The National Spot Exchange Limited (NSEL), the fully owned subsidiary of Financial Technologies (India) Limited (FTIL) was hit by a scam which hit the market, the regulators, investors and all other stakeholders by a storm and a discussion started about the lapses of corporate governance and lapses on all front by the NSEL and even by the regulators. Recently the government has notified to merger the NSEL with its parent FTIL. The FTIL has challenged this notice into the Bombay High Court as it will have to bear 5500 crore liability of NSEL.

This study aims at investigating the NSEL scam and finding out the lapses which led to this mega scam and the impact of the first forced merger by the Indian government on all stakeholders. Various documents have been referenced and all the data available have been analysed to find out the root cause of the NSEL scam. Annual reports of both companies along with the guidelines laid by the government has been analysed to find out the impact of amalgamation order on all the stakeholders.

Through this study it has been tried to provide insight of all the happening which led to closing of NSEL and now the amalgamation order by government in a neutral manner considering all facts and implications.


1.1. Problem Statement

In last two decades India has seen few mega scams by its corporates. NSEL scam was one of such scam which made news in 2014 and recently when government announced merger of NSEL with its parent FTIL. This study tries to answer the below problem statements:

  • What were the causes of the NSEL Scam?
  • What were the lapses in corporate governance?
  • Was there any lapse on the part of government and the regulators of Indian Markets?
  • What will be the impact of proposed merger of NSEL with FTIL on the various stakeholders?

This research work tries to answer the above questions as a neutral person’s perspective.

1.2. Rationale of the Study

On October 21st, 2014 Government of India announced merger of NSEL with its parent FTIL. This move was historic as this was the first time in history that Indian government was going for the forced amalgamation of any subsidiary with its parent. Against this decision FTIL went into to court and currently the matter is sub-judice in front of Honourable Mumbai High Court. There are more than 18,700 shareholders of FTIL and more than 1000 employees. NSEL had defaulted INR 5600 crores to its clients. So there is an argument that in the public interest the burden of INR 5600 crore should be transferred to FTIL thus this order of amalgamation was issued. To study the real lapses and root causes which led NSEL to fall and the impact analysis of the merger is only rational and important for all the stakeholders and the market.

1.3. Company Profile

1.3.1. FTIL

Financial Technologies India Limited abbreviated as FTIL is a financial services firm which prides itself as a global leader in cutting edge technology for Risk, Exchange, Brokerage, Messaging, and Consulting Solutions etc. It was founded by Mr. Jignesh Shah in 1988 but had its first IPO in 1995. Before 1995, it was operating as a technology developer for financial markets. FTIL established India’s first Derivatives Trading Platform and has since developed institutions like MCX (2003), NBHC, DGCX, lEX, SMX, and Bourse Africa.

The company has got unique positioning as a creator of electronic, regulated and organized financial market for investor and new asset classes that are not served by traditional financial market due to issues like less coverage or economic ineffectiveness. Overall FTIL has a network of 2 ecosystem ventures and 5 exchanges with about 80% market share in India. The expertise of FTIL is unparalleled as it is the only company to have established 6 exchanges connecting India with Middle East, Africa and South East Asia. It operates on a non-linear business model and it is super speciality institution for new financial markets. The best part about their model is that it is scalable and flexible and extremely robust to achieve economies of scale for pre-trade, trade and post-trade scenarios.

FTIL has mentioned three main objectives in their ‘Visions’ section in their website. They are as follows:

  • Build a technology company – main focus is on Intellectual Property Rights creation
  • Build a brand-centric model – generation of sustainable annuity revenues
  • Leverage strong technological platforms – transaction intensive multi-billion dollar business

Founder of FTIL, Mr. Jignesh Shah, is known for his innovation in successfully implementing PPP (Public Private Partnership) Model for creating top notch financial institutions. He is also the founder of MCX (Multi-Commodity Exchange) and DGCX (Dubai Gold and Commodities Exchange), IEX (Indian Energy Exchange), Bahrain Financial Exchange (BFX), SMX (Singapore Mercantile Exchange), Bourse Africa and a few others.

Table 1.1. Company Overview of FTIL

Company Name Financial Technologies India Limited. (FTIL)
Website www.ftindia.com
Slogan Creating Markets Unlocking Value
Company Type Public
Trades as BSE: FINTECH


Industry/Sector BFSI
Key People

Jignesh Shah, Chairman and Group CEO

Dewang Neralla, Co-Founder

Prashant Desai, MD and CEO

Head Office Chennai, India

Stock Exchange

FTIL Evolution

FTIL Evolution

Fig 1.1. FTIL Evolution. Retrieved from www.ftindia.com

1.3.2. NSEL

NSEL is the abbreviated form of National Spot Exchange Limited. It was established in month of May, 2005 with the main aim of spot exchange for trading of commodities. In June 2007, NSEL obtained some exemptions from following all the provisions of Forwards Contract Regulation Act (FCRA) subject to certain conditions. NSEL introduced an electronic platform to its clients in October 2008 through which they could perform spot trading of different commodities such as bullion, metals, and agricultural produce like potato, onion, ginger, coffee beans etc. As the biggest stock exchanges of India, BSE and NSE list their trading members as brokers, so does NSEL. These brokers act on behalf of different clients all over India and carry out buying and selling of different commodities in the process of exchange. NSEL was suspended from further trading by the Government in 2013 following a scam coming to light. It also lists NAFED (National Agricultural Cooperative Marketing Federation of India) as a co-promoter. In exchange of using (rather misusing) the brand name of NAFED, NSEL gave NAFED 100 shares only as a token.

1.3.3. Jignesh Shah – Victim of Over Ambition

At 49, Jignesh Shah is one of the leading textbook iconic entrepreneurs of India in the field of finance. He is the man responsible for starting up of the NSEL (National Spot Exchange Limited) and FTIL (Financial Technologies India Limited) and various stock exchanges all over the world. He revolutionized commodity trading in India but his ambition went too far. The crude entrepreneur has been the reason of much of negative media attention in the past year following the well-known NSEL Scam, a company of whom he was the founder. Sources known to Jignesh Shah said he was ruthless in his business tactics and very often blurred the line between right and wrong. For the past 15 years, Jignesh Shah has been on an uphill climb following the mantra “Everything is fair in love, war and business.” This visionary has ironically been called short-sighted because he failed to see what is beneficial to his shareholders as well as himself.

Shah was the man behind the birth of MCX (Multi-Commodity Exchange) that was listed in BSE in 2012. FTIL set up by Shah in 1988 is a provider of technology for brokers, risk, exchange and consulting services. He is also the founder of DGCX (Dubai Gold and Commodities Exchange), IEX (Indian Energy Exchange), Bahrain Financial Exchange (BFX), SMX (Singapore Mercantile Exchange), Bourse Africa and a few others.

Shah was ambitious, no doubt and that was what carried him forward not only in Indian market but also to far off shores. Shah went wrong at many places due to this break-neck ambition of his which led to his arrest following the NSEL fiasco. Shah was accused of not co-operating with Police for questioning and his reputation was maligned. Thus, the rise of Jignesh Shah was super-fast but the fall from the top was harder. Much like his success story, Shah himself went horrifyingly wrong and the fate of the 13000 investors who invested around Rs 5,689.95 crore in NSEL is unsure till date.

Shah was the kind of person who liked to boast of his successes so when he was asked by the head of some large company willing to invest in NSEL how he was able to beat the competition NSPOT by NSE and still has high volumes; he simply said that he knew the market better. But in reality his firm NSEL was violating several clauses of the Forwards Contracts (Regulation) Act such as contract cycles could not extend beyond 11 days and short-selling which were not allowed. It was questioned by the Department of Consumer Affairs (DCA) in this matter and it went into a payment crisis. NSEL was clearly selling things that did not exist in their warehouses nor did they have any funds to pay back the investors.

FTIL, Shah’s other baby, was spurned by the investors as well as soon as news of NSEL scam spread resulting in declining stock prices. Same happened to MCX as well.

During the course of events, Shah and Anjani Sinha (former CEO of NSEL) were the main accused and both implicated the other during investigations. They were both jailed but Shah managed to get out on bail.

Another thing Shah did wrong was move from one venture to the next too fast. NSEL needed his attention but he was busy with making MCX the best. Shah and Dewang Nerella had built their empire from scratch. Shah was a one-time software engineer at BSE’s online trading system. He went on to quit BSE after his and Nerella proposal for software upgradation in BSE was rejected. They started a company called JCS where Shah built a software ODIN which went on to become his largest revenue earner. He took aggressive measures to get ahead of the competition like launching crude oil trading at Rs. 2128 per barrel six months before the competitor NCDEX started trading crude oil by which time the prices had risen to Rs. 2553 per barrel. A rival once said that Shah was always one step ahead of him and he could not fathom how.

Shah was good at recruiting experienced and apt people for his companies. He even brought in people from FMC (Forwards Market Commission) to be in their good books. Sinha on the other hand said that he wanted less people recruited by Shah on the board as they were mostly ex-bureaucrats or government servants.
Shah was a supporter of vyaj badla which is a type of trading in which trade can be carried forward as long as investor wanted provided a financier is available. He spoke openly when this was banned. He also got special permission for one-day forwards for his company. NSEL sold paired contracts fooling the investors by saying their portfolio is being diversified.

After the storm that Jignesh Shah’s venture faced, FTIL is facing the challenge of merging with NSEL as ordered by the government of India. NSEL, by itself is defunct now. MCX and MCX-SX seem to be weathering the storm till things get better.
The stories of several investors’ losses have cropped up on the media after the news broke of NSEL defaulting on payments. Nobody imagined Shah and his glorified NSEL would fail so miserably.

Now, there is nothing left for Shah but to be on a long path of recovery and rectification, collecting pieces of his broken reputation and building it back up. His core competency was technology and being the ‘technology scientist’ that he is he should concentrate more on that rather than on exchanges. The question remains how he will gain back the trust of the investors and colleagues. Was his fault only that he was too big of a dreamer? Time will tell.


Several articles and papers have been written about the government’s announcement of merger of NSEL and FTIL. To understand the background of this decision of the government it is important to understand the history of NSEL, FTIL, The NSEL Scam and also Jignesh Shah – the common promoter of both these entity. Some of the earlier works which have been referenced for this report are discussed in brief below.

The paper “Hard Hit Investors: Governance Lapses of NSEL Scam” [1] by Abhay Kumar, Asst. Professor of NMIMS University, Mumbai and Dr. Shilpa Rastogi, Director of Universal College of Management has explained in very crisp form the modus operandi of NSEL and how it used to engage in forward paired contracts ranging from T+1 to T+35 contracts being a Spot exchange where contracts should have been settled within T+11 days. The paper suggests that the borrowers were the real looters in the scam and the NSEL was also at fault.

The article “FTIL-NSEL Merger: Bad in Law & Policy?” [2] by Sanjay Asher which was published in ‘The Financial Express’ highlights the lapses by the regulators and government bodies like Ministry of Corporate Affairs (MCA), Forwards Markets Commission (FMC) in dealing with the entire NSEL Scam and explains how the MCA’s draft order of the merger is against the guidelines of Section 396 of The Companies Act, 1956. As per this article the decision of merger was taken is a haste and it is an unfair call for the stake holders of FTIL and it is not in the public interest.

The research paper “An Insight into NSEL Scam” [3] by B.V Pushpa, Assistant professor, M P Birla Institute of Management and R Deepak, the Research Scholar of Manipal University gives the insights of the NSEL of scam and how an organization (NSEL) established to help farmers by setting up of electronic exchange to bring transparency and provide better price for farmers turned into an evil and become a case study of lapse of corporate governance and the failure of regulatory and the government. The paper raises serious questions on the government and the regulatory authorities in India.

A news article published by PTI titled “Ministry Prove Finds Corporate Governance Lapses at NSEL” [4] was published 01 December 2013 which states that the ministry investigation has found lots of lapses on all fronts of corporate governance i.e. Ethics, Transparency, Integrity, Compliance and Transparency. This paper set the base to dip dive into the corporate governance norms and how NSEL did not follow them which led to the scam.

Mergers and Acquisition Module by National Spot Exchange which is a part of their certification was studied to understand various aspects of the Mergers and Acquisitions and how due diligence is done. The module also gave details about the synergy and the valuation of the merger along with all the regulatory norms necessary to carry out amalgamation.

“Mergers & Acquisitions: What Winners Do to Beat the Odds” [5] an executive insight report by the L.E.K Consulting in their volume XV, issue 16 gave the idea about the revenue drivers for the shareholders of the amalgamating companies and what strategies should be adopted for the profitable merger.

The article “Rise and Fall of Jignesh Shah” [6] published in the Forbes Magazine on 5th September 2014 explained the journey of Jignesh Shah and how he started various exchanges and then NSEL from being a software developer at BSE. This article also explained the modus operandi of NSEL.

Besides above mentioned papers and articles various websites, posts and articles were referenced which are mention in the “References” section. Along with the posts the website of both the concerned firms were searched in details to gather as much information as possible.


3.1 The NSEL Scam

3.1.1. Important Terms to Understand the Case

  • Spot Market: The spot market also called Cash Market is the market where the underlying asset (Commodities in this case) is sold for the cash and the delivery of the asset takes place immediately. The time given for settlement is T+1 or T+2 depending on the market which is based on the underlying asset. In other words the settlement period of T+2 means the buyer commodity received the commodity after 2 working days from the trade date.
  • Spot Price: The quoted price for the immediate delivery of the underlying asset is called the Spot Price.
  • Forward Contracts: Forward contracts also called simply “Forwards” is the contract where the delivery of the underlying asset takes place at a future date decided at the time of the agreement and the price is also decided at the time of agreement. The buyer can not ask the seller to give the asset at market price which can be lower than the agreed price similarly the seller can not demand the market price of the asset which can be higher than the earlier agreed price the delivery happens at the price agreed upon previously at the time of contract.
  • Forward or Future Price: The forward or future price is the price at the time of contract for the delivery of an asset at a future date.
  • Expiration Date: The final settlement date when the exchange of asset of the contract takes place.
  • Arbitrage: It is the process where a person buys and sells the asset at the same time in different markets to lock the profit due to difference in the prices in the different market. For example if the price of one thing is INR 10 in India and it is INR 20 in China the arbitrager will buy in India and at the same time sell them in China to lock the profit of INR 10.
  • Paired Contract: Paired contract is a contract in which same person goes into buy and sell contract at two different times in future. This is generally done when there is an arbitrage opportunity.

3.1.2 Background of the Scam

The NSEL was setup with the noble intension of eliminating the middle men and intermediaries from the producers i.e. the farmers and the buyers of the farm product by providing an electronic platform to exchange the commodity between the farmers or producers and the traders, exporters, traders and processors. The spot exchange promised to revive the rural economy by institutionalization, electronic platform, demutualization and transparent operations. NSEL was promoted by Financial Technologies India Limited (FTIL) along with the National Agricultural Marketing Federation of India (NAFED) aiming to promote agricultural products, bullion, metal and energy by providing an electronic exchange.

All initial goodwill lost when the fraud of Rs. 5600 crore surfaced after the NSEL could not pay the investors of paired contracts in commodity. The NSEL was a spot exchange so as per norms directed by Forwards Contracts Regulations Act, 1952 all the contracts termed as SPOT must be settled within T+11 days i.e transfer of money and delivery of product must take place within 11 days and Spot exchange.

Normally in spot market the exchange of money and the underlying asset takes place immediately but NSEL was a special case it got an exemption by Ministry of Corporate Affairs by a special notification which allowed to trade in one day forward contracts i.e contracts to be completed in T+2. But NSEL did not stick to only T+2 contracts instead they started offering special kind of paired contracts of buying and selling the same commodity on T+2 and T+23 and even T+2 and T+30 days respectively. This kind of paired contract gave arbitrage opportunity to the investors and fetched lots of profit to the investors and brokers. Later it was discovered that the NSEL had no inventory to deliver the product after T+20 or T+30 days and all the trade was happening just on the warehouse receipt without actual commodity lying in the warehouse.

Once this information came into existence the regulators came into the action but only after INR 5600 crore of the investors was defaulted. On 5th August 2013 the NSEL was shut down completely and series of arrests happened and investigation is still going on with the matter in front of Honourable Mumbai High Court. The entire series of events is summarized in Annexure – 1.

3.1.3. NSEL’s Modus Operandi

There were four players involved in the entire trade. They were the buyers, the sellers, the brokers and the exchange.

The sellers of the commodity used to take their commodity to the NSEL’s warehouse. After examining the underlying goods the warehouse used to issue and receipt called the warehouse receipt (WR). Then the sellers used to go to the exchange and Spot Sell the WR at INR 100 to buyers. Now since the NSEL used to offer paired contract the same seller who sold the goods at 100 had to go for buy position at T+25 at INR 115 and a commission was given to the exchange. Similarly the initial buyer goes into the sell position at T+25 at INR 115. This way the initial buyer was getting guaranteed 15% profit, the NSEL used to get commission from both ends and the sellers used to get short term finance at 15% interest which was reasonable for those looking for short term finance and were not getting those from banks.

The above trade was illegal as NSEL was allowed only T+2 contracts and in any case spot contract couldn’t be settled for more than T+11. Moreover it was found that the goods never lied in the warehouse and there were 24 planters in the NSEL who used to trade using the WR and when they had to settle the contract they used to generate another fake WR and trade using that.

The entire modus operandi is summarized in the Fig. 3.1.


Fig. 3.1. How the Trade Worked., Panchal, S., Palande, P. (2014, Sep 1), Retrieved from http://forbesindia.com/article/real-issue/the-rise-and-fall-of-jignesh-shah/38535/3

In the entire process the real gainers were the brokers who used to take commission from both the buyers and the seller and the real losers were the investors who’s INR 5600 crore got stuck once NSEL defaulted in paying them.

3.2.4. Lapses of Corporate Governance

 Serious lapses in corporate governance were part of NSEL’s culture. It consisted of a menu of violations of Company’s Act accompanied by lack of compliance, integrity, transparency and any kind of ethics. They failed to adhere to compliances, maintain integrity and transparency in their business and did not follow many ethical measures given in their own annual reports in the section of corporate governance.

The failure of corporate governance was at multiple levels of the organizations. This was stated in the interim report given by the Registrar of Companies (RoC) that carried out an inspection.

SEBI also carried out an investigation into the matter specifically from the corporate governance point of view. The share prices of listed entities like FTIL and MCX were also under constant SEBI supervision as well as the role of some particular brokers. Following the scam an independent audit was taken by consultancy PWC on orders of FMC. The audit report was given to FMC as well as to SEBI.

Violations of regulations included the non-performance of board members and how issues like non-compliance of different rules, such as, new member admission rules were conveniently left un-discussed in board minutes.

The minutes of meetings were also fabricated to some extent with blatant disregard for rules and common ethics.

Board also did not fulfil its duties to the interest of shareholders who put much at stake for the exchange. We can say there was a conflict of interest of different parties here.

Declaration of defaults was another major corporate governance infringement

Directors of NSEL, like Joseph Massey, Jignesh Shah and some others also had common directorship in other ventures of FTIL group which in itself was a little fishy. Still, they made the ridiculous claim that they had no idea of what was going on at NSEL. They played a blame game and resigned and no one took responsibility of their actions.

The promoters did not want to be excluded in this wonderful menu of special violations of corporate governance.

Obviously, independent auditors like Deloitte Haskins & Sells LLP, Mukesh Shah & Co and S V Ghatalia & Associates came under the scanner as to how they were giving the green flag to NSEL.

Apart from that, under Section 209 A of Companies Act, inspection into the books of NSEL yielded many discrepancies which should now come of no surprise.

Economic Offences Wing of Mumbai Police has charged NSEL directors, promoters and defaulters with forgery, cheating, criminal conspiracy and breach of trust, to name a few. At least 5 people were arrested by EOW.

Combined with the lapses by regulatory bodies in governing NSEL, the happenings in NSEL was just a time bomb waiting to explode.

4.2.5. Lapses of Regulatory Bodies

 Failure of NSEL as a spot commodity exchange was no doubt due to many intrinsic reasons. However, the fact that the Government and different regulatory bodies like FMC, FSDC and MCA had made quite a few lapses in taking action in spite of having knowledge of the wrongdoings going on at NSEL can’t be ignored.

First and foremost, there was no clearly defined regulatory body made by the Central Government with regard to spot exchanges. On one hand, SEBI was not claiming any rights to govern NSEL. On the other hand, the Ministry of Corporate Affairs (MCA), the Financial Stability and Development Council (FSDC) and the Forwards Market Commission (FMC) were at war over whose jurisdiction it fell under. MCA insisted that FMC had the authority to intervene all the while delaying its own responsibility up until the 6th of February, 2012 when it finally issued a notification. This was around an 8 month delay.

FMC, DCA and FSDC all communicated over the months of June till August, 2011 regarding NSEL issues but could not find common ground to take any regulatory action.

The sub-committee of FSDC, with RBI-Governor itself as chairman made the argument that FMC was not suitable to handle and control issues at NSEL and advised for a regulatory framework to be “addressed urgently”. Rajiv Agarwal, secretary of consumer affairs got written communication from R. Gopalan, former secretary of economic affairs stating the view of FSDC on the matter. With FMCs support Agarwal wrote back saying FSDC was not correct in its viewpoint. Hence, began the argument between DCA and FSDC. Meanwhile, FMC took upon itself to look into 7 issues of NSEL and put a ban on short-selling.

Retail Investors got involved in trades of commodities with no understanding of the grades and margins of the commodities being sold or the supply-demand scenario. Brokers were under the impression that the promoters of NSEL are the same reliable figures of FTIL.

Major fact remains that NSEL was not at all under supervision and it did as it pleased. NSEL is a perfect example of how Jignesh Shah and other directors became crafty businesspersons by taking advantage of regulatory loopholes to loot the normal public. Even the legally banned transactions were carried out nonchalantly in NSEL which further shows how unregulated it was.

Biggest lapse by regulators was that NSEL was allowed to retain funds of investors for a “financial product” which were collaborated in so-called “investment opportunity”.

Political pleasing, disregard of public interest and coalition dharma are reasons cited by former PM Manmohan Singh for such scams.

WRDA also known as Warehouse Development and Regulatory Authority exists as an independent warehousing regulator but it was clueless as to accreditation of warehouses owned by NSEL. National Bulk Handling Corporation is another company set up by FTIL group which was suspiciously involved in the setting up of the warehouses which were also under some key persons properties at NSEL.

Regular audits were also missing by the regulators leading to the mishappenings. Irate investors have claimed regulators went easy on NSEL and took no action despite full knowledge of what was going on. Now SEBI and FMC have to find the path to payback thousands of investors waiting over a year now.

A simple exemption of rule, that is, to be under supervision of FMC, by ministry of consumer affairs led to the birth of NSEL. Little did they know, this very exemption will be used to make a Ponzi-scheme?

Regulatory defects are not limited to just commodity trading. There are many issues in other markets which have not seen the light of day yet.

Regulations are unwelcome when companies have sunny days but they are the ones keeping them safe during the hard times.

3.3. Proposed Merger of NSEL with FTIL

On 21st October 2014 MCA had issued a draft order of merger of NSEL with FTIL. This order was based on the recommendations of FMC. The basis of this decision was taken as section 396 of Companies Act whose constitutional validity was challenged in the Bombay High Court by FTIL, the court had ordered a status quo on 27th November 2014 which was later vacated on 4th February 2015 when Solicitor General of India told the court that based on Prima Facie view the MCA has issues a “Draft” order and its merely a draft and all the concerned parties can raise their concerns.

After 17 months of court proceedings and hearing with NSEL investors, public shareholders and management of FTIL, the Union Ministry of Corporate Affairs ordered the merger of NSEL with its parent FTIL on 12th February 2016. In its order the government said that they were satisfied that merger is in the public interest.

As soon as the decision came out reactions from all sections started coming in. Meanwhile Mumbai High Court directed that the merger order of MCA will not be notified immediately and FTIL will be allowed to challenge the order.

Prashant Desai, the MD of FTIL stated “Pursuant to the Bombay High Court’s Order, FTIL had represented its case in the hearing given by the MCA in October 2015 putting forth all its objections to the Draft Merger Order. The way the hearing went and the way thousands of shareholders, employees and creditors had objected to the proposed merger, we were hopeful that the MCA will take an objective view of the matter and withdraw the Draft Merger Order. Hence, the passing of the Merger Order today — while matters are sub-judice — is highly disappointing.”

On the other hand the investor group “NSEL Aggrieved and Recovery Association (NAARA)” welcomed the decision of merger and in their statement stated, “We shall remain grateful to the Ministry and the Government for the passing the order, and all other authorities, forums that have empathised with the cause of aggrieved investors. Most importantly, it gives confidence to investors those Exchanges, which are institutions of implicit trust, cannot be forced to fail by acts of fraud. The public interest prevails over every other contention.”

The Mumbai High Court has currently put a stay order on the notification but the detailed analysis of the situation needed to be done which resulted in this study.

3.3.1. Compliance with Policy & Law

Sections 396 of The Companies Act, 1956

Article (1) says that Where the Central Government is satisfied that it is essential in the public interest.

Whether the merger is in public interest or not is in question as the merger will not doubt make the recovery of money of investors faster but it will adversely affect more than 17000 shareholders, thousands of employees, creditors, vendors and other stakeholders of FTIL by fastening the debt of NSEL worth INR 5600 crores to FTIL. So in which case more public will be benefitted is a question.

Article (3) of Section 396 says that if the interests of shreholders of both the companies is hampered then they are to be compensated by the resulting company this indicates that the section 396 was not meant to fasten third party liability on the healthy company when the liability itself is unproven and under court’s purview.

Moreover the majority of the claimants are belonging to HNIs and Corporates who traded with knowing the risks and reward, the small claimant’s claim was already settled either fully or partially. So it can not be said with confidence that the innocent investor’s money is stuck. Also the genuineness of the 13000 trading clients is also under the investigation by High Court Committee after certain client’s complaint against the brokers for modifying the clinet code and involved in forgery and benami transactions.

So the use of Section 396 in the name of public interest can be seen against the government’s focus on the ease of doing business if it is against the majority interests of the shareholders, creditors and employees.

Piercing the Corporate Veil

To force the merger the corporate veil between the FTIL and NSEL has to be lifted but as per general norms the corporate veil can not be lifted unless the fraud on the part of the parent corporation is proven in the court of law. This matter is currently sub-judice in front of Honourable Mumbai High Court. And in an order dated 22nd August 2014 the court had held that no money trail is found to any of the promoter of NSEL or FTIL. So in such circumstances without waiting for the final judgement of the civil suit the recommendation may seem prejudged if MCA goes ahead with the merger while the matter remains in the court.

Simplified Procedure for amalgamation of Government Companies U/s 396 of the Companies Act, 1956. GENERAL CIRCULAR NO. 16/2011 by MCA

According to the above circular date 20th April 2011, MCA had layed down guidelines for the compulsory merger of government companies in which MCA had stated that in such cases a resolution should be passed with overwhelming support of the shareholders and creditors. But in the case of NSEL and FTIL more than 96% shareholders and creditors have given written opposition letter. Considering this it will clearly send a message that the government has discriminatory approach to private companies as compared to the government companies.

Limited Liability

The concept of limited liability says that the owners of any corporation are not personally responsible for the debts and obligations of the corporation. With the forced merger the concept of limited liability will be in question which may adversely affect the confidence of the local and foreign investors considering that FTIL has FDI and FII investments.

Decrees and Injunctions Filed so Far

While considering the merger that it should be kept in mind that INR 524 Crores have already been paid, NSEL had filed 150 cases against defaulters obtaining decrees worth INR 1233 Crores and Injunctions worth 3428.86 crores in addition the EOW has attached asset worth INR 5000 crores of the defaulters under Maharashtra Protection of Depositors Act and ED attached assets worth INR 1200 crore. Based on these it can be seen that the claims of the investors are adequately secured. The merger can only fast track the claims.

3.3.2. Impact Analysis

The proposed merger will impact the following:

  • Claimants/trading clients of NSEL
  • Shareholders of FTIL
  • Employees
  • Creditors of FTIL
  • FII & FDI investors of FTIL
  • Market Sentiments

The proposed merger will impact each of the above mentioned. Let us analyse the impact on each of the above in details.

Claimants/Trading clients of NSEL

As per the MCA’s order after the merger the debt of INR 5500 crore fo NSEL will be taken care off by the resultant company after the merger. This would mean that the claimants of money from NSEL can expect a speedy recovery of their money.

Out of these 13,000 trading clients of NSEL 7000 had already been partially settled and all those who had exposure of less than INR 10 lakhs have been fully settled. The remaining is of some HNIs and corporates who can be benefitted from the proposed merger.

Shareholders of FTIL

The proposed merger will adversely impact the market capitalization of FTIL by putting the debt burden of NSEL on FTIL. It will erode its net worth which will impact the more than 17,800 shareholders adversely as they will lose money due to falling of net worth and market capitalization of FTIL.

Employees of FTIL

Employees of FTIL will also feel the heat of merger as the company will be burdened with extra debt of more than 5000 crore which will hamper the overall health of FTIL and thus affect the employees as well.

Creditors of FTIL

The liquidity position of FTIL will be hampered by the merger and thus it will be a cause of concern for the creditors.

FDI and FII investors of FTIL

The confidence of FDI and FII investors of FTIL may shake because they may feel that the concept of limited liability is being destroyed by the forced merger when the fraud on the parent company is yet to be proved.

Market Sentiments

Market sentiments can be affected in the mixed way as for those market players who are getting affected by the non payment of money from NSEL will be able to get their settlement faster and their confidence will be boosted as it will sent a message that the investor’s money is secured in the country and the exchange can’t do fraud and get away.

On the other hand market can feel that the government is doing unjust by lifting corporate veil and compromising the concept of limited liability implying there is not ease of doing business and government treats private and public firms differently considering that majority of the stakeholders of NSEL and FTIL opposed the merger.

Below are some of the ratios calculated from the current FTIL financial statements and also when NSEL will be merged to FTIL. This helps us understand the impact of merger better.

Table 3.1. Some Ratios –  Before and After Merger

Current Ratio

The current ratio will fall from 13.85 to 7.32 after the merger, it means the liquidity position which is vital for creditors will be adversely affected.


The EBITDA margin will be reduced by more than 50% from 054 to 0.25 this shows that the operating health of FTIL will be adversely impacted and the operating efficiency of FTIL will be eroded.


ROE of FTIL after merger will become 4.83 as compared to current 0.34 which means that the efficiency of FTIL to generate profit for every unit of shareholder’s equity will be adversely impacted.

D/E Ratio

Debt-to-equity ratio of the FTIL after merger will be creased to 0.25 from 0.17 which means it will be doing more debt financing than equity financing which is poor for the health of FTIL.

 3.4. NSEL’s Version on the Scam and the Merger Decision

In a report published by NSEL titled “9 Reasons Why NSEL is Fighting the Bias and Injustice” NSEL gave 9 reasons according to which they were made a victim and if the FMC and the government would have helped them they could have sailed out from the crisis.

Below are the 9 reasons given by NSEL:

  1. NSEL failed because of FMC’s forceful closure order, not on its own.
  • As per NSEL they were carrying a business which was perfectly legitimate and legal and it had no history of delayed settlement in their tenure of operation it is the FMC’s sudden decision to close the operation at NSEL which created the liquidity problem. It was like suddenly closing a bank which is fully operational and asks them to pay to all the customers immediately without operating, it is bound to make the bank default on many customers.

On 23rd November 2011 FMC gave a particular reporting format to all spot exchanges including NSEL to submit the fortnightly trading data to FMC. NSEL had given the desired daily report without fail but still NSEL was issued a show cause notice by DCA on the recommendation of FMC for short selling and contracts of more than 11 days settlement period. NSEL had promptly given a detailed reply but FMC and DCA did not reply for more than a year and suddenly asked to close all operations in July 2013 without doing any assessment of the situation.

  1. FMC had not helped in resolving the issue and all the burden of forced closure was taken by NSEL and FTIL
  • NSEL alleged FMC that FMC created this whole crisis but did not help in any way. FMC had no clue about what were the implications of the forced closure on the general market and on the clients. FMC never allowed any conversation by NSEL on the operational aspect of stopping the exchange and how to contain the damage caused by sudden closure of NSEL.

It was FTIL who came into rescue by giving loan of INR 179.25 crore without any prejudice and also supported NSEL with human and other resources with which NSEL was able to settle the small traders having exposure less than 10 lakh. NSEL initiated settlement measures and was able to settle all the 33,000 e-series contracts trading clients.

NSEL also said that while it has cooperated with all the investigating agencies like EOW, ED, CBI etc the FMC has treated them like convict and offered no help. As per NSEL they have taken responsibility to persuade defaulters by filing several cases, and seeking decrees and injunctions. (See Annexure 3)

  1. NSEL achieved substantial success in recovery on its own, FMC provided no support
  • NSEL gained goodwill in the industry when it intervened and was able to get an order from Mumbai High Court on 2nd September 2014 to appoint a 3 member committee who will monitor and assist in the settlement and recovery. Time to time NSEL has taken lots of recovery measures and distributed the recoveries among the clients. Some of the recovery efforts are listed below:
  • NSEL signed agreement with defaulters to settle their liabilities on timely basis, though the defaulters are not complying the agreement.
  • Approximately 400 assets of defaulters were traced by NSEL and handed over to police.
  • NSEL did the analysis of balance sheet of all the defaulting companies to trace their assets.
  • NSEL conducted 23 recovery review meetings with the Monitoring and Action Committee.
  • NSEL filed 3 arbitration petitions
  • NSEL filed 64 complaints against those whose cheque bounced.

Overall the following have been achieved in the recovery process:

Table 3.2. Achievements of Recovery Process

Actions Value
Defaulter’s asset attached by EOW INR 5000 Crore
Defaulter’s asset attached by ED INR 800 Crore
All E-series clients settled by NSEL 33,000 clients
Partially settled clients in trade contracts 7,000 clients
Total amount paid in settlement INR 543 Crore
Decrees obtained so far INR 1,233 Crore
Injunctions obtained so far INR 4,516 Crore

4. NSEL accused FMC for a conspiracy in which NSEL was targeted.

  • There was a meeting of FMC with the defaulting members on 4th August, 2013. NSEL’s biggest question had been why FMC did not disclosed what he found in the meetings with the defaulters and FMC did not try to trace the funds of clients from the defaulters moreover FMC did not even filed any complaint against any of the defaulter in front of EOQ, ED or CBI.

NSEL raised the question that when NSEL was giving fortnightly updates of all the transactions then why FMC had not raised any red flag earlier if there were any discrepancy? Further FMC was accused by NSEL for not taking any action against the defaulters who were the real reason behind the crisis and also no action against the brokers who were found to be involved in lots of irregularities some of them are listed below:

  • Gave false information and assurance to clients
  • Fabricated the documents
  • Unauthorized trading without consent and knowledge of their clients
  • Manipulated ledger accounts
  • Some clients were privately settling with defaulters

As per NSEL, FMC could have easily solved the issue if they would have trapped the defaulters and brokers as they were in small numbers but accounted for the bulk of claims. This claim was based on following facts

  • 30 brokers accounted for 68% of the claims
  • 6% of the clients accounted for the 69% of the claims and
  • 7 defaulters owed up to 85% of the claims

5. FMC was biased against NSEL and FTIL were as they left the real culprits free

  • NSEL said that the FMC was intrusted to be a regulator of spot market but FMC failed to carry out that task instead they took punitive action of FTIL and NSEL based on biased audits and let free all other parties and never tried to resolve the issue or helping in recovery also FMC did not take any action against the broker who carried out benami transactions.

Just after the forced closure in a letter dated 6th August 2013 Ministry of consumer affairs, Food and Public Distribution directed FMC to take actions against all the parties but FMC took action only against NSEL and FTIL when in investigations it was clear that FTIL or its promoters never received any benefit from the operations of NSEL. The order by special court (MPID) dated 27th November 2013 confirmed while rejecting the bail plea of one of the defaulter company’s (N.K Proteins) promoter and director Mr. Nilesh Patel confirmed that each penny of money was traced back to 22 defaulters but still all action was taken against NSEL and FTIL. Adding to that FMC declared FTIL “not fir and proper” for running many exchanges which was set up by FTIL in several countries this caused FTIL to sell its stakes at very lower value which in turn caused severe loss to the investors. Considering all these NSEL finds FMC’s actions unjustified and biased.

6.FMC went beyond the regulatory briefs and governance and its recommendations were and are detrimental to NSEL and FTIL

  • NSEL raised question on FMC that it never bothered to carry out an oversight and regulatory work of protecting the interest of investors and suddenly with DCA they directed NSEL not to issue any contract. Moreover when the matter is sub-judice the order of merging NSEL with FTIL can be considered as a mature decision.

NSEL also questioned the authority of FMC to declare FTIL “not fit and proper” as per them FMC does not holds such rights.

NSEL compared the action taken by FMC with other regulators on other crisis situations. Some of them are listed in below table:

Table 3.3 Some Past Crisis Situations and Action by Regulator

7. Huge social cost had to be paid in forms of loss of jobs, incomes and opportunities by the FMC’s biased actions

  • FTIL group of which NSEL was also a part, had run many exchanges across the world. Prior to the FMC’s decision of declaring not fit and proper FTIL ran exchanges in 10 jurisdictions. Some of the exchanges included MCX which was 2nd ranked exchange in term of no of contracts traded in commodity derivatives, Indian Energy Exchange which was the 1st as well as largest power exchange of India, MCX Stock Exchange which was the leading global exchange for the currency derivatives, Dubai Gold & Commodities Exchange (UAE), SME (Singapore), GBT (Mauritius) Bourse Africa (Botswana), Bahrain Financial Exchange (Bahrain), etc.

In a joint study by Tata Institute of Social Science and MCX, it was found that MCX had the potential to create one million jobs alone in the commodity market plus the revenue it will generate to the state through taxes, stamp duty etc.

The economic and social impact can be summarized as under:

  • Loss of Jobs
  • Reduction in opportunities for employment
  • Huge reduction in trading volumes
  • Steep decline of revenues and fees
  • Lower tax realization
  • Market expansion stopped
  • Self-employment opportunity for youth and women declined
  • Diminishing of India’s position in global market
  • Reduced hedging potential

8. Proposed NSEL’s merger with FTIL is against the spirit of Law

  • As per NSEL the proposed merger is unethical as FTIL had given full support to NSEL and it can’t be forced for the merger which will destroy its valuation and 63000 shareholders along with 1000 employees, creditors, vendors and other stakeholders will be adversely affected. NSEL also called the step unproductive as it will destroy all the efforts made so far in recovery and resolution. NSEL also terms the forced merger decision as unlawful as the concept of limited liability is clearly breached.

19.Due to FMC’s decision, India lost its dominance in the Global Financial Markets

  • Following statistics show how India has lost its dominance in the global financial markets.

Table 3.4 Rank of Indian Commodity Exchanges Among Global Exchanges

Rank of Indian Commodity Exchanges Among Global Exchanges
Year India’s Top Commodity Exchange India’s 2nd Largest Commodity Exchange
2012 10 32
2014 24 34
Fig. 3.2 No of Contracts Treaded on Indian Comm. Exchange

Fig. 3.2 No of Contracts Treaded on Indian Comm. Exchange


4.1. Conclusion

Following are the conclusions which can be drawn from this study:

  • Since the matter is sub-judice, we can’t judge who was/were the real victims behind the NSEL crisis but certainly there were lapses on everyone’s part.
  • Promoters, Employees of NSEL who indulged in the illegal trading, brokers who forged documents and were doing benami transactions, regulators who were blind for years to resolve the jurisdiction of NSEL all are responsible for the crisis in one way or another.
  • MCA’s decision to merge NSEL and FTIL was based on the recommendations of FMC and it was not clear if the FMC recommended this based on any in-depth enquiry and whether FMC was able to establish that “it is essential in public interest” which is required by section 396 or its recommendation was merely on:
  1. Health (Financial) of FTIL
  2. 9% Shareholding of FTIL in NSEL
  • Representation made by traders and brokers who may be the interested parties and
  1. Lack of financial and human resources with NSEL to recover the defaults

The decision seems to be taken in hurry and many questions needs to be answered by the FMC and MCA as well.

  • NSEL and FTIL did not follow corporate governance norms and result was the debacle of the promising organization which could have taken India to a next level in the global market. India also lost lots of employement opportunities by shutting down of the all the exchanges of FTIL when it was declared “not fir and proper” to run an exchange

4.2. Recommendations

Based on this research we would like to recommend the following:

  • Everyone who did not perform their duty in the case of NSEL should held accountable be it the promoters of the FTIL/NSEL, the regulators, Brokers, Traders, Borrowers or any employee of the organization.
  • The decision of MCA based on FMC has not been backed by the concrete explanations and the whole merger is in the public interest is questionable. Under such circumstances the FMC and MCA should release the detailed report explaining the basis of considering the merger in public interest and who are the public whose interest is bigger than around 20,000 shareholders, employees, creditors and vendors of FTIL?
  • Since the matter is sub-judice the government should not rush with its decision to merge FTIL and NSEL as if it came out in court that FTIL was not at fault then it would mean that unjust had happened to them. In the public interest government can ask the court to fast-track the proceedings.
  • Each of such scams is an opportunity to strengthen the regulatory framework of the country. In case of NSEL for years it was not clear under whose purview the NSEL falls. It is an opportunity to go back to the drawing table and identify and fill the loop holes.
  • Every corporate debacle in India has shown the lapses of corporate governance, this is no different case. The government should lay down clear norms of corporate governance and it should monitor each company’s compliances with the corporate governance norms laid for them on quarterly, half-yearly or yearly basis.


[1]       Kumar, A., Rastogi, S., (2008). Hard Hit Investors: Governance Lapses of NSEL Sca, International Journal of Research in Commerce & Management Vol. 5., No. 08, pp. 1-3.

[2]       Asher, S. (2015, Dec 15), FTIL-NSEL Merger: Bad in Law & Policy?, Retrieved from http://www.financialexpress.com/article/fe-columnist/financial-technologies-national-spot-exchange-merger-bad-in-law-and-policy/178737/

[3]       Pushpa, BV., Deepak, R. (2013). An Insight into NSEL Scam, IOSR Journal of Business and Management Vol. 12, No. 4, pp. 18-22.

[4]       PTI., (2013, Nov 29). Corporate Affairs Ministry probe finds corporate governance lapses at NSEL, Retrieved from http://economictimes.indiatimes.com/markets/stocks/corporate-affairs-ministry-probe-finds-corporate-governance-lapses-at-nsel/articleshow/26592680.cms

[5]       L.E.K., (2013). Mergers & Acquisitions: What Winners Do to Beat the Odds, Executive Insights Vol. XV, No. 16, pp. 1 – 7.

[6]       Panchal, S., Palande, P., (2014, Sep 1). The Rise And Fall of Jignesh Shah, Forbes India Magazine, Retrieved from http://forbesindia.com/article/real-issue/the-rise-and-fall-of-jignesh-shah/38535/3

Screen Shot 2019 08 29 at 1.11.26 PM Study of NSEL Scam and Impact Analysis of FTIL – NSEL Merger

Screen Shot 2019 08 29 at 1.12.12 PM Study of NSEL Scam and Impact Analysis of FTIL – NSEL Merger