National Spot Exchange Limited Scam was a major scam in India, which came into light after the National Spot Exchange failed to pay its investors in commodity pair contracts after 31 July 2013.

1. CASE STUDY ON
NSEL
PRESENTED BY
BISMAY MISHRA
M.COM BF A
13351016

2. INTRODUCTION
• National Spot Exchange (NSEL) is a Commodities exchange in India, and is a joint venture of Financial
Technologies (India) Ltd. (FTIL) and National Agricultural Cooperative Marketing Federation of India
(NAFED). National Spot Exchange commenced its live trading operations in different commodities on
Wednesday, 15 October 2008. It began trading in pre-certified cotton bales for Mumbai delivery and
imported gold and silver bars for Ahmedabad delivery immediately, and has since added a number of
commodities.
• National Spot Exchange's stated mission is to develop a common Indian market by setting up a nation-
wide electronic spot market and providing state of art trading, delivery, and settlement facilities in
various commodities. This exchange is now in the middle of a controversy due to a major commodity
scam and all the trades have been stopped.

3. SERVICES OFFERED
• Selling - NSEL provides an electronic trading and auction platform to sell commodities (Agri, bullion
and Metals).
• Procurement - Bulk buyers can procure the agri-commodities directly from farmers through electronic
platform provided by the NSEL.
• Warehousing - NSEL provides warehousing facilities for various commodities and also facilitate to sell it
through the electronic platform to the bulk buyers and millers situated across the country.
• Investment - NSEL provides investment instruments. E-series products launched by NSEL can be bought
by the investors for accumulation in the demat account, just like the shares in the equity market.
Currently, E-Gold, E-Silver and E-Copper are available to investors.
• Arbitrage - A trader can do arbitrage using different prices available for the same commodity.

4. FACILITIES OFFERED
• Single day trading contracts
• Intra-day trading with settlement of obligation on net basis
• All positions outstanding at end of the day resulting into compulsory delivery
• Demat delivery facility available
• Fungibility of delivery between National Spot Exchange and MCX with common ICIN nos
• Loan facility against pledge of demat / warehouse receipt
• Cash futures arbitrage opportunity.

5. E-SERIES PRODUCT
• For the first time in India, National Spot Exchange has introduced E-Series products in commodities. Retail investors can now
trade and invest in commodities like they invest in equities. This will be a unique market segment, which will function just like
cash segment in equities, but offer commodities in the demat form in smaller denominations.
• The clearing and settlement pay-in and pay-out will be based on a settlement cycle as per the practice in the stock market. This
instrument will provide ample opportunity to the masses as secured investment in their product basket of diversification.
• NSEL launched its first product under the E-Series as E-Gold on Wednesday, 17 March 2010. Clients/retail investors who
wish to purchase E- GOLD units are required to open their beneficiary account with NSEL empanelled Depository
Participants (DPs) and disclose their client ids and DP ids to their respective members to enable them to transfer the units to
the respective client’s accounts. On receipt of demat ICIN in the CM-POOL account, the member should transfer the same to
the beneficiary account of the respective client.
• NSEL has made necessary arrangements with National Securities Depository Limited (NSDL), and Central Depository
Services (India) Ltd. (CDSL) is the depository for holding commodity units in the electronic form.
• E-series trading has been suspended w.e.f 5 August 2013 till further notice.

8. NSEL SCAM
• The NSEL scam is estimated to be a Rs. 5600 crore (around US$ 0.9 billion) fraud that came out to light
after the National Spot Exchange failed to pay its investors in commodity pair contracts after 31 July
2013. .
• It was subsequently concluded that most of the underlying commodities never did exist, and the buying
and the selling of commodities like steel, paddy, sugar, ferrochrome etc. was being only conducted only
on paper. The pair trades in various commodities were offered in one-day forward contracts of T+2 and
T+25 (sometimes even T + 35) payment terms (bought and sold at the same time).
• Such pair trades offered an arbitrage opportunity of about 12-15% return per annum. The investors,
who honored the T+2 payment obligation, found that the National Spot Exchange neither had the
money, nor the commodities, to honor their T+25 dues. Around 24 borrowers were given the funds by
the NSEL, without any underlying commodity deposited by those borrowers. One of those borrowers
who borrowed around Rs. 1000 crores is a company named NK Protein Ltd., and is owned by the son-in-
law of the former Chairman Shankarlal Guru of NSEL.

10. • An estimated number of 15000 investors, along with public sector units like MMTC and PEC, were
victims of this NSEL scam. The ROC report on NSEL fraud has come down heavily on the promoters and
the FTIL, as it was found that a majority of minutes of meetings of the NSEL board were fabricated, as
cell phone location data of the said board members did not match to the meetings’ locations.
• Some of the warehouses mentioned on the NSEL website were found to be physically non-existent, and
the SGF (Settlement Guarantee Fund) – of around Rs 839 crores (about US $140 Million), as on 29 July
2013, vanished into thin air.
• Anjani Sinha, the sacked CEO and the MD of the company, attempted to take the blame for the fraud in
order to exonerate other promoters, and filed an affidavit.Mr. Anjani Sinha's wife, Shalini Sinha, though
being a related party, traded on MCX for about Rs. 40000 crores in one year through her company SNP
Designs P Ltd. However Anjani Sinha after arrest retracted his earlier affidavit and filed a fresh affidavit
pinning the blame on the board of NSEL stating that they fully knew what was going on at NSEL.

11. EOW MUMBAI POLICE ACTION
• The EOW (Economic Offences Wing) of Mumbai police is presently investigating this fraud and the Mumbai
police has conducted various raids.An FIR (First Information Report) has been filed against the directors of the
NSEL, and the directors of their promoters i.e. Financial Technologies India Ltd, along with various other
brokers allegedly involved in the fraud. On 9 October 2013, Amit Mukherjee, the Assistant Vice-President
(Business Development) of NSEL, was arrested by the EOW of the Mumbai police marking the first arrest in
the scam.Subsequently, a day later on 10 October 2013, the EOW of Mumbai Police arrested Jai Bahukhandi,
the former Assistant Vice-President of NSEL. Former CEO and MD, Mr. Anjani Sinha, was the third arrest in the
case; he was arrested a week later on 17 October 2013. The EOW has since invoked the MPID (Maharashtra
Protection of Investors Deposit) Act, under which it can attach properties and assets of the accused, for the
interest of the investors. Mr. Nilesh Patel of NK Protiens Ltd., the biggest borrower from the NSEL, was
arrested on 22 October 2013 who got out on bail subsequently. Mr. Surinder Gupta of PD Agroprocessors who
owns Dunar brand rice has been arrested by EOW on 5th March 2014. Mr. Gupta tried various delaying tactics
with EOW , NSEL and investors.
• Soon after the news of the scam broke, FTIL claimed that the server that housed sensitive data related to the
company has crashed. The EOW was, however, able to access the mirror server on which forensic and
investigative tests are being conducted.

13. ROLE OF THE MINISTRY OF CONSUMER AFFAIRS, FMC
& THE GOVERNMENT
• In a show cause notice, on 27 April 2012, based on the data provided by the Forward Markets Commission (India), the
Ministry of Consumer Affairs asked the NSEL to answer why legal proceedings should not be carried out against the company
given it was conducting illegal trades, and that there the company did not provide any apparent mechanism to verify
commodity stocks.However, until 12 July 2013, that is close to 15 months after the show cause notice, no action was taken
by the Ministry. The lack of early government intervention allowed the scam amount to balloon to Rs. 5600 crores.
• It has been claimed that some political maneuvering was done by various government entities to keep this SCN in abeyance
and that cost the investors their hard-earned money. Interestingly, a committee headed by Shri Arvind Mayaram suggested
that the entire system was an 'unregulated exchange' and the HNIs (High Net-worth Individuals) invested with open eyes,
pointing out the scam was the fault of the investors. However, the committee ruled so ignoring the role of FMC - the
designated agency to supervise NSEL from early 2012. Apparently, FMC was aware of 'NBFC like activities' going on at NSEL
and it is also claimed that FMC declined to file FIR against NSEL in spite of being aware of SGS finding that there were not
enough commodities in the NSEL warehouses.
• A panel of high-level officials, and headed by the Economic Affairs Secretary Arvind Mayaram, submitted to the Finance
Minister P. Chidambaram its report on the alleged irregularities at the NSEL. However, the report did not reveal key
shortcomings and acts of omission and commission by the bureaucrats of DCA and FMC was claimed to be more of a cover
up.

14. FORENSIC AUDITS BY GRANT THORNTON ,CHOKSI
AND CHOKSI AND PWC
• At the behest of the Forward Markets Commission (FMC), the NSEL asked Grant Thornton to conduct a forensic audit of the books of
NSEL. The report, though not complete and with insufficient cooperation from NSEL, brought out various glaring irregularities. On the
basis of the Grant Thornton report, the FMC served a show cause notice to the promoters of NSEL about their 'fit and proper' status
to run exchanges.
• There are still wide differences between the books of the NSEL, and those of the most borrowers. The Grant Thornton report also
pointed out how Mr. Anjani Sinha wrote an internal email to stop using IBMA for rigging MCX prices, and to use SNP Designs P Ltd (his
wife Shalini Sinha's company) to conduct proprietary speculative trades on the exchange.
• As an inference, it was clear that the whole group NSEL/IBMA/MCX and the FT were working in tandem. Grant Thornton has also
been asked to conduct a forensic audit of MCX. Subsequent to a court petition by some investors of NSEL, FMC has been directed by
the Mumbai High Court to conduct a forensic audit of Eseries bullion contracts of NSEL.
• After petitions from certain NSEL pair trade investors, the Bombay high court directed the FMC to appoint a forensic audit of Eseries
products of NSEL. An audit firm by the name of Choksi and Choksi was given this assignment and their audit report has damning
revelations against the promoters and FT group.
• The FMC also asked PWC to conduct an audit of MCX where after the audit a lot of related party trades and other deviations were
found which raised serious questions about the integrity and functioning of the FT group.It was learnt that MCX paid Rs 17.76 crore
either as donations or as professional charges to entities to which Sunil Daga Khairnar — former director of NBHC and NSEL

16. EFFECT OF FRAUD
• As an effect of the NSEL fraud, the share prices of its promoter company FTIL crashed by 60-70%
resulting in massive erosion in the company’s market cap. The share prices of the sister
company MCX (Multi Commodity Exchange Ltd) also took a beating.
• The FMC has already issued an order on FTIL, Jignesh Shah, Joseph Massey etc. that they are not fit and
proper to run any exchange in India. Jignesh Shah and Joseph Massey on 9 October 2013, had to resign
from the board of MCX-SX stock Exchange. Jignesh Shah was also compelled to resign from MCX on 31
October 2013.

22. POST SCAM SCENARIO
• Over 30,000 investors in the e-series metal contracts that were suspended by National Spot Exchange since August last year following a
payment crisis of Rs 5,500 crore on the bourse will be able to either convert the units they purchased for underlying metal or seek financial
closure.
Remat will commence from April 12 through April 23 and those who cannot convert units into metals will be paid money in lieu of bullion or
other metals like platinum, zinc, lead, copper and nickel from May 6.
NSEL said on Friday that rematerialization will only be feasible for those who hold units either matching or exceeding the denominations
offered by the exchange of the underlying metals. All unit-holders can check the denomination-wise stock availability as updated on
www.nationalspotexchange.com/eseries .htm before placing the request for rematerialization .
• The investors, many of whom are not as well off as their counterparts in the so-called paired or buy-sell contracts, which are at the heart of the
NSEL scam, can heave a sigh of relief after National Spot Exchange's announcement for remat and financial closure on Friday.
The move, said NSEL, follows a no-objection to the settlement by commodity market regulator(FMC), following results of a forensic audit, which
found that metals backing the units existed and that money used to purchase them prima facie did not belong to investors in paired contracts.
Subsequent to the rematerialization process, the exchange will commence the 'financial closure' of the balance units of e-series starting from
May 6. Details of the procedure have been updated on the NSEL website. The settlement of the contracts was stalled following a complaint by a
few National Spot Exchange investors in the Bombay High Court, which ordered a forensic audit before the contracts can be rematerialized.