Cover Story Jignesh

1. GOVERNANCE
scam nsel
28 gfiles inside the government
vol. 8, issue 6 | September 2014
www.gfilesindia.com After handpicking dubious
characters like Joseph
Massey, the infamous
erstwhile MD of Inter-connected
Stock Exchange,
and Anjani Sinha, who
presided over the closure
of Magadh, Ahmedabad
and Safal exchanges,
does Shah have a right
to complain?
by NEERAJ MAHAJAN
THE Bombay High Court
recently granted Jignesh Shah
bail after 107 days in jail in the
`5,600-crore National Spot Exchange
Limited (NSEL) scam. Justice AM
Thipsay said in his order: “I am
granting him bail… since there is no
possibility of him absconding.” This
has raised eyebrows.
All agree that the `5,600-crore
crime was committed. The only
debate is whether the court should
have accepted the Economic Offences
Wing (EOW) chargesheet which
clearly spelt out that Shah was deeply
involved in the fraud. However,
senior advocate Mahesh Jethmalani,
arguing on behalf of Shah, took the
plea that his client had no knowledge
of the shortfall in stock and that the
crisis was perpetrated by a clutch
of brokers and NSEL employees,
including former CEO Anjani Sinha,
and that there was no possibility of
Shah tampering with evidence.
This is contested in the EOW
chargesheet, which says that, unlike
his other ventures, NSEL was not
under any regulatory authority and
hence proved to be an ideal platform
to gain quick success. An earlier
Forward Markets Commission (FMC)
order corroborates this by stating
that there was “malafide intention
on part of the promoter of Financial
Technologies (India) Limited (FTIL)
to use the trading platform of its
subsidiary company for illicit gains,
away from the eyes of the regulator”.
Wash trades on the exchange helped
jack up trading volumes from `10
crore in March 2010 to `1,700 crore
a day by 2012-13. Accordingly, the
NSEL profit shot up from `30 crore
to `130 crore — little over half of the
FTIL Group profit. This was then
informally adjusted with other Group
subsidiaries. NSEL was contributing
60 per cent of the FTIL Group’s
revenues, the EOW chargesheet adds.
As the Chairman and Group chief
executive, Shah himself made several
presentations to government officials
Jignesh Shah
goes free
again
Despite being indicted
by various government
agencies for economic
fraud, Shah manages
to get bail

2. gfiles inside the government
www.indianbuzz.com vol. 8, 29
issue 6 | September 2014
As the chairman and Group
chief executive, Shah
himself made several
presentations to
government officials and
investors on NSEL and
should have known that
there was virtually no
stock of commodities in
the exchange.
and investors on NSEL and should
have known that there was virtually no
stock of commodities in the exchange,
or the fact that 25 borrowers were
being allowed to squander `5,600
crore worth of stocks belonging to the
13,000 investors.
Significantly, FMC chairman
Ramesh Abhishek and two members,
in their order declaring FTIL ‘unfit
and improper’ to run a bourse, had
dismissed Shah’s claim that he was a
victim of the fraud. He benefited from
the profits of NSEL and the illegal
paired contracts which helped boost
the market capitalisation of his listed
entities, the FMC order concluded.
“Shah misused his position as the
promoter to create confidence in the
minds of the participants regarding
the legitimacy of the business and its
operations in the exchange platform
of NSEL,” the order added.
EVEN the Registrar of Companies
(RoC), in its 69-page report
opined, “the directors of FTIL
have failed in their fiduciary duty to
safeguard the interests of shareholders
and creditors by not exercising due
diligence”. Prima facie, it appears
that the FTIL board allowed the
state of affairs at NSEL to continue,
which resulted in the fraud. Some
of the violations are so serious
that they can even lead to their
imprisonment under the Companies
Act, the report added.
Preliminary investigations by
Income Tax authorities observed
severe lapses, mismanagement,
cheating, criminal breach of trust,
conspiracy and forgery in NSEL,
which was not functioning as a spot
exchange is supposed to. “If the NSEL
management and Board of Directors
say that they failed to see piles of
bounced cheques and forged ware-house
receipts right on top of their
table, they are either incompetent or
impractical,” the report concluded.
After handpicking dubious
characters like Joseph Massey, the
infamous erstwhile MD of Inter-connected
Stock Exchange, and
Anjani Sinha, who presided over the
closure of Magadh, Ahmedabad and
Safal exchanges, does Shah have a
right to complain? As the head of the
audit committee at NSEL, he could
have ensured that the stock offered as
collateral was kept with independent
warehouse agencies instead of the
borrowers’ own factories. He could
have also ensured that the borrowers
weren’t allowed any credit beyond
their financial strength. But he didn’t.
Can he now escape responsibility
when, instead of barring these
defaulting borrowers from trading, his
board gave them margin exemptions
and extended corporate guarantees to
serial defaulters?
To add insult to injury, FTIL and
its 60,000-odd shareholders—the
victims of the pre-planned and
premeditated fraud—had to shell out
over `40 crore as legal costs to defend
Shah, who owns 45 per cent stake
in FTIL. He was the director and
key management person in both the
companies. The entire cost to engage
expensive lawyers to argue for him is
on company expense.
Many small shareholders have
requested FTIL to stop paying Shah’s
legal expenses and recover the money
spent so far from him, as he is a
direct beneficiary of the NSEL scam,
as mentioned in the Mumbai Police
EOW chargesheet and FMC’s “unfit
and improper” order. g