National Spot Exchange limited (NSEL) was India’s first electronic spot exchange that was established in view of the prime minister’s vision to create a “single market” across the country for both manufacturing and agricultural procedure. The government issued a notification dated June 7, 2007 had granted an exemption under section 27 of the Forward Contracts Regulations Act (FCRA), to NSEL from complying with all the provisions of the FCRA subject to certain conditions. It is a joint venture of Financial Technologies of India (FTIL) and National Agricultural Cooperative Marketing Federation of India. It was incorporated in May 2005 as a spot exchange for trading in commodities. It is a private organization run by Shri Shankar lal guru (chairman), Jignesh shah (vice chairman) and Anjani sinha (Managing director and CEO). NSEL is a commodity exchange, which means it acts as a platform for commodity spot trading where in you buy goods by paying cash on the spot. The key factor of this exchange is its facility of online trading where in the buyer had the ease to transact being anonymous and it also solved the problem of being at distant places.
Content of the Scam
The infamous NSEL 5600 crore commodity came in to light when the company. The policies are that the transactions should be executed fairly and the commodities should be in the warehouse. The performance of the company was opposite to the policies authorized by the Forward Contracts Act. The exchange was carried on contracts without underlying assets. The deliveries were taking place on T+35 bases but the authorized bases were T+2 basis. NESL was carrying out a lot of activities for which there is no authorization, like for instance NESL was carrying out E-Contract basis without permission. NESL was turning T+2 contracts into longer contracts it was not authorized to perform. The investors were in the dark about the arbitrage.
On 31st July 2013, NSEL was stopped carrying out any new contracts by the government. The news became viral and the investors were shocked as they didn’t get their payouts and NSEL’s managing director Anjani Sinha was kept insuring the investors with statements as shallows as warehouse receipts. The investors were confused and finally Pankaj Ramnaresh Saraf one of the investor, filled a case against NSEL. Immediate action was taken against the matter and in no time the key people for the scam were Amit mukerjee (vice president) and Bahukhandi (assistant vice president) are arrested. Jignesh Shah and his team of NSEL charged under the IPC sections 409,465,467,468,471,474,120(B) and 34. All these sections focus on criminal conspiracy.
Implications of the scam
Commodity futures markets came to halt in 2013 because of the scam in jignesh shah-led national spot exchange and imposition of tax in non-farm items hampered the growth of business.
Tax imposition was decreased to o.o1 in commodity tax in that particular year budget but there was no growth because of that change.
The NSEL company forward contracts violated the law, finally suspended trading at the spot exchange that unearthed a fraud of 5600crore (even bigger than other scams in the market).
Series of events of this scam shook the investors’ confidence in the commodity markets as multi-agencies probe found at NSEL.
Forward market commission transferred this scam enquiry to the finance ministry for overseeing.
Jignesh shah resigned from the board of Multi commodity exchange and stock exchange.
NSEL crisis is a Ponzi scheme that promised to pay investors 18%.Everyone was jumping at the prospect of making profits without analyzing the risk and fraud behind the returns.