To: All Members of NIF Dear Fellow Victims, Please find below copy of Press Release issued by NIF. Regards, Team NIF NSEL Investors Forum Technocraft House, A-25, MIDC Industrial Area, Road No. 3,Opp. ESIC Hospital, Andheri (East), Mumbai- 400 093. Tel: 022-4098 2222 I 4098 2340 Fax: 022-2836 7037 I 2835 6559 Email: nselinvforum@nselinvforum Issued by: Mr. Sharad Kumar Saraf Chairman, NSEL Investors Forum Place : Mumbai Date : November 17, 2014 PRESS RELEASE Sub: FTIL – NSEL Merger, A Historic Step Against Corporate Fraud The Government has rightly used Sn. 396 of the Companies Act to announce a merger of NSEL (National Spot Exchange Limited) with its parent, FTIL (Financial Technologies (India) Ltd.), which wholly owned it. FTIL has challenged this merger in the Bombay High Court, arguing that the use of this provision, and the lifting of the corporate veil, would set a bad precedent, and would scare away foreign investors. THE NSEL Investor Forum argues that it is just the opposite. This provision u/s 396 is to be used in the rarest of rare cases, and the Government has determined that the NSEL scam qualifies for it. We would say that NOT using Sn. 396 would set a bad precedent. It would indicate to investors, both domestic and foreign, and not just the 13,000 investors affected by NSEL but ALL present and future investors, that people can get away with fraud by sheltering themselves behind the corporate veil. It is not only the 13,000 investors affected in the NSEL case who matter. It is the entire body of investors. In cases where there is an outright fraud, the Government has to stand up and use every means at its disposal, to correct the situation. Several independent committees appointed by the Government, have proven beyond doubt that this was a case of outright fraud. FTIL’s expertise, and raison de etre, was in making software for Exchanges and their members to use. It defies belief, then, that the software it supplied to its own, wholly owned subsidiary, NSEL, was so faulty that there were no checks in it to verify stocks of commodities supposedly lying in the godowns of a group company. This was not a systemic failure. It was not an organisational failure. It was fraud, pure and simple. FTIL has to be made accountable for this fraud. A merger would make it so accountable. As an Exchange, authorised by Government, NSEL is liable for payment to investors, as it is the counterparty. In any Exchange, anywhere in the world, the two sides of a transaction do not know each other. Privity of contract is only with the Exchange, which stands counterparty to both sides. The liability of NSEL is, thus, a given. Since it was set up by FTIL as a wholly owned subsidiary, and since this was an outright fraud committed by the management of FTIL, the liability extends to FTIL, the parent. The merger is thus not only necessary, but it is desirable. At the moment, FTIL is not supporting the efforts of NSEL in the recovery of the stolen money. NSEL has no resources, human or capital, to pursue the borrowers. In other words, the cost of delay is borne by the suffering investors.Once a merger is affected, and FTIL funds are used to partly repay investors, it would be in FTIL’s interest to try and recover the money from defaulters. It would then provide adequate resources, and use its clout, to affect recovery. FTIL had floated National Spot Exchange Limited (NSEL) in 2005 presumably to conduct spot trade in commodities. On 1st August 2013 NSEL defaulted in its payments to the investors. It was a fraud over 13,000 innocent investors involving a staggering amount of Rs.5600 Crores. Then Finance Minister Mr. P. Chidambaram was quite prompt in asking Secretary, Economic Affairs, Mr. Arvind Mayaram to investigate the fraud, since never before in history an Exchange failed causing serious disruption in commodity trade. On receipt of complaints from investors, Economic Offence Wing of Mumbai Police also swung into action and carried out quick investigations. The regulatory authority Forward Markets Commission (FMC) ordered a forensic audit of NSEL, EOW Mumbai Police ordered their own forensic audit of Brokers and NSEL and Registrar of Companies of Mumbai and Chennai carried out their own investigations. Apart from these investigations, FMC conducted an indepth study of the scam and came to a conclusion that Mr. Jignesh Shah and FTIL were not fit and proper to run any Exchange. A very well researched and documented order declaring Mr. Jignesh Shah and FTIL not fit and proper was issued by FMC. In spite of the reports and data available, it was surprising that the previous government dragged its feet and took no serious action to bring the culprits to book. The chain of events clearly proved that NSEL was an alter-ego of FTIL. In fact, NSEL was promoted by FTIL only to carry out the fraud. Mr. Jignesh Shah was the common key director in FTIL and NSEL. He cleverly employed ex-senior bureaucrat Mr. Venkat Chary and others to influence government policies and decisions in his favour. Statutory Auditor of NSEL was Mr. Mukesh P. Shah, uncle of Mr. Jignesh shah. The affairs of NSEL were managed by a Committee consisting of Mr. Manjay Shah (brother of Mr. Jignesh Shah and director of FTIL); Mr. Shreekant Javalgekar, another common director and Mr. Mukesh P. Shah. The Committee oversaw the management of NSEL under the guidance of Mr. Jignesh Shah. The minutes of meetings of this committee were available with auditor Mukesh Shah. We are not sure whether EOW have recovered the same and if so, why no action has been taken against FTIL. In any case it is clear that it was FTIL who managed even day-to-day affairs of NSEL. NSEL operated from the premises of FTIL, used all the facilities and utilities of FTIL and NSEL data management was done on FTIL servers. The servers of NSEL were located in FTIL server room. It was only after the scam was unfolding that they thought it fit to separate the NSEL server. In fact, when EOW team went to FT Tower together with Mr. Anjani Sinha, former CEO of NSEL, they were informed by the Chief Technical Officer of FTIL that NSEL server has crashed and the hard disk has been sent Bangalore for retrieving the data. It is intriguing that EOW did not find it fit to involve experts from Cyber Department of Mumbai Police nor did they check NSEL server physically to verify the truth. It is again surprising that a month ago EOW and FTIL officer claimed that NSEL server never broke down. Clearly it was FTIL who was effectively managing NSEL and the CEO and other officers were mere puppets. The decision of Ministry of Corporate Affairs (MCA) to merge NSEL with FTIL is a bold step meant to send a strong message to corporates to desist from using the route of sham corporate veil for committing fraud. Section 396 in the Companies Act has been specifically provided for this very purpose. Since this section was never used before, FTIL probably thought that it can get away with the fraud. If their intentions were to do legitimate business, they could have done it easily in MCX. The decision of MCA is in public interest, because it safeguards the interest of all present and future investors and instills confidence of investors in Commodity Trade. It is surprising that FTIL should file an appeal in Mumbai High Court against a draft Order which is still open for wide debate and discussions. MCA has taken this decision after properly analyzing all the reports and data that they had received. If the Government does not take decisive action, then investors’ confidence in commodity trade will be lost forever. This will be a grave blow to the Indian economy and will discourage FDI in Indian markets. FTIL should stand up and face the situation squarely and boldly. Instead of spending crores of rupees in legal defence and influencing public and Government opinion, they would do well to go after the defaulters and recover the dues. We are presently blessed with a proactive and well performing Government. FTIL is sure to get full support not only from Government but also from investors and other stake holders. It is now time that the Government takes stern action against fraudulent corporates and individuals and drive home the agenda of good Governance and Rule of Law.
Posted on: Wed, 19 Nov 2014 06:15:13 +0000
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