The NSEL Scam That Had Huge Impact on Commodities Market in India

The National Spot Exchange Scam (2013) was a massive fraud involving the National Spot Exchange Limited (NSEL) and several associated entities.

The scam, which surfaced in mid-2013, was one of the largest financial frauds in the history of India.

The scam caused losses worth over Rs 5,600 crore ($760 million) to thousands of investors across the country.

The scam was eventually investigated by multiple agencies, including the Enforcement Directorate, the Economic Offences Wing of the Mumbai Police, and the Securities and Exchange Board of India (SEBI).

Background

National Spot Exchange Limited (NSEL) was a company that operated an electronic platform for spot trading in commodities, including metals, agricultural produce, and energy.

It was promoted by Financial Technologies (India) Limited (FTIL), a company founded by Jignesh Shah.

Shah, who was known as the “king of exchanges” in India, was the founder of multiple exchanges in the country, including Multi Commodity Exchange of India Ltd (MCX), the largest commodity exchange in India.

NSEL began its operations in October 2008 and quickly became popular among investors, including small farmers, traders, and retail investors, who saw it as an opportunity to invest in commodities without having to physically store them.

The platform allowed investors to trade in commodities through electronic contracts (e-contracts), which promised physical delivery of the commodity within a specified period.

The scam

In 2013, the NSEL scam came to light when the exchange suspended trading in all its contracts, citing a “force majeure” situation.

The exchange claimed that it was unable to make deliveries of commodities to investors due to a shortage of stocks.

It was soon discovered that NSEL had been operating a fraudulent scheme, where it was selling e-contracts of commodities that did not exist or were not stored in the designated warehouses.

The exchange had also been misusing investors’ money to finance its operations and to pay off other investors, which is a classic Ponzi scheme.

The scam was a result of a complex web of transactions and entities, involving NSEL, its promoter FTIL, its subsidiary companies, and a few other brokers and traders who had colluded with NSEL.

The fraud was executed through the use of “paired contracts,” where two contracts were created for each e-contract, one for the buyer and one for the seller.

These paired contracts were not linked to any physical commodity, and their sole purpose was to generate profit for the exchange and its associates.

The exchange had also violated several norms and regulations, including the Forward Contracts (Regulation) Act (FCRA), which governs trading in commodities in India.

NSEL had been operating as a spot exchange, which is not allowed under the FCRA.

The exchange had also failed to maintain adequate collateral to cover the transactions, as required by the FCRA.

Additionally, the exchange had not obtained the necessary approvals from SEBI for the launch of the spot exchange.

Impact

The NSEL scam had a severe impact on thousands of investors who had invested their savings in the exchange.

Many of these investors were small farmers and retail investors who had been lured into investing by the promise of high returns.
The scam caused losses worth over Rs 5,600 crore ($760 million) to these investors. The scam also led to a loss of confidence in the commodity market and the regulatory system in India.

The scam had a ripple effect on the financial system in India, with several banks and financial institutions being exposed to the fraud.

Many of these institutions had extended loans to NSEL and its associated entities, and they were left with unpaid dues when the scam came to light.

The scam also had a negative impact on the reputation of Jignesh Shah, who was regarded as a pioneer in the field.

However, the NSEL scam had a severe impact on Shah’s reputation and legacy.

Shah was accused of being the mastermind behind the scam, and several agencies, including the Enforcement Directorate and the Economic Offences Wing of the Mumbai Police, had launched investigations against him.

The investigations revealed that Shah had been involved in the day-to-day operations of NSEL and had played a key role in executing the fraudulent scheme.

Shah was arrested in September 2014 on charges of cheating, forgery, and criminal conspiracy.

He was released on bail after spending over a year in jail.

However, the legal battles continued, and Shah was again arrested in November 2018 in a separate case related to alleged violations of the Companies Act.

Shah was eventually granted bail in this case as well.

The NSEL scam had a lasting impact on Shah’s reputation, and he was widely criticized for his role in the fraud.

Many investors who had lost their savings in the scam held Shah personally responsible for their losses.

The scam also had a negative impact on the reputation of FTIL and its subsidiaries, as many of these entities had been implicated in the fraud.

Conclusion

The National Spot Exchange Scam (2013) was a massive fraud that had a severe impact on the Indian financial system and the commodity market.

The scam caused losses worth over Rs 5,600 crore ($760 million) to thousands of investors across the country, and it exposed the loopholes in the regulatory system in India.

It exposed the risks associated with investing in unregulated exchanges and highlighted the need for stricter regulations in the financial market.

The NSEL scam remains one of the most significant financial frauds in the history of India, and it serves as a cautionary tale for investors and regulators alike.