The management and the board of the National Spot Exchange (NSEL) ignored an internal audit report prepared way back in 2011, which noted that the spot exchange was acting as a non-banking finance company (NBFC) without formal approval from the Reserve Bank of India (RBI).
The audit report for the period between April 1, 2011, and September 30, 2011, prepared by the then internal auditor, Mukesh P Shah & Co, further said that the books of accounts have been restructured to avoid any formal application to the central bank for an NBFC licence.
NSEL was taking higher risk of credit default as it does not hold any security or line. The activity entails funding of the transactions and the provisions of NBFC and the company has not secured any such licence as an NBFC for carrying out such activity and in order to avoid the application pertaining to NBFC, the transaction needs to be restructured in the books of accounts of the company, said the auditor in its report.
The observations of the internal audit report are similar to findings of recent investigations by government agencies like the Income-Tax Department and the Economic Offences Wing (EOW), which have also revealed that NSEL was functioning as a platform for short-term financing and that the members did not have adequate commodities as collateral to back up their exposure on the exchange.
The auditors observations have also been highlighted by the Forward Markets Commission (FMC) in its showcause notice (SCN) sent to Financial Technologies India Ltd (FTIL), Jignesh Shah, Joseph Massey and Shreekant Javalgekar on October 4, a copy of which has been viewed by FE.
The commodities market regulator has questioned the fit & proper tag of all the four entities, which, according to FMC, are jointly as well as severally responsible for the unlawful, irregular and fraudulent activities as well as poor governance in NSEL.
While FTIL is the parent company of NSEL, Massey and Javalgekar are former heads of Multi Commodity Exchange (MCX) and MCX Stock Exchange, respectively. Shah is the chairman and group CEO of FTIL.
If FTIL loses its fit & proper tag, then the company would have to sell its 26% stake in MCX. The three individuals would also not be able to hold any position in a commodity futures exchange.
Sources, meanwhile, add that the entities in their respective responses to the FMC have challenged the jurisdiction of the regulator