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NSEL: Forensic audit spots related-party trades involving ex-CEO Anjani Sinha's wife

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Anjani Sinha is the former head of the National Spot Exchange (NSEL). Anjani Sinha is the former head of the National Spot Exchange (NSEL).
SummaryFMC is likely to issue a show-cause notice next week questioning FTIL's 'fit & proper' status.

Matters could soon come to a head for Financial Technologies India Ltd (FTIL), the promoter of the crisis-ridden National Spot Exchange (NSEL), with the Forward Markets Commission (FMC) likely to issue a show-cause notice next week questioning the group’s “fit & proper” status.

The regulator is in the final stages of drafting the notice which will be sent out next week, confirmed sources close to the development.

If the “fit and proper” tag is withdrawn, FTIL would have to sell its 26% stake in Multi Commodity Exchange (MCX), which is regulated by the FMC. The FMC will take a final call after giving time to the promoters to respond.

FTIL shareholding

“In the eventuality of you losing your status as a fit and proper person, you cannot continue to hold directorship or shareholding in any of the recognised futures commodity exchange,” said the FMC in a letter dated August 20, 2013.

The letter to the NSEL board said the non-settlement of outstanding trades on NSEL “reflects on your credibility and reputation which is a key ingredient in meeting the fit & proper criteria”.

FTIL holds close to a 100% stake in NSEL. FTIL chairman and group CEO Jignesh Shah is also the NSEL vice-chairman. NSEL has been battling a R5,600-crore settlement crisis since late July.

Withdrawal of the “fit and proper” status could also have a bearing on FTIL-promoted equity exchange MCX-SX, which falls under the regulatory purview of the Securities and Exchange Board of India (Sebi). According to the Stock Exchange and Clearing Corporation (SECC) Regulations 2012, if a person or entity is declared not “fit and proper” by any regulatory body, Sebi can also do the same.

Earlier this month, Sebi granted a renewal of recognition to MCX-SX for a period of one year beginning September 16. The renewal, however, came with significant riders including the setting up of a committee to oversee all financial transactions, capital expenditure and key management appointments.

Meanwhile, more instances of wrongdoing by the ousted management at NSEL have come to light after a forensic audit by Grant Thornton stated there were various instances of related-party transactions involving Shalini Sinha, the wife of Anjani Sinha, the former head of the spot exchange.

According to sources, the report has said that Shalini Sinha floated a firm called SNP Designs, which traded huge volumes and on many occasions the regulatory requirement of initial margins was also waived.

Sources also add that SNP Designs traded through Karvy and had built large positions on MCX and also IBMA, which was acting as the clearing member of Karvy. IBMA is a subsidiary of NSEL with Anjani Sinha being on the board of directors.

It is further believed that Anjani Sinha has stated that waiver of initial margin requirements was done to encourage business volumes and the margins were collected later. However, it could not be ascertained if the forensic report found any instances of the pending margins of SNP Designs being collected at a later date.

“The Grant Thornton forensic report is a confidential document. Hence, we would not be able to comment on the same,” said an NSEL spokesperson. A spokesperson for MCX, however, said that SNP Designs has not traded in MCX through IBMA.

On a different note, the NSEL Investor Forum filed a writ petition in the Bombay High Court on Friday along with a complaint with the Economic Offences Wing (EOW). As part of its petition, the forum has asked the court to involve the Enforcement Directorate (ED) in the probe and to invoke the Prevention of Money Laundering Act (PMLA) that allows the probe agencies to attach the assets of the wrongdoers.

Speaking at a gathering of NSEL investors and brokers, veteran stockbroker Motilal Oswal said that the forum members are in continuous dialogue with the board of directors of FTIL. The move by the investor forum comes a day after the finance minister said that the investors were well aware of the risks when they put money in NSEL.

“We are getting positive vibes... The details still need to be worked out... We are trying to get some assurance of financial commitment from them. Even they need to balance the interest of the NSEL investors and their own shareholders... We have even demanded a change in the board of FTIL because the existing persons have lost the confidence of everyone,” said Oswal.

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