Forensic report nails down master players including Jignesh Shah (Pic credit: Nalin Solanki)
The background: Financial Technologies (India) Limited (FTIL), now known as 63 Moons Technologies Limited is an Indian company, incorporated in 1988. It is promoted by the FTIL group of companies. Jignesh Shah was the Group Chairman (GC). Multiple exchanges were started by the FTIL Group of companies, including MCX, NSEL, etc. NSEL was one of such exchanges promoted by FTIL, and the National Agricultural Cooperative Marketing Federation of India (NAFED) in 2005 with FTIL holding 99.99% of the shares, while NAFED held a nominal 100 shares in NSEL. NSEL engaged in ‘trades in commodities and bullion (through e series). Considering the nature of activities in which NSEL operated,the erstwhile Forward Markets Commission (FMC) was named as the designated agency. FMC has since been merged with SEBI.
On July 31, 2013, around 13,000 investors had reportedly lost around Rs.5,600 crores on account of trading on the NSEL platform. All hell broke loose after that. Now, read the Bizbuzz report on the exposeby the Forensic Audit…
MUMBAI: The Forensic Audit into the Rs 5,700 crore NSEL scam that left over 13,000 investors in the lurch has confirmed large scale profit manipulations by main players to build investor confidence and raised serious questions about the role of auditors.
The voluminous report done by Chetan Dalal Investigation and Management Services Private Limited (CDIMS) for the EOW detailed the modus operandi of the scam and listed major defaulters.
“In any company the profit or loss is one of the most important disclosures in the audited financial statements and these details are available in the public domain. Therefore any entity dealing with it, whether it be a government or regulatory entity like FMC, Income Tax authorities, or third parties like investors, creditors and suppliers, or shareholders themselves, relies on these disclosures in the public domain,” the forensic investigation report said. “
“Wrongful disclosures, in particular those done wilfully to show manipulated numbers, could affect decisions of third parties like investors to invest or participate in dealings with the company,” it said.
For instance, NSEL showed Rs 2.43 crore profit against an actual loss of Rs 18 crore for FY 2010-11. The Actual figure which is a loss has been substantiated by an email trail that the investigation has chased.
Similarly in the FY 2009-10, the auditors had initially been insisting on provisions for NAFED dues, Insurance claims and depreciation and had they stood firm the loss would have been about Rs. 28 crores as against the disclosed Rs. 6 crores. They were somehow convinced and these provisions were not made.
The evidence available specifically shows these adjustments were known not only to NSEL CEO but there was awareness and some support even from directors in FTIL, directors of N K Proteins Limited Group, Statutory and Internal auditors of NSEL.
Considering the evidence gathered, these manipulations in the profits were not executed merely for showing a healthier financial position. They also enabled NSEL to camouflage losses and expenses related to efforts made in increasing trading volumes. They also facilitated in suppression of huge exposures and stock shortages. Some evidence of manipulations is seen even in the subsequent financial year 2011-12, which has been furnished in this report.
The CDIMS report listed the participants who have performed some role in contributing to these manipulations identified in this report (as best understood by us): FTIL, Jignesh Shah, Shreekant Jawalgekar, Devendra Agarwal, NSEL. Anjani Sinha, Amit Mukherjee, Jai Bahukhandi, Santosh Mansingh, H B Mohanty, Sashidhar Kotian, Narsingh Rao, Rakesh Shetty. N K Proteins Limited (the largest defaulter), Directors including Rajiv Todi, Auditors - Statutory Auditors (In case of NSEL both the signing partner Amit Kabra and the working partner Shrawan Jalan) and CA Mukesh P Shah’s firm, the statutory auditor for IBMA, who was as well the internal auditor of NSEL and the statutory auditor for FY 2012-13.
Presenting a snapshot view of manipulations and other wrong doings affecting the revenues of NSEL, the report said:
a: Fictitious trading was being performed using E trader software.
b: Creating artificial revenues from a defaulter like N K Proteins Limited to inflate revenues of NSEL through delivery charges and pricing mark ups for trading with N K Proteins Limited.
c: Documentation created and backdated to support artificial revenue through delivery charges
d: Falsification of minutes on 26 May 2010. Though the auditors had not attended, they were not only marked present wrongly but the minutes even recorded some statements made by auditors during that meeting
e: Auditors did not insist on making provisions for possible non recovery of dues from NAFED, Insurance claim etc. They did not qualify the report as regards additional delivery charges as stated in c above. They did not object to the falsification of minutes and even accepted a letter of representation from the management which includes a reference to these minutes.
f: Settlement Guarantee Fund (SGF) inadequacy was not disclosed in the financial statements during these financial years from 2010 to 2012. Neither the management nor the auditors (both internal and statutory) disclosed or reported the inadequacy of the SGF as per the bye law 12 of NSEL. The SGF was required to be created BEFORE commencement of trading by NSEL per Bye Law 12.
g: Group Chairman, CFO of FTIL Devendra Agarwal, Shreekant Jawalgekar were fully aware about these foregoing matters. With respect to the adjustment of Rs 1.5 crores in IBMA they even provided the necessary support from MCX to compensate IBMA’s losses and suggesting the required documentation. Shreekant Jawalgekar was aware about the huge party-wise exposure in July 2012, a year before the closure of the exchange.
h: Exposure of the defaulters and the inadequacy of stocks in warehouse was being reported internally to Anjani Sinha regularly. The entire management of NSEL was fully aware about the huge exposure of N K Proteins right from 2011.
The role of the auditors: Auditors also failed to raise alarm bells. The statutory auditors (S V Ghatalia & Associates) did not take any serious note to examine and report or disclose these matters particularly those directly affecting financial statements.
Evidence of email exchanges between auditors and management indicate that many serious issues like
- non availability of stock records and supporting details
- falsification of minutes,
- inadequacy of SGF,
- legitimacy of delivery charges earned by NSEL,
- non recoverability of NAFED dues,
All these matters were known and discussed with the NSEL management, but these were not appropriately disclosed or reported in a manner which could have raised alarm bells. The notes and disclosures in the reports, read with some of the email exchanges that we have, indicate that the auditors had taken a soft stand. For example the CFO of FTIL insisted on the date of the balance sheet that a certain qualification needed to be removed from the report, the forensic report says.
One of the fundamental requirements for spot trading on the NSEL exchange was depositing of stocks in the designated warehouses. All sellers of commodities were required to deposit equivalent value of stocks of commodities traded after getting quality check clearances. Investors could trade on the exchange through a process of pair trades (buying and selling virtually simultaneously) at prices whereby they could get a profit on the price differential between and the buy and sell price. Buying would be on say T +2 days and Selling would be T+25 days. In essence, through these pair trades, sellers thus got finance against their commodity stocks for a period of 25 days and investors got interest on the finance provided by them. NSEL had multiple settlement accounts, numbering 9 (nine) with various banks from which it used to deposit pay-ins and make the pay-outs for trades executed on the NSEL platform.
Snapshot of the NSEL scam:
- Creation of trading volumes at any cost using all practices without adequate investor protection (Settlement Guarantee Fund (SGF) and Stocks)
- Colluding with sellers to generate volumes ignoring their financial capabilities and not evaluating their KYCs and creditworthiness thoroughly. In this regard consideration for NSEL, was in the form of unquestioned support to the exchange to increase volumes which would have increased the revenues and valuation of NSEL. The sellers benefited by getting finance through trading.
- Corporate Governance was minimal; and auditors also supported the management to a great extent
- Empanelling members (borrowers) having poor credibility
- Virtually non-existence of any control on stocks or end-use of funds provided from NSEL exchange.
- Indulged in other activities like trading and procurement with defaulter sellers which also resulted into losses. Instances were also observed where NSEL in association with its parent company (FTIL) provided bank finance to NKP.
- Eventually the ‘bubble’ burst since the exposure of sellers reached massive proportions and investors’ were left unpaid NSEL commenced its trading operations in FY 2008-09 when the bulk of the trading on the exchange was with a seller, N K Proteins (who became eventually the largest defaulter on 31 July 2013 Rs.969 crores approx.). Over a period of 4 years other sellers started trading on the exchange. A due diligence exercise had not been carried out satisfactorily to justify the trading and eventual exposure of Rs.969 crores for N K Proteins. It is evident that many of these sellers were starved of finance, and were probably not getting finance anywhere else. When these sellers were permitted to trade, they got a chance to get finance on the exchange and were therefore willing to pay steep interest rates which were ‘profits’ for investors’ trades as explained earlier. The exchange permitted them to trade without adequate stocks, at times without adequate margins merely to generate trading volumes. As the volumes grew, more investors were lured into trading through brokers.
Because of the financial stress and lack of resources sellers were unable to meet their commitments on T+25 (or T +36) dates, but the exchange permitted them to roll over their transactions by having fresh trades whereby they used the money from the fresh trades to offset the earlier trade commitments. Thus their exposures started creeping up and gradually snowballed into massive proportions.
The NSEL exchange did not build up the minimum required corpus (as required by bye laws) for investor protection called (Settlement Guarantee Fund, SGF) and since the margins were also not forthcoming as needed, and since adequate stocks were not kept as security, the trading activity was always vulnerable and what happened on 31 July 2013 was bound to happen.
The foregoing was not just a case of reckless trading and misjudgement of sellers’ credentials. Evidence has also been found to show that there has been collusion between the NSEL management and the defaulters in many ways. Evidence of personal enrichment of the NSEL CEO by N K Proteins Limited Group (NKP Group) is available through bank statements. Amit Mukherjee had received certain amounts in cash at Kadi and Rs. 2.50 lakhs from Prakash Bhalotia.
Jai Bahukhandi had also got certain favours and benefits per his submission available with the EOW. Apart from the foregoing, IBMA also got funds from other defaulting members such as LOIL – Rs. 22.50 crores as consultancy fees, Mohan Infracon – Rs.10 crores.
It is relevant to mention here that the chairman of the Board of Directors of NSEL was Late Mr Shankarlal Guru, the father in law of the director of N K Proteins Limited, Mr. Nilesh Patel. The NSEL exchange even provided a borrower advance to trade on it (Mr. Anjani Sinha in his mail dated 29.09.2011 authorized to issue an advance of Rs.5 crores to M/s Dunar Foods Ltd. to commence its trading on NSEL platform.
The Forensic Audit lists the following key players who have performed some role in contributing to these manipulations identified in this report:
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