C-Company – Part 9 – A Long History of Harassment

C-Company found a convenient stick in NSEL to beat Shah with

C-Company found a convenient stick in NSEL to beat Shah with
C-Company found a convenient stick in NSEL to beat Shah with

Parts 1 through 8 of this series can be accessed from this page. This is Part 9.

The Deconstruction begins

Once MCX-SX got a license to become a full-fledged Stock Exchange, NSE had to move to a higher gear to protect the interests of Chidambaram and the C-Company. In a previous series8, I have written about how NSE allowed co-location at its premises[1] that resulted in a scam of Rs.50,000 crores-Rs.100,000 crores. While the main beneficiaries are being investigated[2], the fact that most of the accused are card carrying members of the C-Company cannot go un-noticed.

The FMC created the crisis and took no action against the defaulters or to resolve the crisis despite having all the powers.

C-Company was looking for a weapon to launch against Jignesh Shah and his FTIL group and the NSEL crisis came in handy.

How NSEL became a convenient scapegoat

National Spot Exchange Limited (NSEL), which was set up as per the vision of the then Prime Minister, and which has been making rapid progress across the country, was made a scapegoat in order to hatch a conspiracy against the FTIL Group. The Forward Markets Commission (FMC), the then commodity markets regulator, misinterpreted and misrepresented facts to the Ministry of Consumer Affairs, Food and Public Distribution (MoCA) by alleging that NSEL was violating certain terms and conditions pertaining to exemption granted to it under Section 27 of Forward Contracts Regulation Act (FCRA). Though the exemption was general in nature, acting on its evil intentions, the FMC ill-advised MoCA following which it issued a show cause notice to NSEL. Interestingly this happened only after Ramesh Abhishek took over as the Acting Chairman of FMC in August 2011, which in retrospect shows that the pawns were being moved in position to make a strike.

Figure 1 below captures the timelines of MCX-SX getting a license to become a full-fledged stock exchange and the reaction of the C-Company by going after NSEL.

MCX-SX, NSEL timelines
Fig 1. MCX-SX, NSEL timelines

Normally regulators intervene when an exchange faces a default. But the NSEL was a running exchange, without any history of payment problem. After the FMC abruptly stopped the exchange from launching new contracts, the defaults happened. The FMC created the crisis and took no action against the defaulters or to resolve the crisis despite having all the powers. The FMC acted only against NSEL, FTIL and Jignesh Shah, initiating all actions against the FTIL Group on the instructions of Chidambaram which were executed through K P Krishnan and Ramesh Abhishek, the then FMC Chairman. The regulator became the destroyer.

As the majority of actions by the regulators and other government  agencies were concentrated only against NSEL and Shah, the defaulters possibly swindled the goods from the warehouses and in some cases failed to deposit full stock in connivance with Anjani Sinha, MD & CEO of NSEL. Some had already hypothecated certain stocks to banks. In hindsight, it can be said that the hiring of Anjani Sinha as the CEO, given his precedents was perhaps a mistake. But why did FMC stop with just NSEL? Why did they not go after the defaulters?

The defaulters, did not honor their part of the commitment.  Once the Exchange stopped functioning, and the FMC began pursuing only FTIL, they were emboldened to not  only disregard their side of contracts to purchase back the goods, but also did not deliver the stocks.

Like SEBI did in solving the NSDL scam[3], the FMC should have taken a lead role to solve the crisis… The rashness that FMC showed in punishing and penalizing FTIL has not been seen anywhere else. The FMC had failed to act as a regulatory body and was creating a crisis just to spite Shah. It was easily solvable but was deliberately kept alive to target the FTIL Group. A vicious trial by media, with articles blaming Shah and NSEL appeared every day, adding fuel to the fire.

FMC had the powers yet did not act

Defaulters assured FMC Chairman to pay back money

On August 4, 2013, the FMC held a meeting of all stakeholders of the NSEL crisis including the defaulters and brokers. The defaulters admitted to FMC Chairman Ramesh Abhishek to holding the entire default amount and even agreed to pay back in a phased manner. In normal circumstances, any regulator after due consultation with the exchange would have endorsed or certified the liability of individual defaulters which could have been followed up for quick payment. This did not happen as FMC chose to be a bystander rather than an active player in bringing the defaulters to book and ensure an early resolution. Seeing the inaction of the regulatory body, the defaulters chose to not adhere to the NSEL payment schedule, as a result of which the money is now with the defaulters who have siphoned it off to buy personal properties and start new businesses.

FMC targeted NSEL/ FTIL instead of Defaulters

The FMC continued its dilly-dallying tactics vis-a-vis the defaulters and brokers despite the fact that on August 6, MoCA gave it wide-ranging omnibus powers to take such measures as deemed fit against “any person, intermediary or warehouse connected with NSEL.’’ But the FMC trained its guns only against NSEL/ FTIL and their promoters, allowing the defaulters to go scot-free.

Chidambaram wanted to shut the door on Shah

It was then that Chidambaram decided to deliver a body blow to the FTIL Group. On August 26, his Finance Ministry constituted the high-powered Mayaram Committee comprising top bureaucrats from various departments and investigative agencies to recommend measures to “ensure that there is no systemic impact of the NSEL developments.” Shockingly enough, the Mayaram Committee was given a mere two weeks to submit its report on such an important issue. The committee, too, sprang a surprise by doing that in a record time and recommending multi-pronged actions only against NSEL, its directors and promoters while completely ignoring the defaulters and brokers who had precipitated the crisis. Strangely, it never gave NSEL a chance to explain its side of the story! A source privy to the findings of the committee, who wished to stay anonymous said the following:

  • The RBI, a part of this committee, submitted that the NSEL crisis would not lead to any systemic impact on the markets. Despite this, the Committee asked all investigative agencies including EOW, ED and CBI to take action against NSEL.
  • The RBI also told the committee that the NSEL operations did not constitute a “deposit scheme as per section 45-I (bb) of the RBI Act,” and as such “NSEL was under no obligation to repay the buyers” but the Committee recommended that NSEL be booked under the Maharashtra Protection of Interest of Depositors Act (MPID) by EOW.

As a matter of fact, NSEL had not taken any money as ‘deposit’ but the traders had paid it to buy commodities and even paid tax on that. The Committee also ignored the findings of the IT department, that had conducted raids at warehouses of all the defaulters on August 22. The Committee did not even mention the stock verification done by the IT department.

FMC declared FTIL ‘not fit & proper’ to run Exchanges pending legal opinion

The FMC action of declaring FTIL and Jignesh Shah ‘not fit and proper’ based on Grant Thornton (GT) report had several shortcomings – detailed explanations given to FMC by NSEL were never considered; the report went beyond the Terms of Reference (TOR) and just 3 weeks were given to do forensic audit and finalize a report of such vital significance. To achieve its ulterior motive, the FMC intentionally misinterpreted the Grant Thornton forensic audit reports and on December 17, 2013, declared FTIL and Jignesh Shah ‘not fit and proper’ to run any exchanges even as all cases regarding NSEL/ FTIL were sub-judice. This was despite the fact that GT had clarified in its disclaimer that:

  • The report is based on information made available to it and GT have not independently verified or validated it.
  • It does not constitute an audit under any accounting standards and hence, cannot be relied upon to provide the same level of assurance as a statutory audit.
  • The report is also not intended to be interpreted as a legal advice or opinion.

The damage was done. Once the FMC called FTIL not fit and proper, it started reverberating across different countries, where Shah had businesses. He was forced to offload his stake in SMX and other ventures as shown in Figure 2.

Who bought what
Fig 2. Who bought what

To be continued…

[1] Anatomy of a Crime – The HFT scamOct 2017, PGurus

[2] Why Income Tax Officers are zeroing in on Ajay ShahNov 26, 2017, The Sunday Guardian

[3] NSDL’s IPO scam won’t go awayNov 26, 2013, MoneyLife

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Sree Iyer

An inventor and out-of-the-box thinker, Sree Iyer has 37 patents in the areas of Hardware, Software, Encryption and Systems.

His first book NDTV Frauds has been published and is an Amazon Bestseller.

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1 COMMENT

  1. In any other democratic country, like USA (because most ppl compare with USA for every damn thing) an article with such a details will EXPLODE and the EVERY MEDIA will be all over chiddu and sonia. But in India it is different BECAUSE we have ONLY paid media.
    Biggest surprise is: why Modi govt doesn’t act?

    anyway pgurus you guys are doing commendable job and kudos.

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