The detail study

1. NSEL Spot Exchange Scam..
ITM - EMBA (Finance) Group 2 - Batch 34

2. Group No 2 (EMBA – Finance) Batch 34
• Prashant Mirgule – Roll No. 52
• Karunakar Niwate – Roll No. 53
• Theresa Tumkur – Roll No. 100
• Shital Pawar – Roll No. 105
• Sahezad Sakharkar – Roll No. 23
• Rinki Haldar – Roll No. 14
ITM - EMBA (Finance) Group 2 - Batch 34

3. About NSEL
• National Spot Exchange Limited (NSEL) is the national
–level, institutionalized, electronic, transparent spot
trading platform for commodities.
• It is a structured market place, set-up to transform the
commodity market by way of reducing the cost of
intermediation and thereby improving marketing
efficiency.
• NSEL provides customized solution to farmers, traders,
processors, exporters, importers, arbitrageurs,
investors and other stakeholders pertaining to
commodity procurement, storage, marketing,
warehouse receipt financing, etc.
ITM - EMBA (Finance) Group 2 - Batch 34

4. Background
• It was discovered after the exchange defaulted on 31 July 2013 that
most of the underlying commodities did not exist and the buying
and the selling of commodities like steel, paddy, sugar, ferrochrome
etc. was being only conducted only on paper.
• The pair trades in various commodities were offered in one day
forward contracts of T+2 and T+25 but, The investors, who honored
the T+2 payment obligation, found that the National Spot Exchange
neither had the money, nor the commodities, to honor their T+25
dues.
• Around 24 borrowers were given the funds by the NSEL, without
any underlying commodity deposited by those borrowers.
• An estimated number of 15000 investors, along with public sector
units like MMTC and PEC, were victims of this NSEL scam.
ITM - EMBA (Finance) Group 2 - Batch 34

5. Background (cont)
• The ROC report on NSEL fraud has come down
heavily on the promoters and the FTIL, as it
was found that a majority of minutes of
meetings of the NSEL board were fabricated,
as cell phone location data of the said board
members did not match to the meetings’
locations.
ITM - EMBA (Finance) Group 2 - Batch 34

6. The Beginning of Black Hit..
• NSEL was promoted as a spot commodity exchange by FTIL and a token
100 shares were given to NAFED so that the brand of NAFED can be
used and the exchange could be touted as a 'farmer's market'.
• The business between 2007-2009 was lackluster and that is when NSEL
with full knowledge of Jignesh Shah and other board members
introduced fraudulent 'paired contracts' where investors could buy
short duration contract and sell a long duration contract at the same
time (usually T+2 and T+25).
• NSEL in 2010 applied to FMC for registration of these NTSD (Non
Transferable Specific Delivery ) paired contracts exceeding 11 days
under section 14A of FCRA. The FMC did not approve or reject this
application till the scam broke out in 2013.
• Without waiting for the FMC regulation approval or registration, NSEL
went ahead and sold these contracts rampantly through brokers.
ITM - EMBA (Finance) Group 2 - Batch 34

7. The Beginning of Black Hit..(contd)
• In early 2012 the FMC was appointed as 'designated
agency' to collect data from NSEL and protect
investors' interest.
• In April 2012 the Ministry of Consumer affairs issued a
show cause notice to NSEL that it was violating the
conditions of 2007 exemption like 'no short sale' , 'no
stock verification mechanism' and conducting trades
beyond 11 days'.
• So from early 2012 - July 2013 the FMC knew about
fraudulent NTSD contracts rampantly being conducted
without registration under section 14A14B of FCRA but
for reasons unknown did not act.
ITM - EMBA (Finance) Group 2 - Batch 34

8. Light on the Issue..
• The NSEL scam or NSEL fraud is a systematic and
premeditated fraud perpetrated in the commodity
market on the National Spot Exchange that is based in
Mumbai, India.
• The NSEL is a company promoted by Financial
Technologies India Ltd and the NAFED (only 100 shares
given for misusing the NAFED brand.)
• The NSEL scam is estimated to be a Rs. 5600 crore
(around US$0.95 billion) fraud that came out to light
after the National Spot Exchange failed to pay its
investors in commodity pair contracts after 31 July
2013.
ITM - EMBA (Finance) Group 2 - Batch 34

9. Allegations and Actions Taken on Issue
• Mumbai police is presently investigating this fraud and the Mumbai
police has conducted various raids.
• An FIR (First Information Report) has been filed against the
directors of the NSEL, and the directors of their promoters i.e.
Financial Technologies India Ltd, along with various other brokers
allegedly involved in the fraud.
• On 9 October 2013, Amit Mukherjee, the Assistant Vice President
(Business Development) of NSEL, was arrested by the EOW of the
Mumbai police marking the first arrest in the scam.
• Finally, Mumbai police finally arrested Jignesh Shah along with his
trusted lieutenant Shreekant Javalgekar who were all along believed
to be the masterminds of the scam on 7 May 2014.
Article Economics Times in June 2014 reported below
ITM - EMBA (Finance) Group 2 - Batch 34

10. Allegation On Investigative Agencies
• The NSEL investors association has alleged
slow investigation by Mumbai police ,
purposely going slow on FTIL group,Auditors
of NSEL, defaulting borrowers and brokers
who sold the ponzi scheme. It is being alleged
that the data of crashed email server of FTIL-
NSEL was not purposely being recovered by
Mumbai police.
ITM - EMBA (Finance) Group 2 - Batch 34

11. CBI Action
• India's premier investigation agency The Central Bureau of
Investigation raided various NSEL and borrowers' offices as
well as the residence of Jignesh Shah and booked an FIR
under prevention of corruption act for the funds that
MMTC and PEC two public sector units were made to invest
in NSEL.
• However investors have complained that CBI has taken no
action against politicians/bureaucrats involved in this scam
and FTIL group.
• The CBI conducted searches at 15 locations to unravel the
conspiracy to get Project & Equipment Corporation (PEC), a
PSU, to trade on NSEL. The fraud by a group of people
resulted in an alleged loss of Rs. 120.75 crore to PEC, said
the CBI in a press release on 13 March 2014.
ITM - EMBA (Finance) Group 2 - Batch 34

12. Major Changes after Issue..
• On 21 October 2014 the Ministry of Corporate
affairs announced a draft order for merger of
NSEL which is the subsidiary company with its
holding company ,viz., FTIL.
• On 28 February 2015,The ministry of corporate
affairs convinced about FTIL's fraudulent
activities, moved a CLB application to take over
the board of FTIL and replace it with govt.
nominated directors. This move is being
contested by Jignesh Shah appointed FTIL board.
ITM - EMBA (Finance) Group 2 - Batch 34

13. Effect of NSEL Fraud…
• As an effect of the NSEL fraud, the share prices of its promoter
company FTIL crashed by 60-70% resulting in massive erosion in the
company’s market cap.
• The share prices of the sister company MCX (Multi Commodity
Exchange Ltd) also took a beating.
• The FMC has already issued an order on FTIL, Jignesh Shah, Joseph
Massey etc. that they are not fit and proper to run any exchange in
India.
• Jignesh Shah and Joseph Massey on 9 October 2013, had to resign
from the board of MCX-SX stock Exchange.
• FTIL has sold 15% stake of MCX to Kotak on 20 July 2014.
• Subsequent to a High Court directive the FMC got a monitoring and
Auction committee(MAC) formed to dispose liquidate assets of
NSEL
ITM - EMBA (Finance) Group 2 - Batch 34

14. Thank You
ITM - EMBA (Finance) Group 2 - Batch 34