FTIL asks for cross-examination of the forensic report on NSEL in its response to the show-cause notice
Mumbai: Financial Technologies (India) Ltd, or FTIL, told the commodities market regulator on Tuesday that its show-cause notice is premature and questioned the credibility of a forensic audit report prepared by Grant Thornton on National Spot Exchange Ltd (NSEL), according to a person directly involved in the development, who declined to be named.
FTIL was responding to the 4 October notice issued by the Forward Markets Commission (FMC) asking its directors why they should be considered “fit and proper” to operate a commodities exchange.
FTIL is the owner of beleaguered NSEL, which is in the middle of a Rs.5,574.35 crore payment crisis to its investors. It also holds 26% in Multi Commodity Exchange of India Ltd (MCX).
FTIL’s promoter Jignesh Shah and directors Joseph Massey and Shreekant Javalgekar appeared for a hearing of the show-cause notice at the FMC office.
FTIL, in its response to the show-cause notice, has asked for cross-examination of the forensic report on NSEL. The firm also said it has “fully segregated management, control and operations in MCX which is a demutualized commodity exchange and the shareholding has no relevance to its management”.
Massey and Javalgekar not only held directorship on MCX and NSEL but were also senior executives on exchanges promoted by FTIL till recently.
On 25 September, Massey, who was to retire by rotation as a director in the company, withdrew his offer for reappointment, while on 19 October, Javalgekar resigned from the board, without specifying a reason.
Shah, founder-chairman, managing director and chief executive of FTIL, on 31 October resigned from the board of MCX, linking his decision to the crisis at the spot exchange.
FMC in its show-cause notice has alleged that even though borrowers had defaulted on earlier loans, they were allowed to raise money on the NSEL platform. FMC also said FTIL issued corporate guarantees for these borrowers for getting bank loans. The notice also said FTIL-promoted India Bullion Market Association was allowed to trade on NSEL and MCX.
In its response, FTIL said that the allegations related to NSEL have not been adjudicated but the final conclusions of the FMC notice showed the regulator prejudged the case against the parent firm. “NSEL appointed Grant Thornton in the first place to conduct the forensic audit,” said Ketan Shah, an aggrieved investor of NSEL. “Now they say their findings are questionable? It sounds ridiculous to me.”
Meanwhile, the economic offences wing (EOW) of the Mumbai police on Tuesday issued an order for attachment of properties of Mohan India Pvt. Ltd, one of the borrowers of NSEL, additional commissioner of police Rajvardhan Sinha said.
This order has been issued by EOW despite Mohan India’s recent pact with NSEL to pay Rs.771 crore over one year towards its settlement obligations. “I cannot comment on the agreement between Mohan India and NSEL, but we have issued an order for attachment of two properties of Mohan India,” Sinha said.
In a related development, a Maharashtra court on Tuesday extended police custody of Arun Kumar Sharma, director of Lotus Refineries Ltd, one of the borrowers of NSEL, till 16 November. EOW had arrested Sharma on Monday. The settlement crisis at NSEL came to light on 31 July when the exchange abruptly suspended trading in all but its e-series contracts. These, too, were suspended a week later. The closure of trading may have been prompted by an instruction from the ministry of consumer affairs to the exchange asking it not to offer futures contracts. A spot exchange isn’t supposed to do so, but NSEL was doing that.
NSEL tried to implement the change but because its appeal was to investors and members who were not interested in spot trades, it eventually had to suspend all trading. It later emerged that trading on NSEL happened in paired contracts, with investors, through brokers, buying a spot contract and selling a futures one for the commodity.
The entities selling on spot and buying futures were planters or processors and members of the exchange. It turned out there were only 24 of them, and they used the paired contracts as a way to raise easy money. When the trading was suspended, investors were left holding contracts that the members couldn’t buy because they didn’t have the money to do so.
Khushboo Narayan & Ami Shah Mail Me
First Published: Tue, Nov 12 2013. 09 42 PM IST