In a severe indictment, commodity market regulator FMC has said Jignesh Shah and his firm FTIl are not 'fit and proper' to run any exchange in the country and charged him of being the "highest beneficiary" in the NSEl scam.
Shah founded Multi-Commodity Exchange or MCX in November 2003 and then went on to set up a stock exchange this year. He is currently the Chairman of Financial Technologies India ltd (FTIl) which owns and runs National Spot Exchange ltd (NSEl) where a Rs 5,500 crore payment crisis is being probed by multiple agencies.
In an 80-page order, the Forward Markets Commission (FMC), which went into the running of NSEl following payment defaults, held that FTIl is not a 'fit and proper person' to hold anything more than 2 per cent shareholding in the MCX.
FTIl currently has 26 per cent stake in MCX, the country's largest commodity exchange and will need to cut its stake following the FMC order. Shah on October 9 quit as Vice-Chairman and Shareholder Director of MCX-SX, the third major stock exchange in the country. Few weeks later, he also resigned as Vice Chairman of MCX.
Noting that Shah was "practically the highest beneficiary of the fraud perpetrated at the NSEl Exchange", the FMC ordered that "Shri Jignesh P. Shah is not a 'fit and proper' person to hold any position in the management and the Board of any Exchange recognised or registered by the Government of India/Forward Markets Commission under FCRA, 1952".
FMC also ordered Joseph Massey and Shreekant Javalgekar, former directors of MCX, not a 'fit and proper' person to hold any position in the management and the Board of any Exchange. "The Commission is of the view that the general reputation and character, record of fairness, honesty and integrity of Shri Jignesh Shah has been substantially eroded in view of his role in the affairs of NSEl as its Vice-Chairman & Director and also as the Chairman of the holding company of NSEl," the order said.
It further directed that neither Shah individually, nor though any company/entity controlled by him, either directly or indirectly, should hold any shares in any association/ exchange in excess of the threshold limit of the total paid-up equity capital as prescribed under FMC guidelines. The FMC said that because of the huge profit of Rs 125 crore (approx) earned by NSEl during FY 2012-13 the value of the shares of Jignesh Shah in FTIl shot up manifold giving him the benefit of a spectacular market capitalisation of his investment in FTIl running into thousands of crores of rupees.
"Shri Jignesh Shah, as the promoter of FTIl and NSEl has misused his position to create a confidence in the minds of the participants regarding the legitimacy of the business and its operations in the exchange platform of NSEl," the order said.
"Shri Shah consciously used his position to represent to the public at large about the attractive features of the contracts being traded on NSEl platform while taking no steps to introduce any effective governance mechanism including risk management, due diligence, assured collaterals etc., to ensure the legitimacy of his claims and to prevent frauds," it added.
About FTIl, the regulator said the company cannot seek to take refuge behind the corporate veil so as to unjustifiably isolate itself from the fraudulent actions that took place at NSEl resulting in such a huge payment crisis. The fraud involved settlement crisis of Rs 5,500 crore owed to over 13,000 sellers/investors on the trading platform of NSEl.
"The fact that FTIl promoted NSEl sought exemption from FCRA, 1952 provisions even before they had started any trading or operation, points to their intention from the outset. In this manner, it misinterpreted the conditions stipulated in the exemption notification in collusion with a handful of members, which ultimately culminated in a massive fraud involving Rs 5,500 crores, which has the potential effect of eroding trust and confidence in exchanges and financial markets," the order said.
NSEl yesterday paid about Rs 11.50 crore against the scheduled payment amount of Rs 174.72 crore, defaulting for the 18th straight time. It has so far settled about Rs 263.50 crore against about Rs 5,500 crore. On its seventh pay-out date and thirteenth pay-out date, the spot commodity bourse was unable to make any payment. The bourse had earlier said it plans to settle all the dues in 30 weeks time, by paying Rs 174.72 crore each for first 20 weeks followed by Rs 86.02 crore each in next 10 weeks.
NSEl is facing the problem of settling dues to 148 members after it suspended trade on July 31 following a government order. Its decision to suspend trading followed a Consumer Affairs Ministry directive asking the bourse not to launch any new contracts till further order as it found violations of government norms in trading at NSEl.