Post NSEL scam, FTIL faces toughest challenge with government moves

The management, investors and lenders of Financial Technologies India Ltd (FTIL) are waiting with bated breath as the Company Law Board, a quasi judicial body, is set to hear a petition filed by the ministry of corporate affairs (MCA) on May 15. The ministry had filed the petition asking CLB to allow the government to appoint its own nominees on the board of FTIL, the parent of scam-hit commodity exchange NSEL, in order to "prevent further acts of fraud, misfeasance, breach of trust".

The government move came against the backdrop of the Rs 5,600-crore payment fraud at NSEL, in which FTIL holds a 99.99% stake.

The move by MCA has raised some unanswered questions. Is the government trying to supercede the company board (using section 397 of the Companies Act, 1956) so that it would not face any opposition while merging the company with NSEL under section 396 of the Companies Act? Does the government's argument before the CLB that the current board of FTIL is trying to "scuttle any attempts made to carry out amalgamation between FTIL and NSEL" hold water, especially when it is FTIL board's prerogative and right to reject the arbitrary and tyrannical merger?

More than 20 months after the NSEL scam broke out in July 2013, it is life as usual for two dozen defaulters and several brokers, who, according to investigating agencies, mis-sold, mis-represented and leveraged on the commodity exchange. It is baffling that there are no investigations so far into the serious allegations that the brokers ran 10:90 and 20:80 schemes by lending huge money to their investors and in turn, used the investors' PAN cards to surreptitiously skip KYC (know-your-customer) norms. Even after the arrest of three brokerage officials -- Anand Rathi Commodities managing director Amit Rathi, India InfoLine Commodities vice president Chintan Modi and Geojit Comtrade's whole-time director CP Krishnan, the scope of investigation is yet to be expanded to include issues related to money-laundering.

Soon after the arrest of brokers, Rajvardhan Sinha, the then additional commissioner of police (EOW), told media that they have found fictitious transactions showing the sale of commodities to defaulting counterparties and book adjustments of money. The police have also found large scale market capturing practices by unique client code modification at brokers' end and illegal trading through clients' accounts without the latter's knowledge and consent. Some brokers acted as clearing and forwarding (C&F) agents, meaning that they were responsible for stocks' safekeeping and transportation. Interestingly, the brokers had even given confirmation of stocks to NSEL auditors.

So far, the investigative agencies have found no money trail to nail NSEL's initial promoter Jignesh Shah, who is the "prime suspect in the scam", whereas investigations into brokers and defaulters, and allegations on their money laundering activities seem to have hit a slow lane. Is there anyone scared that the judicial process might open up a Pandora's box?

On March 1, the board of FTIL passed a resolution to strongly oppose the MCA petition, claiming that that it is a "clear attempt by the ministry to render it ineffective and in fact, defeat FTIL's challenge and opposition to the proposed amalgamation of NSEL with FTIL." Immediately, MCA moved CLB seeking extraordinary powers under Section 397 to supercede FTIL's board by removing its existing members and appointing government nominees.

The investigative agencies have already attached assets worth more than Rs 5,600 crore that is believed to have lost in the scam. Investors, who lost money, hope that the government would focus on quick settlement.
Instead, any move to abolish the FTIL board and then conveniently merge NSEL with it will mean the final nail on the group's coffin, and none of the FTIL shareholders, lenders and employees would ever want this. Does the government want it?