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What Next For FTIL & NSEL?

Published on Sat, May 10,2014 | 16:47, Updated at Tue, May 13 at 23:10Source : CNBC-TV18 |   Watch Video :

On May 7th, almost 10 months after the government cracked down on NSEL, its founder Jignesh Shah was arrested by Mumbai police’s economic offences wing. In these 10 months Jignesh Shah has witnessed the decimation of his empire. NSEL shutdown leaving a Rs 5,600 crore hole and 13,000 aggrieved investors. Shah was declared as not fit and proper to be an investor in both the other exchanges he founded – MCX and MCX-SX. His main company financial technologies or FTIL, the parent company of all these Exchanges and several other entities, is being forced by regulators to exit its 26% stake in MCX & over 5% in MCX-SX. With Jignesh in jail it’s not clear how quickly the FTIL Board, now being led by Venkat Chary will be able to move on these divestments. What is clear is that there are two different interest groups in this matter. Those that lost money in the NSEL scam and FTIL shareholders, especially public shareholders whose investments in FTIL are slowly being withered away. Can both interests be protected? How? By government or court intervention? To answer those questions, I have with me today Shuva Mandal of AZB - the lawyer representing the NSEL Investors Forum; H Jayesh of Juriscorp – also representing NSEL creditors and in Akila Agrawal of Amarchand. Akila advised the government appointed board of Satyam.

Doshi: Shuva, what should happen now given that Jignesh is in jail?

Mandal: The criminal process is a standalone process. I think the focused question before us is frankly which is the best way to recover funds for the investors who have lost. I think the debate just to rephrase it, are the assets of the Financial Technologies (FT) to be used for recovering the funds for the investors at National Spot Exchange Limited (NSEL). Is it the assets of NSEL itself or is it the assets of promoters of FT.

Effectively there are provisions in the Companies Act today where the government is well empowered to approach the (CLB) Company Law Board to make an application seeking for attachment of assets of persons who participated in the fraud, which is effectively under one of the schedules. Pending the investigation it is important to show that interim reliefs, there is an attachment proceeding which is pretty much what happens.

Doshi: Whose assets do you think should be attached given that you represent interested parties in this?

Mandal: It is not about my perception of this. Legally it is the people who have participated in the fraud which at this stage are all arrested individuals.


“Firstly, it will have to be proved that NSEL is liable for the shortfall. Then, the corporate veil has to be lifted to make FT liable for the acts and omissions of NSEL. Legally, this is an uphill task. It is true that FT may have appointed the nominee directors of NSEL, however, it does not automatically mean that the corporate veil can be lifted.”

- Jignesh Shah’s Defence Team

Doshi: 11 of them roughly I think now?

Mandal: All arrested individuals, it would also translate to the some of the borrowers because a fraud which involves complicity, which involves conspiracy, involves some of the borrowers who are the actual beneficiaries in a way, direct beneficiaries because they are the ones who borrowed and this is in the contracts. It would involve probably the key members of the board of NSEL.

Doshi: Would it involve the assets of FTIL? Is that your position?

Mandal: The people who were on the board of NSEL which was a wholly owned subsidiary of FTIL were individuals who were nominated by FTIL. So, when they acted on the board of NSEL which was wholly owned subsidiary of FTIL they acted on behalf of FTIL.

Doshi: Therefore you say FTIL stands liable to pay off those who have made losses in NSEL?

Mandal: Here is the proposition. It s not that FTIL is exclusively liable. It is FTIL and all other individuals whether acting in their capacity as representative of FTIL or in their capacity as directors.

Doshi: Are you in favour of some sort of government supersession of the FTIL board?

Mandal: I think the legal basis for supersession of the board at FTIL would involve that the affairs of FTIL have been conducted in a wrongful manner. If you ask me at this stage there are not enough facts out there to demonstrate that.

Doshi: Should FTILs assets be liable for paying off the dues of those who lost money in the NSEL collapse? My second question to you is the same as I put to Shuva, do you think that the FTIL board should be superseded by the government at this point in time as many analysts and experts have been calling for?

Jayesh: Even if it is proven that there was fraud and what not, lets assume all of that, it still begs the issue that are we saying that FTIL setup NSEL as a listed corporate entity with the objective of perpetuating a fraud? That is the major intent out there we are talking about. If not so then on what basis are we talking about going after the assets of FTIL.

Doshi: So, you are saying we shouldn’t go after the assets of FTIL?

Jayesh: Look at the contrary position. You are saying I should put the assets of FTIL into play for what? Robbing Peter to pay Paul? because the investors are vociferous lot or politically connected. You are forgetting that FTIL also has its own set of stakeholders.

Doshi: How do you respond to Shuva's point that FTIL is the one that setup NSEL and in a sense therefore FTIL should be responsible and liable for what went on at NSEL.

Jayesh: That is why I asked that are we saying that FTIL setup NSEL with the intent of perpetuating a fraud even if fraud is proved?

Mandal: That is the allegation in the criminal complaint that has been filed before the EOW in Mumbai. That is the fulcrum of the case in the representative suit in the Bombay High Court and that is the allegation in the 42 paged unsigned or so called statement of the former head of NSEL Anjani Sinha which was presented before the court, that the sole motive of setting up NSEL was to conduct this particular form of business in what allegedly is said to be not the correct way.

Jayesh: If two directors of FTIL had that intent are we saying that all of the board of FTIL had the intent because to attribute the intent of two individuals to a corporate entity as a whole are two different things.

Doshi: Lots of people over the last couple of days have raised similarities between Satyam and FTIL and have called for government intervention in this matter, government supersession of the FTIL board. Do you see any similarities between Satyam and this? Do you see any grounds for government intervention or do you see any grounds for let's say any kind of creative court intervention in this if the laws permit?


There is no justification of any Central Government a la Satyam. There is no systemic failure in FT’s own governance or management. In Satyam, there was a confession. In the present case, there is the strongest possible denial of any wrongdoing. You cannot penalise the holding company’s shareholders for a mishap at one of its subsidiaries.”

- Jignesh Shah’s Defence Team

Agrawal: One cannot deny that there are some similarities in both the cases given that in Satyam there were fictitious salary accounts, fictitious customers and convoluted transactions which finally resulted in siphoning of funds and even creation of fictitious balance sheets.

In this case what we hear from the observations and the report that are in the newspapers whether it is the PwC report or the earlier reports by Grant Thornton and the like is that there is may be or there is a case of fictitious warehouses, commodities not being there, transactions with related parties which are not proper. So, there are similarities to that extent that yes there is something fishy. It could be a fraud. There is somebody who has perpetrated injury to a number of stakeholders across various institutions. So, there is a similarity there.

However if you have to further examine the two situations or the two scenarios in Satyam and in this case, in Satyam the entire episode started with a confession, a public confession where somebody confessed fraud. That is slightly different here because hearing the two gentlemen on the panel there is obviously a lot of difference of opinion as to who is responsible and whether in fact there is fraud, an intention to commit injury and intention to dupe investors, traders, borrowers, brokers and the like. So, that I find a key difference.

However going back to your previous questions as to what could be done to safeguard the various interests, sometimes may be conflicting interests of shareholders and stakeholders of say FTIL, NSEL and even to some extent MCX, I would say that each matter has to be looked at separately. It may not be possible to look at it together.

Doshi: Akila, you are saying that while there may be similarities the current case does not prove enough grounds for the government to step in, is that what you are essentially saying? 

Agrawal: Suppose as I said because of the fact that there are only allegations nothing has been proved yet. A number of people, various agencies are investigating this matter whether it is the CBI, whether it is the EOW or whether it is SFIO, there are people investigating it but we haven’t been told of the findings. We don’t have stated fact on this matter yet. So, that will take time which is not the case in Satyam.

Mandal: But in this case you have a statement from the CEO which is saying there were certain individuals who were perpetrators.

Doshi: CEO of NSEL.

Mandal: That is right, CEO of NSEL who probably himself may be.

Doshi: Can that be used to takeover the board of FTIL?

Agrawal: As far as taking over the board is concerned that is something which needs to be initiated by FTIL’s shareholders.

Jayesh: Not necessarily. Central government has the powers to move suo-moto.

Agrawal: Yes, but we haven’t heard anything from the FTILs shareholders.

Doshi: I think what Akila is trying to say is that it would be more effective for the FTIL shareholders to standup and assert their right at this point in time if they wanted a revamped board as opposed to expect the government to come in.

FTIL Shareholding

Promoter                  45.63%
Public                       54.31%
- FII                            22.44%
- Non-Institutional  31.61%

Key Shareholders Of FTIL: March 2014

Blackstone GPV Capital Partners Mauritius         7.02%
Government Pension Fund Global                        3.95%
CVCIGP II Employee Rosehill                                 1.54%
Ravi K. Sheth                                                            5.40%
Bharat K. Sheth                                                       2.84%
CVCIGP II Client Rosehill                                       2.75%
Laxmi Shivanand Mankekar                                  2.93%
Merrill Lynch Capital Markets Espana                 2.57%

Jayesh: Within two days of Raju's email coming out, the government moved. They did not wait for shareholders to demand you do something. The government moved on its own. Here you have a CEO of NSEL making whatever statements he has made, he may have retraced…there is enough material out there …..

Doshi: First he said he was fully responsible. Now he has moved the blame on to Jignesh Shah. So, I don’t really know what part we should trust and how because we haven’t seen the full charge sheet, so I don't know.

Jayesh: But is there anywhere a statement being made over the board of FTIL as a whole was guilty of all this or if at all whatever is emerging it is focusing on specific individuals.

Doshi: You are saying there is no case for government's supersession?

Jayesh: On the contrary there should be supersession for the simple reason to protect the interest of the other stake holders. The consistency point which you raised earlier, if somebody or a group of people or not fit and proper for one segment of the market how were they allowed to continue run a large listed company?

Doshi: Akila you wanted to add something here.

Agrawal: It also discussed that, assets worth Rs 5000 crore have been identified.

Doshi: Those were borrower’s assets.

Agrawal: If there are sufficient assets available there is no question of lifting the veil of NSEL and going on to the assets of FTIL. The question of lifting the veil arises only when there are insufficient assets on the primary people concerned in NSEL. On the second point on whether a person who is not fit and proper for purposes of FMC or SEBI regulations can be a director of a listed company. Unfortunately the qualifications under the Companies Act are slightly different. So, it maybe very simplistic to say that somebody who is not fit and proper under the SEBI and FMC regulation should not sit on the board of any company but that is not the case. 

Doshi: I agree with you on that but I have one question what recourse do the investors of FTIL have? Outside of let us standing up and making some noise and saying look we can’t allow our company to be fitted away or the assets of FTIL to be liable for the dues of NSEL, what can they do, what should they be doing at this point in time because that is the better bet than expecting the government to step in?

FTIL Shareholding

Promoter                 45.63%
Public                      54.31%
- FII                           22.44%
- Non-Institutional  31.61%

Key Shareholders Of FTIL: March 2014

Blackstone GPV Capital Partners Mauritius         7.02%
Government Pension Fund Global                        3.95%
CVCIGP II Employee Rosehill                                 1.54%
Ravi K. Sheth                                                           5.40%
Bharat K. Sheth                                                       2.84%
CVCIGP II Client Rosehill                                       2.75%
Laxmi Shivanand Mankekar                                  2.93%
Merrill Lynch Capital Markets Espana                 2.57%

Agrawal: What would be ideal is for the institutional investors of FTIL to step up. Here is a situation where the key person is in police custody, there is a board comprising of five people; one is in police custody and there are four people left running the operations out of which only two are independent. It would be ideal for the institutional investors of FTIL to be more active. Maybe the board could be reconstituted to have more representations from all stakeholders whether it is the institutions or the small shareholders and one need not wait for the government to take suo moto action or one need to not even wait to move the government. The company based on its own advisors could run a transparent shop. 

Mandal: It is nice to say. We are not in a forum to say what they should be doing. What is the exact provision under which they do? So, only shareholders with more than 10 percent have the legal ability to approach the company law board. 

Jayesh: There are institutional investors and the question is why would they want to spend their time and money.

Mandal: They do not have the ability.

Jayesh: Even if they had why would they want to spend the time and money going there? 

Doshi: Blackstone has 7 percent invested in this company; either you watch your 7 percent get destroyed or you do something about it and stand up for the money that you have put in to this company.

Key Shareholders Of FTIL: March 2014

Blackstone GPV Capital Partners Mauritius         7.02%
Government Pension Fund Global                        3.95%
CVCIGP II Employee Rosehill                                 1.54%
Ravi K. Sheth                                                           5.40%
Bharat K. Sheth                                                       2.84%
CVCIGP II Client Rosehill                                       2.75%
Laxmi Shivanand Mankekar                                  2.93%
Merrill Lynch Capital Markets Espana                 2.57%

Mandal: As I said calibrated; it is one thing to speak about this over coffee, there is another thing to talk about it in the strict sense of law. 

Agrawal: It happened before. This is not unknown. It has happened before where 7 percent shareholders have been extremely active in a number of instances. Even recently we have seen mergers being taken onto backburner because of shareholder activism.

Mandal: Quite correct but you have to have 100 shareholders or 10 percent.

Agrawal: My point is slightly different; one is the legal recourse of oppression and mismanagement and the other is simply an active shareholder body spearheaded by institutions, everything need not be through a process of going through the court of law.

Doshi: And while that sounds like the more appropriate thing to do, the honest truth is that 22% of that 54% public shareholding is FIIs and it is most unlikely that any of these FIIs are really going to step in…

FTIL Shareholding

Promoter                 45.63%
Public                      54.31%
- FII                           22.44%
- Non-Institutional  31.61%

Key Shareholders Of FTIL: March 2014

Blackstone GPV Capital Partners Mauritius         7.02%
Government Pension Fund Global                        3.95%
CVCIGP II Employee Rosehill                                 1.54%
Ravi K. Sheth                                                           5.40%
Bharat K. Sheth                                                       2.84%
CVCIGP II Client Rosehill                                       2.75%
Laxmi Shivanand Mankekar                                  2.93%
Merrill Lynch Capital Markets Espana                 2.57%

Jayesh: Can I deal with one earlier point which Akila made, if the assets are not sufficient then lift the corporate veil, I disagree with that because you can’t go about setting the principle of robbing peter to pay Paul, FTIL has its own set of shareholders…As it is doing business in India is very difficult, we have a notorious reputation and now we are going to add to that to say when you are dealing whether as an Indian or a foreigner, when you are dealing with an Indian company, you need to heighten your diligence whether the Indian company is perpetuating a fraud in some other part of the business…

Doshi: So, you are saying under no circumstances can the FTIL assets be held to ransom by NSEL…

Jayesh: Unless, it is shown that FTIL as a corporate entity had the intent of perpetuating all this, not just an individual promoter or a couple of individuals who did this.

Doshi: The Bombay High Court is also involved in this whole process because of a representative suit and several other civil matters that I am told are somewhere in the system. Is there any space within the law that permits for the court to say I can recognize there are two conflicting interest groups here. Can the court appoint lets say a special administrator and I am drawing a very rough comparison with what they do in winding ups, right? A special administrator who ensures that the assets of FTIL are not fitted away in this entire nonsense and that they are maintained. For instance the MCX stake sale that is supposed to happen anytime soon and the money that will come from there and that that money is protected, so, that whether it is the NSEL – those who lost in the NSEL scam or it is the FTIL shareholders those interests are almost equally protected.

Mandal: That is exactly one of the reliefs in the representative suit sought is to have administrators appointed to take possession of any asset disposals. For example the sale of the Singapore exchange where approximately USD 120 million came, that was not allowed to be disbursed to the lenders. A large portion of that is trapped because pending the High Court order …..

Jayesh: The irony there is that the money was raised to make those offshore investments. So, it is not the case that FTIL diverted money from NSEL and built-up the stake.

Doshi: What I am interested in is that who is supposed to take action in this? Is it the shareholders of FTIL, is it the government or is it the court?

Jayesh: It should have been the government. They could have taken much more action much earlier in time.

Mandal: It is the government who had the first responsibility.

Doshi: Are you saying that in every single case for instance we had a bunch of CEOs in the 2G scam end up in jail. Does that mean that the government should step in and say I know there is clearly some fraud that has gone on here. So, we should takeaway your company and run it?

Mandal: There is no fraud in a company. There is a difference between fraud in a company versus a fraud against the government. Let us not use 2G as an example here, there is no relevance here. The relevance we are talking here is there is a fraud in a corporate. When there is a fraud in a corporate there are certain situations in which the government is empowered to take control. There are certain provisions which have been used in the past when persons who have participated in a fraud our law of 1956 recognized the ability of a government to attach those assets.

Doshi: Akila, Government supersession or active shareholders?

Agrawal: Your original question was whether government can takeover and take care of the interests of all stakeholders, conflicting interests of all people concerned in this big mess. My view in that would be that that is really not possible given the way our laws are drafted. So, a government supervision of the board could happen but clearly that’s just operational and mismanagement related matter. However whether it is an income tax matter, whether it is the prevention of money laundering matter or if it is some other matters like the SEBI violations of the individual guidelines of FMC and SEBI, all of them unfortunately cannot be clubbed together.

Doshi: How do you resolve this in the best interest of both those who lost money in NSEL as well as the existing shareholders of FTIL?

Agrawal: There is no simplistic solution to resolve this because the law has to take its course unfortunately and it is going to be a time consuming process unless people file settlement or rather quicker solutions before the entire process is complete.

Jayesh: I have a concern that what happens if the application of MPIDC is struck down by the courts down the line.

Doshi: It does seem that Jignesh Shah's team is going to challenge that.


“So far none of the accused have challenged the jurisdiction of the MPID Court and the applicability of the Maharashtra Protection of Interest of Depositors (MPID) Act. However, such legal challenge is now imminent. Earlier, not ‘upsetting’ the Police was the reason, why such challenge was not mounted.”

- Jignesh Shah’s Defence Team

Jayesh: I wouldn’t bet on the government succeeding that MPIDC is applicable. The question I am asking here is that we are going after quick fixes to show that we are taking action and not necessarily that the right action is being taken. So, there is a fundamental issue that whether MPIDC is really applicable here.

Agrawal: I would disagree that there have been quick fixes.

Jayesh: Use of MPIDC to attach assets I am worried about that. I would rather go after these very assets of the borrowers, associates and what not in the context of fraud, money laundering and whatever else. However using only MPIDC I have my concerns.

Doshi: Is there any scope here for any kind of creative solution or do we have to just wait and watch for all the legal processes to run their due course and may be see the value of whatever is left in this group erode?

Mandal: I think it’s very simple there are three steps that are required to solve this whole mess. First, make an application before the Company Law Board. The central government makes an application on prima facie facts. Attach assets of promoters. Two, when you attach assets you suspend voting rights of the promoter groups, replace the board, get a constituent incumbent professional management or may be a new corporate group to take over FT. Three, use MPID to attach the assets of borrowers and any other criminal laws, I am not commenting on whether MPID is right or any other. Criminal law generally allows you attachment be it the PMLA, CRPC - The Criminal Procedure Court or MPID. So you got whole a bunch of attached assets, promoters and borrowers and then you have a trial that takes its usual 24 months on expedited ways .You can have a special court and whatever is the outcome, use the proceeds to repay or not repay investors.

Doshi: It's been five years since Ramalinga Raju confessed and that trial has still not come to a conclusion as yet. We can only hope for the speedy solution and for the implementation of Shuva's three point plan.


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