Concerns over the financing activities undertaken by the National Spot Exchange (NSEL) were raised at a board meeting as far back as 2011, according to the showcause notice issued by the Forward Markets Commission (FMC) to Financial Technologies India Ltd (FTIL) and Jignesh Shah, chairman & group CEO of FTIL.
Minutes of board meetings reviewed by the FMC showed that an internal audit report submitted by Mukesh P Shah & Co had noted that NSEL
was indulging in financing activities similar to a non-banking finance company (NBFC) without having the licence to do so. The report was submitted to the board and recorded in the meeting minutes, even though no subsequent action was taken.
"The report was submitted to the board and available with them, which shows they were aware,” said a senior official at the FMC.
The FMC cites this as one of many instances that implicate Jignesh Shah and other board members in the R5,600-crore settlement crisis at NSEL.
Apart from Shah, Joseph Massey and Shreekant Javalgekar who were also on the board of NSEL, have also been named in the showcause notice, which questions the fit-and-proper status of FTIL. The showcause notice, which was issued late on Friday, has given the concerned parties two weeks to respond before a final call is taken.
Meanwhile, FTIL acknowledged the receipt of the showcause notice in a notice to the BSE on Monday. “The company will reply to the showcause notice suitably in due course of time,” said the company.
Interestingly, a senior Reserve Bank of India official had told FE last month, that the RBI had also raised similar concerns over the financing activities undertaken by NSEL at a meeting of the Financial Stability & Development Council (FSDC) in 20011 – suggesting that regulators were aware of the developments at NSEL.
“Pair trade” contracts offered by NSEL ended up facilitating arbitrage trading between an investor and a supplier of a commodity as the counter-parties. For example, in a commodity where prices were trending up, the investor would buy a contract while simultaneously selling a contract of T+25 settlement cycle. The supplier or processor of the commodity acted as the counter-party to both these trades. As a result, the investor could execute an arbitrage trade, which offered 1% to 2% of