NSEL fraud: Mumbai police's Economic Offences Wing arrests Jignesh Shah - Livemint

A file photo of Jignesh Shah. The arrest, made on Wednesday, is the most significant in the case since the crisis broke out. Photo: Abhijit Bhatlekar/Mint

Mumbai: The Mumbai police’s Economic Offences Wing (EOW) has arrested Jignesh Shah , chairman and group chief executive of Financial Technologies (India) Ltd , in connection with the Rs.5,574.34 crore fraud at National Spot Exchange Ltd (NSEL).

Shah’s arrest is the 10th and the most significant in the case since the crisis began in July. FTIL owns 99.9% of NSEL. It is a new low for an aggressive entrepreneur who set out to build a global empire. Shah and his companies have been declared unfit to run a commodity exchange and ordered to reduce their stake in Multi Commodity Exchange of India Ltd , or MCX, (he has already lost control of the exchange that is now run by a board). He also runs the risk of losing control of MCX-SX with the stock market regulator declaring him and his company unfit to run an exchange (he has appealed the order).

Former MCX chief executive Shreekant Javalgekar was also arrested on Wednesday, taking the total number of arrests in the case to 11. Shah and Javalgekar will be produced in court on Thursday. MCX is also an affiliate of FTIL.

Rajvardhan Sinha, additional commissioner of police, said on Wednesday that the two have been arrested because they were being evasive during questioning. He added that Shah had approved the futures contracts offered by the exchange—it wasn’t supposed to offer any, being a spot exchange. Sinha said that Shah’s defence of not knowing about the fraud doesn’t hold.

In a statement to BSE, FTIL acknowledged that its chairman has been arrested without offering any further comment.

“He (Shah) was the chairman of the group and very much involved in the company. The question is why it took so long to arrest him. Now, Anjani Sinha (former CEO of NSEL who is under arrest) and Shah should be interrogated together. I expect the borrowers also to be under pressure now,” said corporate lawyer H.P. Ranina.

Shah, 46, and his family hold around 45.5% of FTIL. Shah had founded FTIL 18 years ago.

The crisis at NSEL came to light on 31 July when the exchange suspended trading in all but its e-series contracts. These, too, were suspended a week later. The suspension may have been prompted by an instruction from the ministry of consumer affairs to the exchange asking it not to offer futures contracts. A spot exchange isn’t supposed to do so, but NSEL was doing that.

NSEL tried to implement the change, but because its appeal was to investors and members who were not interested in spot trades, it eventually had to suspend all trading.

It later emerged that all trading on NSEL happened in paired contracts, with investors, through brokers, buying a spot contract and selling a futures one for the same commodity.

The entities selling on spot and buying futures were planters or processors and members of the exchange. It turned out there were only 24 of them, and they used the paired contracts as a way to raise easy money.

Subsequent investigations have highlighted the possibility of fraud and, according to the Forward Markets Commission, the involvement of promoters. On 14 August, NSEL proposed a payout plan, but it has been unable to stick to the schedule and has not made a single successful payout ever since.

“Finally, justice prevails. Though (the arrest was) delayed, we appreciate the move. We hope investors’ money will come back,” said Ketan Shah , an investor in NSEL.

In the case of former MCX CEO Javalgekar, EOW found that his role as the financial controller of the exchange put him at the centre of the fraud. FTIL holds 26% in MCX.

“During the course of our investigation, we found that Javalgekar, who was the financial controller and controlled the finances of FTIL, NSEL, IBMA (Indian Bullion Markets Association) and the other FTIL subsidiaries, was fully in control of IBMA and NSEL for a very long time. Javalgekar was in criminal conspiracy with others accused in the NSEL crisis,” Sinha said.

Sinha said the agency has found that most of IBMA’s clients are “bogus”.

So far, the EOW has securitized Rs.5,100 crore by attaching assets of the borrowers and some of the directors of NSEL.

Kirit Somaiya, president of Investors’ Grievances Forum, said that all the borrowers and stock brokers involved should be arrested and their properties should be seized.