Jignesh Shah is back in the news after the Enforcement Directorate raised questions about his firm renting out a farmhouse owned by Rahul and Priyanka Gandhi in 2013 — around the same time he was being probed by the UPA government. The rent agreement between Shah-promoted Financial Technologies India Limited (FTIL) and Rahul and Priyanka is dated February 1, 2013, almost 10 months after National Spot Exchange Ltd (NSEL), also promoted by FTIL, received a show-cause notice for alleged violation of norms. This is the latest controversy involving Shah, who made his fortunes in India’s financial markets only to take a hit in 2013.
Shah made his name as a technology expert involved with Project BOLT in the Bombay Stock Exchange to automate it. In 1999, he and another friend, quit their jobs to set up FTIL with the objective of dominating the markets. Another friend from his BSE days, Dewang Neralla, also joined them. The dream was to capture a chunk of the expanding field of computer-based trading. An engineer from Mumbai University, Shah was the first businessman from a middle-class family based in Kandivali.
Shah obtained a Rs 8 lakh software contract from the NSE, with a loan underwritten by a Rs 5 lakh mortgage raised on his home. FTIL’s software – named ODIN – became the preferred platform for brokers, and the company in 2012 claimed 82 per cent of the brokers still used it.
When the Ministry of Consumer Affairs and Agriculture sought expressions of interest from companies willing to set up a commodity futures markets based on the NSE model. The futures market was meant to create a mechanism for spot trade of perishable products to help the government contain inflation. Four of the 14 applications received were approved, one of them was FTIL-sponsored MCX.
In 2006, spot trading was allowed in commodities in a new exchange set up by Shah — the NSEL. The exchange was set up via a government order without involving the Forward Markets Commission. In 2008, NSEL was allowed to enter forward trading on spot contracts, with the rider that all trade should be squared in 11 days.
NSEL grabbed almost all the spot exchange turnover. Since there was no regulator to inspect the markets till 2012, high net worth people could invest huge money with promised returns, and traders with no fear of having to settle their trades with corresponding physical delivery ramped up volumes. When the crisis broke in 2013, the total unsettled trade volume at the exchange was over Rs 5,600 crore.
After analysing data submitted by NSEL, the Forward Markets Commission submitted a report to the Department of Consumer Affairs that the exchange was violating the conditions under which it was granted exemptions, and requested necessary action. A show cause notice was issued in April 2012. But no action was taken for almost 15 months until July 2013, when the department asked NSEL not to issue any fresh contracts, and settle all existing contracts. NSEL discontinued all its contracts on July 30, 2013.
However, the spot exchange was not able to settle outstanding trades. This sparked investigations by regulators to find out whether the exchange defrauded traders by not enforcing rules that require sufficient collateral to be set aside.
The promoter, FTIL, blamed NSEL executives and the trading parties for the default. There are 24 members who have defaulted on the payment of Rs 5,600 crore to about 13,000 investors. In December 2013, the FMC declared FTIL and Jignesh Shah among others as “not fit and proper” to be shareholder/director in the management or board of any exchange.
Since then NSEL, FTIL, its promoters, brokers and its 24 borrowing members have since come under the scanner of multiple probe agencies.