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 returns over the duration, while the supplier could utilise the money earned in the first tranche of the trade for financing working capital requirements.
FTIL and Shah have so far blamed the mess at NSEL on the management of the exchange, particularly Anjani Sinha former MD & CEO. Sinha, in an affidavit, has submitted that the board was not aware of the developments at NSEL, which led to the settlement crisis.
That claim, however, has not been accepted by the FMC, which feels that the promoters cannot absolve themselves of responsibility by claiming ignorance.
Another instance, highlighted by the FMC is the showcause notice issued by the consumer affairs ministry to the NSEL in April 2012, questioning the contracts being offered by the exchange, which were not in keeping with regulations.
Minutes of an NSEL board meeting subsequent to the notice show that it was taken up by the board, which took cognisance of it once again suggesting that board members were aware of the nature of contracts being offered.
In fact, the FMC points out that the board had approved these contracts in 2009. The board was aware of these financing activities since the paired contracts were approved by the board in 2009, said a senior FMC official.
FTIL and Shah may be forced to divest their 26% holding in the group's flagship commodity futures exchange MCX if the FMC finds that they are no longer seen as 'fit& proper'. The decision may also have a bearing on the stand taken by the Securities & Exchange Board of India (Sebi) with regards to MCX-SX, the group's equity exchange, which got a renewal of recognition for a period of one year in September.