CALL it an act of omission or commission, but a number of coincidences in the Rs. 5,600-crore FTIL-NSEL case seem to convey that the decks are being cleared to help Jignesh Shah bail out without a blemish. The Ministry of Corporate Affairs (MCA) passed a merger order between NSEL and FTIL, its parent company (now called 63 Moons Technologies ltd). FTIL filed a writ petition in the Bombay High Court challenging the merger. SEBI (originally called Forward markets Commission, FMC) was respondent no. 2.
The matter was argued at length in the Bombay High Court by SEBI counsels who ostensibly pleaded in support of the merger order issued by the MCA, which in a way was what NSEL investors wanted. However, the HC rejected the FTIL writ petition because of a special leave petition (SLP) in the Supreme Court by FTIL. Curiously though, SEBI, a respondent, is nowhere to be seen or taking interest in arguing the case being heard in the Supreme Court.
Intriguingly, the whole idea of FTIL-NSEL merger was mooted by the FMC (now SEBI) which suggested this option to MCA. Based on SEBI’s advice, the Ministry has given its go-ahead to the Serious Fraud Investigation Office (SFIO) to prosecute 17 individuals and companies in the Rs. 5,600-crore NSEL scam.
Based on SEBI’s advice the MCA authorised SFIO to file winding-up petition against 17 defaulter companies, including Lotus Refineries Pvt Ltd, Juggernaut Projects Ltd and Mohan India Pvt Ltd. Apart from this, MCA recommended stringent action against 12 auditors including SV Ghatalia& Associates and Ernst & Young (E&Y), who were conducting FTIL group’s statutory audit till 2011-12. But for reasons best known to them, SV Ghatalia and E&Y decided to part ways and expressed their unwillingness to continue as the group’s statutory auditors. As a result, Mukesh P Shah & Co—a little-known statutory audit firm; its proprietor was related to Jignesh Shah, husband of his mother’s sister—was appointed as statutory auditor.
Coincidentally this phase dates back to around April 2012 when the change in the audit firms took place. This was also the period when the 24 defaulters made hay and nearly 70 per cent of the outstandings worth crore of rupees piled up.
THE SFIO had pointedly raised an objection about the role played by auditors who failed in their duty to verify and report the fact that the warehouses which NSEL claimed to be using were not accredited with WDRA (Warehousing Development and Regulatory Authority) from the very beginning. The auditors also failed in their duty to cross-check whether the internal control mechanism or the fact that warehouses were in reality were controlled by the defaulters.
A 31-page complaint filed with the Mumbai Police’ Economic Offences Wing (EOW), which alleges mismanagement by NSEL’s senior management and that nearly 99 per cent of the receipts for commodities stored in NSEL’s warehouses were ‘fake’
“In the (SFIO) report it has been mentioned that auditors did not verify and report—NSEL was the counter guarantor for all trades taking place on its exchange. It was the responsibility of the auditors to check that there were adequate internal control mechanisms,” the MCA order said.
This coincides with a 31-page complaint filed with the Mumbai Police’ Economic Offences Wing (EOW), which alleges mismanagement by NSEL’s senior management and that nearly 99 per cent of the receipts for commodities stored in NSEL’s warehouses were ‘fake’. In reality, there was not even a grain physically present on the ground.
This has cleared the deck for the prosecution of the auditors, engaged by NSEL and the defaulters, under Sections 227, 233 and 628 of the Companies Act, which pertains to the powers and duties of the auditors as well as the penalty for noncompliance by them.
Another significant issue now is how Jignesh Shah, whose name is mentioned in the NSEL balance sheets between 2005-06 and 2011-12 as the “key management person”, claim that he didn’t have any role to play in managingthe NSEL affairs. It is pertinent to note that from the financial year 2013 onwards Shah’s name was mentioned only as a former MD & CEO, and Anjani Sinha was officially designated as the key management person. Key management personnel mentioned in the annual report of a company is expected to be familiar with the organisation’s long-term goals and day to day activities. Though Shah did not receive any remuneration, as a promoter-director he cannot be condoned for being unaware of the firm’s dealings.
Incidentally, ????? has given its clearance to SFIO to proceed against 13 people, including Jignesh’s father Prakash Shah, two brothers Manish and Manjay Shah and sister-in-law Tejal Shah (wife of Manjay Shah).
According to highly placed sources, Shah is like a ‘cold blooded mastermind’ who prefers to work anonymously from behind a smoke-screen. He managed to create an impression in the minds of the investors and made them believe that NSEL’s operations were legitimate and conceal the signs of a cozy relationship between NSEL’s promoters, management and defaulters.
But the issue is, what happens to the Mumbai Police EOW’s 28,000-page supplementary chargesheet against Jignesh Shah, Anjani Sinha, NSEL, 63 Moons, India Bullion Market Association and 63 accused—36 companies and 27 individuals as well as brokerage firms like AnandRathi Commodities, GeofinComtrade and India Infoline Commodities (the non-defaulting brokers)—for criminal conspiracy (Section 120B), cheating (Section 420), forgery ( Sections 468 and 471), misappropriation of property (Section 403), and falsification of account ( Section 477-A) under the Indian Penal Code (IPC). Taking a tough stand the MCA has sought SEBI and SFIO’s clarification about probable action against the non-defaulting brokers. The EOW had filed the first chargesheet against key officials of NSEL, including Jignesh Shah, in May 2014. Both MCA and SFIO agree that Sebi should monitor the non-defaulting brokers like Anand Rathi Commodities, GeofinComtrade, India Infoline Commodities and their directors to ensure that they do not accessthe money market orfinancially hurt their clients, even if it comes to declaring them unfit and improper.
However, despite the best of intensions, various agencies investigating different aspects of the case are only confusing each other. Instead of strengthening each other, they are ending up creating more trouble. For instance, Enforcement Directorate (ED) wanted to know the report filed by SFIO on September 4, 2018. Instead of a copy of the report, it received a cold shoulder. Likewise, an anti-money laundering agency, which sought a copy of the Economic Affairs Wing (Mumbai Police) second chargesheet, was asked to come through proper channel.
ALL in all, it is neither smooth sailing for the investigators or the nearly 13,000 investors. Initially, investors were confident that sooner or later, they would get their money. But in the last 3-4 years, they have seen so many failures that about half of them have lost hope while the other half don’t care. This is a psychological operation which Jignesh Shah and his supporters seem to be close to winning. Right now many of them have nothing much to do; they have all the time and money to engage best lawyers and keep track of what is happening. On the contrary, investors who have already lost most of their savings have to work hard to earn enough to support their families. Besides, many of them have been brain washed by Jignesh Shah’s supporters that they will lose all chances of recovering their amount if they don’t cooperate and stand-by Jignesh Shah now. As a result, many of them have stopped paying the money required to run the Investors Association and engage lawyers to pursue the case in court. On the contrary, the pro-Jignesh Shah army is highly motivated; the prospect of winning an almost lost battle is making them bold and daring.
Coming back to the question whether Jignesh Shah knew what was going on in his group of companies, page 329-331 of SFIO report cites an email dated June 29, 2013, from Amit Mukherjee to Regional offices of NSEL which states, “you are hereby notified not to send return calculators related to T+2 andT+25 contracts from your official email id… you are requested to communicate daily trade rates and the returns telephonically or from your personal email id to all members…”
APPARENTLY, the NSEL management had come to know that regulatory authorities were scrutinising the paired contract. Hence this email was sent to warn the regional offices to stop circulating the “Return Calculators” and directed the Business Development Teams to communicate the daily trade rates and returns by telephone or through personal email ids.
Shortage of Stock
On July 5, 2012, ShreekantJavalgekar, MD & CEO of FTIL-MCX group sent an email to Shashidhar Kotian, Anjani Sinha and Mukesh Shah providing details of deficit payments of Rs. 2,703 crore from 21 parties, including IBMA (Rs. 994.03 crore), NK Proteins (Rs. 662.29 crore), PD Agro Processors (Rs. 417.76 crore), ARK Imports (Rs. 194.19 crore), Lotus Pharma Chemand Aastha Minmet India (Rs. 134.59 crore). These companies were to be regularly monitored by FTIL, NSEL and Mukesh Shah.
Despite the best of intensions, various agencies investigating different aspects of the case are only confusing each other. Instead of strengthening each other, they are ending up creating more trouble. For instance, Enforcement Directorate (ED) wanted to know the report filed by SFIO on September 4, 2018. Instead of a copy of the report, it received a cold shoulder
Later, Sunil Sarda, Director, Systematix Shares & Stocks sent a similar mail to Manjay Shah on July 3, 2013, raising concern about deficit stock position in NSEL warehouse vis-a-vis the open position. The mail stated that there was a stock position of Rs. 3813.12 crore against an open position of Rs. 6698.84 crore. Manjay Shah forwarded a copy of this email to Jignesh Shah, Anjani Sinha and Mukesh Shah with the comment “Do the needful on priority”. These emails in a way confirm that the management of FTIL, NSEL and the Auditor was aware that trading was going on without being backed by underlying commodities and that there were no standard operating procedures, documentation, and book-keeping of commodities in the warehouses.
It is being argued that as the founder Shah exercised full control over FTIL and its group companies. He was the key managerial person of NSEL till 2012 and enjoyed special rights including unlimited drawing rights against NSEL’s bank accounts. This also becomes clear from the manner in which Jignesh Shah, in the meeting dated July 10, 2013, briefed the Secretary, MCA and FMC officials explaining the entire risk management and mitigation procedures being practiced at NSEL.
