The Mumbai police said Shah had tried to shift the blame for the NSEL payments crisis to Anjani Sinha, the former MD and CEO of the spot exchange, who was arrested by the Economic Offences Wing on October 17. The police debunked Shahs claim that he had no knowledge of the contracts being traded on the NSEL saying volumes on the bourse were linked with the profits of FTIL. The police confirmed that brokers who were trading on the exchange would also be investigated. The brokers are in focus as we have detected certain malpractices, such as using accounts for making purchases and modifying the codes, a police spokesperson said.
FTIL has called a board meeting on Thursday to discuss the arrest.
Shreekant Javalgekar, former managing director and CEO of MCX and director, Indian Bullion Market association (IBMA), the groups bullion trading arm, was also arrested.
A Grant Thornton audit had pointed out that IBMA, a subsidiary of NSEL, owed the exchange Rs 1,100 crore as "net obligations". In particular, a manual entry made on September 13, showed a large "net obligation" of Rs 1,159 crore on behalf of IBMA to NSEL for "existing trades", the audit revealed.
Shah has been in the spotlight after the payments problem was detected on the NSEL and the forward Markets Commission discovered that NSEL was permitting trades without verifying whether sellers had stocks, in effect allowing short-selling by members. The regulator also discovered that contracts traded on the exchange for which the settlement period exceeded 11 days were non-transferable specific delivery contracts, which violated the Forward Contracts Regulation Act.
In December, Shah was declared not fit and proper by the FMC which said in an order that the FTIL chairman was unfit to run an exchange in the country. FMC barred him from holding a management position in any recognised exchange in India and said FTIL could not hold more than 2% of the paid-up capital of MCX. FTIL, as the anchor investor in MCX, does not carry a good reputation and character, record of fairness, integrity or honesty to continue to be a shareholder, the FMC observed.
Following the action by the FMC, the Securities and Exchange Board of India (Sebi) on March 20 declared FTIL not fit and proper to own a stock exchange and directed it to bring down its stake in MCX-SX to 2% from 26%. In September 2013, Sebi had renewed MCX-SXs equity exchange licence conditionally, saying, Any non-compliance with the directions of Sebi...or which may be given from time to time or any adverse findings by any other regulator may result in withdrawal of recognition of the exchange.
The Grant Thornton report also says that IBMA maintained a loan account with the spot exchange and that the end use of these funds was at its discretion. As on July 31, 2013, IBMA owed NSEL Rs 28 crore with the amount falling to Rs 14.9 crore as on September 20, 2013. Transactions between NSEL and IBMA for pay-ins and pay-outs are understood to have continued till September 18, 2013 although trading in e-series contracts was halted in August.