency in the transactions on the electronic platform.
iv. NSEL suspended abruptly its trading in all the contracts (except e-Series contract) leaving thereby an outstanding default of Rs5,500 crore (approx.) from a group of 24 borrowers with poor credentials who owed the money to a large multitude of over 13,000 investors.
v. The management of NSEL provided inconsistent figures about the fund availability in Settlement Guarantee Fund which, from a stated position of Rs738.55 crore on 1 August 2013 came down to a figure of only Rs62 crore on 4 August 2013.
vi. Within a few weeks, 19 out of 24 borrowers were declared defaulters and the management had no risk management tools at their disposal to recover any money from them.
vii. The management of the NSEL formulated a Settlement Plan to pay to the investors through equated weekly disbursements of Rs174.72 crore for 30 weeks, but till date have not been able to meet the said target for any single week.
viii. The NSEL engaged a collateral management firm, named SGS to make a detailed assessment of the stock of commodities lying in their accredited warehouses. As mentioned at paragraph No.7.3 of the SCN, SGS has pointed out in their interim report that from their inspection of 16 warehouses, physical verification revealed that as against stock of Rs2,389.36 crore supposed to be lying in these warehouses as per the records, stock worth only Rs358 crore was found. Moreover, the inspecting firm was prevented from inspecting 22 warehouses despite the fact that they were engaged by NSEL for carrying out inspection on their own stock lying in their accredited warehouses. The survey conducted by the Income -tax Department on 23 May 2013 at ARK Imports Ltd, a member of NSEL, wherein gross discrepancies in the stock of raw wool was found, has also been set out at paragraph no.7.4 of the SCN.
ix. The Commission directed NSEL to engage a forensic auditor to inspect their books of accounts, records maintenance etc. Accordingly, NSEL engaged a forensic auditing firm, Grant Thornton who have submitted their report to NSEL. From the report of the forensic auditor and other information collected by the Commission in course of dealing with NSEL, various facts about lack of due diligence and control over warehouses, gross irregularities in risk management by allowing repeated defaulters to trade without margin money or collaterals, poor clearing and settlement system, mis-utilisation of margin utilisation account, financing of defaulters by NSEL, allowing related party like IBMA (a group company) to trade on the platform of NSEL and MCX etc., have come to the knowledge of the Commission which have been elaborately addressed at paragraph 6 to 8 of the SCN issued to FTIL and the other three directors.
x. The Board of NSEL failed to constitute 9 out of 10 committees mandated under the rules and bye-laws of the Company which included important Committees such as Vigilance Committee, the Clearing House Committee and the Trading Committee etc., as a result of which there was absolutely no oversight over the risk management system in place at NSEL.
Earlier in November, MCX appointed Satyanand Mishra, the former chief information commissioner as its new chairman.
MCX also recommended to FMC the appointment of Miten Mehta as a shareholder director of its promoter FTIL on its board.
On 31st October, Jignesh Shah had resigned as non-executive vice-chairman of MCX after sector regulator FMC issued a notice to him and FTIL. MCX fiasco was due to the imposition of commodity transaction tax (CTT) applied in July and recent payment crisis at NSEL.
Earlier in November, Paras Ajmera, the last nominee of promoter FTIL and Shreekant Javalgekar, managing director and chief executive officer of MCX have also resigned from the commodity exchange's board due to Rs5,600 crore payment crisis at the FTIL-promoted NSEL.
Here is the order of the FMC...
In a discussion paper on framework for revitalising distressed assets, the RBI has proposed several measures including making future borrowing expensive for defaulters and setting up a central repository for collecting information on large credits
Reserve Bank of India (RBI) has released a discussion paper on framework for revitalising distressed assets or non-performing assets (NPAs). The discussion paper outlines a corrective action plan that will incentivise early identification of problem cases, timely restructuring of accounts which are considered to be viable, and taking prompt steps by banks for recovery or sale of unviable accounts. The paper also talks about making future borrowing more expensive for borrowers who do not cooperate with lenders.
Under the proposals, RBI will set up a Central Repository of Information on Large Credits (CRILC) to collect, store, and disseminate credit data to lenders. Before a loan account turns into an NPA, banks should identify incipient stress in the account by creating a new sub-asset category, special mention accounts (SMA) in line with instructions issued by RBI.
"Banks will have to furnish credit information to CRILC on all their borrowers having aggregate fund-based and non-fund based exposure of Rs5 crore and above. While all scheduled commercial banks will mandatorily contribute their credit information on their borrowers/ customers as above, systemically important non-banking financial companies (NBFC-SI) will also be asked to furnish such information. In addition, banks will have to furnish details of all current accounts of their customers with outstanding balance (debit or credit) of Rs1 crore and above," the central bank said.
Banks will be required to report, among others, the SMA status of the borrower to the CRILC. Reporting of an account as SMA-2 by one or more lending banks/ NBFC-SIs will trigger the mandatory formation of a Joint Lenders’ Forum (JLF) and formulation of Corrective Action Plan (CAP).
RBI said, "With a view to limiting the number of JLFs to be formed, it is proposed that JLF formation would be made mandatory for distressed corporate borrowers, engaged in any type of activity, with aggregate fund based and non-fund based exposure of Rs100 crore and above. Lenders, however, have the option of formation of JLFs even when the aggregate fund-based and non-fund based exposures in an account are less than Rs100 crore."
To resolve the stress in the account, the JLF may explore various options like rectification, restructuring and recovery. "Wilful defaulters will normally not be eligible for restructuring. However, the JLF may review the reasons for classification of the borrower as a wilful defaulter and satisfy itself that the borrower is in a position to rectify the wilful default. The decision to restructure such cases should however also have the approval of the board/s of individual bank/s within the JLF who have classified the borrower as wilful defaulter," RBI said.
Here are the main proposals in the paper titled, ‘Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalising Distressed Assets in the Economy’...
Going forward, RBI said, "While some regulatory and governmental measures may be required to address the factors that are leading to deteriorating asset quality, there is an equal need for proper credit discipline among lenders."
Comments on the Discussion Paper may be sent to the Principal Chief General Manager, Reserve Bank of India, Department of Banking Operations and Development, Central Office, 12th Floor, Central Office Building, Shahid Bhagat Singh Marg, Mumbai-400 001 or emailed to [email protected] by 1 January 2014.
A close well above 6,200 is needed to for Nifty to be back on an uptrend
Yesterday, we mentioned that Nifty has to stay above Monday’s low and close -above 6,210 for an upmove to start. This did not happen today and Nifty made its lowest low of December. The market today opened with full optimism after the US economic data indicated solid improvements in business activity across the country. After five days of negative opening the benchmark opened in the positive and had a range bound session until the end of the morning session. With the beginning of the noon session, the indices started heading down.
The Sensex opened at 20,732 while the Nifty opened at 6,178. At the beginning of the session itself the indices hit their days high at 20,784 and 6,191. At the end of the session the Sensex hit a low of 20,595 and closed at 20,612 (down 47 points or 0.23%) while the Nifty hit a low of 6,133 and closed at 6,139 (down 16 points or 0.25%). The NSE recorded a volume of 52.85 crore shares, marginally higher than yesterday.
Among the other indices on the NSE, the top five gainers were Pharma (1.76%); FMCG (0.67%); Consumption (0.63%); MNC (0.61%) and Media (0.53%) while the top five losers were Finance (1.57%); Bank Nifty (1.44%); PSU Bank (1.01%); Energy (0.76%) and Service (0.71%).
Of the 50 stocks on the Nifty, 23 ended in the green. The top five gainers were Ranbaxy (4.81%); Bharti Airtel (4.58%); Cipla (3.06%); Sun Pharma (2.18%) and NMDC (1.94%), while the top five losers were HDFC Bank (3.67%); Coal India (2.96%); NTPC (2.21%); HDFC (1.97%) and Bajaj Auto (1.73%).
Of the 1,223 companies on the NSE, 511 closed in the positive, 645 closed in the negative while 67 closed flat.
Market now looks ahead for Reserve Bank of India mid-quarter monetary policy review tomorrow and the Fed’s two-day meeting starting today, where the discussion over the $85 billion of monthly bond purchases would take place.
US indices closed in the positive on Monday. The Empire State manufacturing index rebounded in December after a slump in November. Markit's US Purchasing Managers' Manufacturing index rose further into expansion at 54.4. Industrial production jumped 1.1% in November, its biggest one-month gain in a year, and surpassed its pre-recession peak, versus a 0.1% fall the month before.
Asian indices closed mainly in the green. Jakarta Composite was the top gainer which rose 1.37% while the Shanghai Composite was the top loser which fell 0.45%. European indices were trading in the negative while US Futures were trading flat.