A 2009 board meet of the National Spot Exchange Limited (NSEL), where related party Indian Bullion Merchants Association (IBMA) was allowed to trade on the NSEL, has emerged as one of the most concrete charges against the promoters of NSEL.
The Forwards Market Commission (FMC) has found that all directors of NSEL - including Jignesh Shah - were present at that 2009 board meet which approved a decision to allow IBMA to trade on the exchange despite this being against the rules.
The charge is one of many that have been included in a 40 page show cause notice sent to the promoters of NSEL late on Friday, questioning their fit & proper status. The notice has been sent to Financial Technologies India Ltd (FTIL), Jignesh Shah - chairman & group CEO of FTIL, Joseph Massey - MD& CEO of MCX stock exchange and Shreekant Javalgekar, MD & CEO of MCX.
All parties have been given two weeks to respond, after which the FMC will take a final call on the issue. If their fit and proper status is withdrawn, FTIL will have to sell its 26% stake in commodity futures exchange MCX and give up directorship on any exchange regulated by the FMC.
The show cause notice holds the board fully responsible for the acts of omission and commission at the NSEL, said a senior official privy to the matter, FTIL was the ultimate holding company and a large part of their business came from NSEL, the official further added.
NSEL has been embroiled in a Rs 5600 settlement crisis which came to light in late July. While NSEL initially put out a detailed plan to make good on dues to investors, it has been unable to recover money from borrowers. In most cases, it has emerged that borrowers were not holding adequate commodities to back the contracts being traded, making it difficult to liquidate stock to make payments.
In that regard, the show cause notice also cites nearly 2000 cases of default that took place over a period of 2 years. The notice states that not only were these defaults ignored, the defaulters were allowed to continue trading on the exchange. In some instances, margin requirements were waived off to allow the defaulters to continue trading, explained the senior official.
In two cases, the FMC found that NSEL gave a corporate guarantee to borrowers in order for them to avail of funds from private banks.
Other instances cited by the FMC in the show cause notice include the fact hat the board of NSEL was asked to set up 10 oversight committees to oversee the functioning of the exchange, however 9 of these committees never saw light of day.
The FMC's final decision on the 'fit & proper' status of the FTIL group could also have a bearing on the group's stock exchange, MCX-SX. While the Securities & Exchange Board of India (SEBI) renewed the recognition to the exchange in September for a period of one year, it had indicated that any adverse ruling from another regulator could have a bearing on it's decision to allow the group to continue operating the stock exchange