CBI set to probe NSEL crisis

With Finance Minister P Chidambaram on Thursday saying the Central Bureau of Investigation (CBI), the Forward Markets Commission (FMC) and the Ministry of Corporate Affairs (MCA) will look into the payment crisis at National Spot Exchange Ltd (NSEL), the probe net on the exchange looks set to widen.

Chidambaram said the three would look into different aspects of the troubles at NSEL, “which flouted rules from Day-1”, and take action under their respective jurisdictions. He added the income tax department was also checking the financial details of NSEL investors to see if any black money was involved.

A committee headed by Economic Affairs Secretary Arvind Mayaram had on Monday given its report on NSEL to the finance minister.

“The Mayaram panel report has suggested CBI, FMC and MCA must take appropriate action. They have listed the irregularities... They will take action,” Chidambaram said at a press conference here.

FMC might file its report in a couple of days, after which the three bodies would decide on the action, he said.

A CBI official said the agency was in the process of verifying the NSEL complaint. It was looking into the aspect of criminal offence to find out if there was an instance of fraud or cheating.

The government had received a complaint from investors but not referred the matter to CBI yet. The agency, therefore, was also trying to establish whether the probe in this matter came under its jurisdiction, a senior CBI official said.

Ruling out similarities between the crises at Satyam and NSEL, Chidambaram dropped hints that the government might not bail out the people that had put their money in the exchange, saying they invested with open eyes, knowing full well they were investing in an unregulated entity. “The government does not come into the picture at all,” he added.

Chidambaram said NSEL was not a registered or recognised association under FMC; it got exemption even before it started its business.

“In the way NSEL started business, there’s much more than meets the eye. People seem to have given money to NSEL promoters, knowing fully well that it is not a regulated entity... Many of them made money in initial stages and some lost money now... I have seen the exemption order. Now, whether it is valid or not has to be examined.” he said. o f the 17,000 investors who put their money in NSEL — which is now grappling with a Rs 5,600-crore payment crisis — 9,000 traded through eight top brokers, including Anand Rathi, Motilal Oswal, India Infoline and Systematix. According to the finance minister, the investors would definitely move court, as it is a matter between them and the company.

The government had in 2007 exempted NSEL from provisions of the Forward Contracts Regulation Act (FCRA) to operate one-day forward commodity contracts.

The exemption was given on some conditions, including delivery of commodities within 11 days and a bar on short-selling by members of the exchange. “From Day-1, NSEL was violating the very conditions under which it claimed it could do business,” he said.

The Mayaram panel had suggested NSEL’s troubles had no systemic risk of an impact on other markets. However, Chidambaram said he had asked both the Securities and Exchange Board of India (Sebi) and FMC to keep a careful watch. NSEL, part of the Jignesh Shah-led Financial Technologies group, had to suspend trading on July 31 after a government directive. It had committed itself to clearing its dues to investors in tranches through weekly payments. But it has so far defaulted on its weekly obligations for six weeks in a row.

Two other trading platforms — Multi Commodity Exchange and MCX-Stock Exchange — are also Financial Technologies-promoted entities. On whether the government was looking at changing the management of other entities with the same promoters, Chidambaram said: “Let us wait for the regulator’s report.”


Supreme Court order on tainted MPs: FM accuses BJP of changing stand
Under attack from the Opposition for bringing an ordinance to protect lawmakers from immediate disqualification, the Centre on Thursday hit back, accusing BJP of changing its stand on overturning a Supreme Court judgment on the issue. Finance Minister P Chidambaram had said in an all-party meeting on August 13 that there was a “unanimous demand” that something be done in relation with the Supreme Court judgment on Sections 62(5) and 8(4) of the Representation of People Act. “They are entitled to change their mind but they should not ask everybody to do so,” he said on Thursday.

Financial Technologies' exchanges abroad under lens

Laxity in enforcing KYC and allied norms suspected; money laundering gaps also on probe panel’s mind

The role of global exchanges floated by the Financial Technologies group has also come under the government’s scanner.

Several investors are said to be holding positions on the Multi Commodity Exchange, while the same investors were offered similar positions on international exchanges floated by the Financial Technologies group, to take arbitrage advantage. While these facilities were offered by brokers, the government is looking at whether there was any laxity on the part of these overseas exchanges floated by the FT group regarding Know Your Clients (KYC) or other processes.

If such linkages are found, that would be also considered violation of the foreign exchange and money laundering laws.

“The government is now looking at pare trades in FTIL-controlled exchanges NSEL, MCX and also exchanges owned by it outside India,” said a government official. The FT group had floated Bahrain Financial Exchange, Singapore Mercantile Exchange and Dubai Gold and Commodity Exchange. All these three have been offering gold contracts.

An FT spokesperson said, “We’ve not received any communication from any authorities/regulators on such investigations and, hence, cannot comment.”

A sector official said investors and traders having positions abroad without the knowledge of the Indian authorities had been happening and these also hold positions in other names, with US-based Comex and the London Metal Exchange being common destinations. In those exchanges, Indian authorities have no say but they are investigating this.

Officials in the know said one of the high-powered working groups constituted by the government on the NSEL crisis, headed by the RBI deputy governor, was looking into the possibility of money laundering among firms trading on this exchange, MCX and also exchanges in foreign lands controlled by FTIL. "All these possibilities are within the realm of the committee and working groups constituted by the government on August 26 and we are looking at the matter from every possible issue and involving all sister-concerns of NSEL," a senior official said.

The chain of exchanges, domestic and global, are under the scanner of other regulators as well, following the forward Markets Commission (FMC)’s warning to the NSEL board that their ‘fit and proper’ status was at risk. The warning was given by the regulator last week, after  NSEL defaulted on its commitment to make the first week’s agreed payout.

A former regulator told Business Standard, “Once the promoter loses s status as a fit and proper person to run the exchange, other regulators have to reconsider if promoters of the entities regulated by them have the same promoter that have lost this status. Global regulators  generally follow.” So, if the NSEL promoters lose their fit and proper status there, the commodity, stock and power exchanges set up by the same promoters might face similar action.

A source in FMC said, “The decision to withdraw the fit and proper status on the NSEL board of directors is under consideration and task forces appointed by the government will also look into it, as it has implications for other regulators, too.”