The government now merges The National Spot Exchange Limited (NSEL) with its parent, Financial Technologies (FT). NSEL has been involved in a mega scam (see Capital Mind’s complete coverage) where it was unable to payout exchange trades. The scam was that the whole thing was supposed to be a commodity exchange, but instead it was used by the exchange and by certain parties to finance themselves, with lay investors buying commodities and selling them immediately back on a forward contract to lock in returns. NSEL is a subsidiary of FT.

The problem came when the government banned the “forward” part of the scheme, which unravelled the whole thing – it turned out that the commodities that people had bought (which were sold back), didn’t even exist. That they didn’t exist was because the stocks were held by the counterparties of these trades i.e. the people who were being financed. THose being financed didn’t have enough cash (or commodities) to return, and they were just rolling over all interest and principal into new contracts, because no one was checking.

After NSEL fell, investors have tried hard to push NSEL to pay up – and they did get some cash in the beginning, but that went down to a trickle. The head of FT, Jignesh Shah, and the CEO of NSEL, Anjani Sinha, have gone to jail and both are out on bail.

The merger of NSEL and FT is being done forcibly by the government, under Section 396 of the Companies Act. See the entire draft order here.

NSEL has to pay out over Rs. 5000 cr. to investors as part of the exchange settlement. That liability now passes over to FT. That’s why FT’s share is so badly hit:

FT has 4.6 cr. shares, which, at the current rate of Rs. 170 will be worth less than Rs. 800 cr. A liability of this size means the company is more or less finished, they cannot pay.

Effectively, this order seals FTs fate as well. They’ve had to sell their stake in MCX (they still retain some) and whatever money they now have is going to have to be used to pay up for NSEL’s misdeeds. In a way this is poetic justice – while the company law requires limited liability, FT has been saddled with unlimited liability because they effectively knew what NSEL was doing – the liability of NSEL is now theirs.

The big founder, Jignesh Shah, who set up FT, MCX and NSEL, was known as someone who couldn’t do anything wrong. That image is now in tatters – everything he could do wrong, he has done, it seems.

What happens then to the brokers who run FT software (a considerable market share) if FT is finished? What happens to FT’s other businesses which include data-vending? These may be cut up and sold, and the money used to pay back NSEL investors. We hope they will find a better home.

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