Did NSEL-FTIL : Illegally transfer funds?

63 Moons Technologies Limited, earlier known as Financial Technologies (FTIL) Group of companies, started multiple exchanges in the country including MCX, and NSEL in association with the National Agricultural Cooperative Marketing Federation of India (NAFED) in 2005. Intriguingly FTIL—an unknown entity then—chose to hold 99.99% shares, while a giant-sized entity in the agricultural commodities market like NAFED agreed to play second fiddle with just nominal 100 shares in NSEL.

But this is not the first and only instance of reckless decision making and governance failure in the Jignesh’s Shah’s empire. Some of the pointers to this effect include:

• Stock shortage—fake records and fabricated stock statements were made to fudge facts
• Fictitious trading using E trader software
• Falsification of minutes—on May 26, 2010, though the auditors were absent, they were shown as present and even some statements were recorded as made by auditors during that meeting
• Manipulations of profits to paint a healthy financial position
• Settlement Guarantee Fund (SGF) was missing; neither the management nor the auditors (both internal and statutory) disclosed or reported the inadequacy of the SGF from 2010-2012
• FTIL, NK Proteins, and auditors helped NSEL in suppressing losses or showing greater profits.
• Both NSEL and NK Proteins Limited had common auditors—SR Batliboi and Co., SV Ghatalia and Associates and E&Y a global accounting firm.
• NSEL management’s personal interests first and foremost above that of the investors.
• NSEL tried in vain to raise a loan of Rs. 100 crore for IBMA a day before the closure of the exchange. This clearly shows that IBMA desperately needed funds to meet its obligations.
• Trading at the exchange was not the only activity that led to NSEL’s eventual collapse.

“Fictitious trading should be stopped, once the software is installed at 10 locations. Instead, IBMA software for hedging accumulated position on MCX should be activated. Hence, this software will create a pipe to distribute the money among clients and brokers, extracting the same from MCX”, Anjani Sinha wrote in his email dated June 28, 2010, to Amit Mukherjee, Arpan Jain, and others.

These manipulations not only helped NSEL show a healthier financial position but also enabled it to camouflage losses and expenses related to efforts made in increasing trading volumes. They also facilitated in the suppression of huge exposures and stock shortages.

Even before the exchange was officially asked to wind up operations, NSEL also frantically tried to get loans from third parties. This clearly demonstrates NSEL’s personal interest and collusion with the sellers—as a neutral party (if that was so) NSEL had no reason to try to raise loans from external parties. This also indicates NSEL’s awareness about the financial vulnerability of its traders turned defaulters.

In fact, it is reliably learned that fact the NSEL management got their old letterheads printed in August 2013 (after the closure of the exchange). Why and for what purpose, they know best?

Investigators probing the NSEL scam have come across many occasions where the exchange based on electronic platform and technology-driven by computers and software, inappropriately violated the procedures for digital records and system-driven workflow management.

Evidence collected by the investigators shows that there was a collusion between the NSEL management and the defaulters in many ways. Rather it wouldn’t be wrong to say that there was not one black sheep but an entire flock of black sheep with clashing interest and loyalties.

According to sources the principal actors in this drama included Jignesh Shah, ShreekantJawalgekar, Devendra Agarwal, Anjani Sinha, Amit Mukherjee, Jai Bahukhandi, Santosh Mansingh, HB Mohanty, SashidharKotian, Narsingh Rao, and Rakesh Shetty. Why blame them. This is what Shah and DewangNeralla did when they were both working for the Bombay Stock Exchange (BSE) which sent them abroad to study how technology revolutionised the capital markets at Hong Kong, Tokyo, and NASDAQ stock exchanges.

“But instead of using the knowledge acquired to help BSE, they backstabbed their parent organization and started their own business venture after coming back to India. So why crib when their own employees did t them, what they did not too long ago,” sources say.

History repeats itself

NSEL CEO Anjani Sinha was allegedly hand in glove with NK Proteins Limited Group (NKP Group). Sinha was an important decision making authority for all exchange operations right from the commencement of trading without adequate SGF, permitting sellers to trade with poor diligence, margin waivers, the inadequacy of stock and other matters. There is evidence on record that he had got Rs. 35 lakh in his bank account (Bank Account 02271050005815 HDFC Bank, Vile Parle East, Mumbai branch; Chq No. 487790) from NK Group, Bank account no. 00692320007671. The NKP group claims that this was a personal loan but still the conflict of interest cannot be ruled out.

Even before the exchange was officially asked to wind up operations, NSEL also frantically tried to get loans from third parties. This clearly demonstrates NSEL’s personal interest and collusion with the sellers—as a neutral party (if that was so) NSEL had no reason to try to raise loans from external parties

Similarly, even the NSEL assistant vice-president, business development Amit Mukherjee also appears to have been on the defaulting companies. He is said to have backdated documents, created vehicle, and delivery documents and generated pre-decided trades on a quid-pro-quo basis.

In his statement before Economic Offence Wing (EOW) of Mumbai Police, Sinha alleged that Mukherjee and his wife Bonhi Mukherjee received a sum of Rs. 18 lakh (vide Cheque dated Feb 11 and March 22) from Mohan India Pvt Ltd.

In his affidavit, Sinha also disclosed that Jai Shrivastava, a director of Mohan India, reportedly paid a sum of Rs. 35 crore to Mukherjee, in a meeting in Delhi on September 7 partly in cash and partly by cheque. “I also came to know that in the course of visits to Delhi, Amit Mukherjee was using high-end cars like Bentley, or Porsche, and would stay at the Hotel Radisson Blue (owned by Mohan India),” Sinha added. He is also understood to have received payments from Prakash Bhalotia, who seemingly was connected to SR Bhalotia who defaulted on huge payments for sugar at the exchange.

Likewise, Jai Bahukhandi is believed to have received favours for maintaining dual stock records. In one of his statement before the investigators, he is believed to have admitted that NSEL was maintaining dual records—one set which was ‘actual’ stock and another set was false stocks, which was always more than the actual stock.

Another dramatis persona involved in the fabrication of records and favoring rogue-businessmen was Shashidhar Kotian who played a role in the manipulation of accounts, fictitious invoices and billings. Being the CFO of NSEL he was involved in every act or omission relating to manipulation of accounts. All the emails relating to exposure, stocks, dealings with NK Proteins Limited were known to him.

Investigators probing the NSEL scam have come across many occasions where the exchange based on electronic platform and technology-driven by computers and software, inappropriately violated the procedures for digital records and system-driven workflow management

Apart from them, the Indian Bullion Market Association (IBMA) also got funds from other defaulters like LOIL ( Rs. 22.50 crore as consultancy fees) and Mohan Infracon (Rs. 10 crore). Out of NSEL total dues amounting to Rs. 5,600 crore, IBMA’s investors aggregated to Rs. 1,170 crore approximately. These included Rs. 12 crore ‘idle funds’ placed by Sahara Group with IBMA for trading.

Significantly, Late Shankarlal Guru, Chairman of NSEL’s Board of Directors, was the father-in-law of Nilesh Patel, a Director on the Board of NK Proteins Limited. Sinha provided a borrower advance of Rs. 5 crore to M/s Dunar Foods Ltd in his mail dated September 29, 2011, authorising it to commence its trading on NSEL platform.

The purpose behind all this was to use any ethical or unethical practice to win over investor confidence and make it seem that huge trading took place at NSEL exchange. The modus operandi was to lure more and more investors and make them participate in the trade by suppressing any losses and preventing the old investors from leaving the exchange.

In this context, it may be mentioned that a group of investors called ‘the Raval’ group traded to the extent of Rs. 1,352 crore on the exchange. Closer scrutiny reveals that La Fin Financial Services Private Limited promoted by Shah had an investment of Rs. 5 crore in one of its group company M/s Dynamatic Developers Limited. Another of its group company called M/s Tezas Trading Company Limited was a shareholder in NBHC (a group company and subsidiary of FTIL), which was subsequently acquired by Paras Ajmera (a senior executive in FTIL). CA Mukesh Shah was the common auditor of NSEL, IBMA and some of the group companies. His office was also the registered office of one of the companies in the Raval Group. This group stopped trading just before the exchange closed down and did not have any outstanding dues as on July 31, 2013. One of the NSEL directors V Hariharan also received a loan from one of the of Raval Group companies.

Reportedly there were circular money movement transactions between NKP Group and Raval Group.

It is worth mentioning that recently Sebi imposed a fine of Rs. 12 lakh on Naisadh P Desai, a former senior vice-president of Financial Technologies India Ltd (FTIL), for violating insider trading norms. As per Sebi’s order, Desai a senior vice-president and company secretary of FTIL (March 2008 to September 2013) bought and sold 12,000 shares of FTIL without obtaining pre-clearance of trades in accordance with model code of conduct under PIT (Prevention of Insider Trading) norms.

Almost five years after it started an investigation, the Enforcement Directorate (ED) has filed a supplementary complaint under the Prevention of Money Laundering Act (PMLA), against FTIL, NSEL, Shah, Indian Bullion Market Association (IBMA) and Sinha, the executive director of IBMA for laundering close to Rs. 1,254.08 crore

As per the model code of conduct, all directors, officers, designated employees of the company and their dependents who intend to deal in the securities of the firm should pre-clear the transaction.

“Therefore, being an officer of a listed company, an obligation was cast upon him (Desai) under the Sebi PIT Regulations to obtain pre-clearance in respect of his trades in the scrip of the company,” Sebi order stated while imposing a monetary penalty on Desai.

Meanwhile almost five years after it started an investigation, the Enforcement Directorate (ED) has filed a supplementary complaint under the Prevention of Money Laundering Act (PMLA), against FTIL, NSEL, Shah, Indian Bullion Market Association (IBMA) and Sinha, the executive director of IBMA for laundering close to Rs. 1,254.08 crore.

Further according to ED NSEL earned an income of Rs. 1,112.03 crore from 2008-09 to 2013-14, which according to it amounted to proceeds from the crime. Apart from this as per law, NSEL was to maintain a sum of Rs. 236.05 crore under the head of ‘Settlement Guarantee Fund’ to safeguard the interest of its trading members. However, the funds were allegedly used to repay the overdraft facility of a private sector bank.

According to highly placed sources, though NSEL was licensed to function as a commodity exchange, instead it was being run like a financial exchange. “FTIL has incorporated and operated NSEL as financial exchange with the sole aim of maximizing profits. FTIL has been actually involved with possession, acquisition, and use of proceeds of crime,” ED claimed in its complaint.

“In fact, the NSEL executives… submitted bogus stock offer letters claiming that equivalent stocks have been delivered to the NSEL designated warehouses. Huge funds were channeled to the defaulting entities without any semblance of goods,” ED claimed in its complaint.

Likewise, the IBMA acquired proceeds of crime from members/defaulters of NSEL under the guise of fake invoices prepared in the name of trading of various commodities and also in the name of consultancy charges. “IBMA has been actually involved with possession, acquisition, and use of proceeds of crime, and projected the same as untainted,” ED claimed.