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...