NSEL scam and role of SEBI in it

Table of Contents

INTRODUCTION

NSEL is subsidiary of FTIL Company and it works in the field of buying and selling of trading between investors and borrowers. In 2013 it was revealed that company had made fraud of Rs.5600 crore and company is not in a position to repay the amount of investors. This fraud largely affects investors, stakeholders. SEBI took the matter and carried investigating. GOI ordered the forced merger of NSEL and FTIL. Mr.Jignesh shah owner of FTIL filled case in High court of Mumbai against the order of merger of Government.

NSEL

FTIL (Financial Technologies India Limited) is parent company of which NSEL is wholly owned subsidiary and was established by Jignesh Shah in 1988.
NSEL stands for national spot exchange limited.
It was established in May 2005 with the objective of “spot exchange for trading commodities”.
“Spot market is a market where assets are sold for cash and delivery of assets takes place”.
It was established with the intention to eliminate middlemen by providing a market for trading of commodities.
The scam was outcome of lack of corporate governance and regulatory framework.

SCAM OF 2013

It started in 2010 when performance of NSEL was increasing rapidly.
NSEL was a spot exchange as per Forward Contracts Regulation act 1952 but company got exemption by Ministry in corporate affairs to trade in one day forward contract.
“Forward contract is a contract where an asset is delivered at specified future date and which is decided at the time of agreement and price is also decided at the time of agreement”.
But company instead of following the specified rate of trade started using different series of contract.
In December 2012 turnover of the company reached 21,76,431.3 million.
Investigation was carried out by different agencies which revealed that in 2010 the exchange rate was low and generated very little revenue. NSEL in order to generate more revenue started trading with new settlement period.
“The initial performance of exchange was rather poor and somewhere in 2010 it launched a paired series of T+2 and T+25 contracts in contravention of conditions of exemption”.
Company continue to trade with new settlement period but in 2103 situation become worse when company was told to stop trading in these controversial rates.
When fraud of Rs.5600 hit headlines goodwill of NSEL becomes zero as company was not able to pay its investor. On August 5 2013 NSEL was shut down completely and defaulters were arrested immediately.

In 2014 GOI declared that NSEL should be merged with FTIL its parent company so that the burden of Rs.5600 crore would become the liability of FTIL. This was first time where such action was to be taken against any company and Government forced the amalgamation between the two companies.

FTIL was aggrieved with this decision of government and decided to file matter before hon’ble court Mumbai. FTIL argued that there are 18700 shareholders and more than 1000 employees in his company they cannot discharge the liability of Rs.5600 crore of NSEL.

IMPORTANT POINTS TO BE DETERMINE

Limited Liability – As per company’s act 2013 the liability of public limited company is limited which means owners are not personally liable for debts of company there are exception to this rule. This limited liability of members becomes unlimited in case of fraud by owners.

In NSEL case the question of limited liability arise as now after merger with FTIL parent company has to bear the liability of subsidiary.

Doctrine of Lifting of corporate veil – According to this doctrine when fraudulent and inappropriate use of corporate entity is made then the defaulters will not be allowed to take shelter behind the corporate personality of company. Court will break through the veil and apply thus principle.

The merger between NSEL and FTIL can be done only if the veil of both the companies is lifted but this veil cannot be lifted until fraud on part of FTIL is proved in court.

Section 237 of company’s act– It states that Central government can order for amalgamation of two companies if it considers it necessary in public interest to do so. Central government may provide for amalgamation of two companies into single company where their rights, liabilities, property, interest will be constituted as one.

In NSEL case whether merger is in public interest or not is important question of it will benefit investors of NSEL but on the other hand it will also affect employees, shareholders of FTIL.

ROLE OF SEBI:

SEBI stands for Securities exchange board of India and works for protection of investors in securities market.

In 2015 economic offences wing asked SEBI to take serious action against NSEL case.

SEBI investigated this case for 5.5 years.
Declared Jignesh shah as “Not fit and proper”.
4000 crore assets were notified to be auctioned.

It was revealed that 300 brokers were connected with this NSEL scam some of them are: Kotak Securities, Anand Rathi, Edelweiss Broking, Motilal Oswal, JM financials, Geojit Comtrade, Philips Commodities.

Brokers were the only one being benefit from this scam as they used to take commission from both buyer and seller. Investors were the losers whose money got stuck in the scam.

All the brokers involved were aware of NSEL inappropriate activities.

Five brokers made application to SEBI for registering as commodity broker but sebi after investigation rejects their application and imitate inquiry against them.
Brokers moved to High court but court also rejects their petition stating that they are trying to escape the investigation going against them.
“The designated authorities submitted report on April 2017. They recommended that since the conduct of brokers was questionable and their general reputation, record of fairness, honesty and integrity has eroded, sebi should ban them from commodities derivative trading and also initiate prosecution for irregularities”.
SEBI has given 45 days to the clients of these commodities to wrap up their trades and transfer their share to other commodity accounts.

And now the commodities market will be regulated by SEBI.

Author: Pooja Rathore,
Delhi Metropolitian Education, IP university,3 year