HC questions government's charge of NSEL as deposit taking company

NSEL counsel argues that the exchange did not hold or put the money for own use, so cannot be called a deposit

The high court here on Monday asked the government counsel in the National Spot Exchange (NSEL) controversy the basis of the charge that it was a deposit taker. The bench asked the government counsel to explain how NSEL could be considered so, when the money deposited by buyers of commodities on its platform had been immediately transferred to the account of sellers, with NSEL’s interest being a transaction charge of 0.001 per cent.

In the two-year-old NSEL payment crisis involving Rs 5,600 crore, about Rs 6,000 crore worth of properties of NSEL borrowers and even directors of the entity have been attached by the economic offences wing of the city police. This power they have under the Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act. NSEL has challenged this law's applicability in the case. The court will continue hearing the matter on Tuesday.

The issue of applicability was first raised by the HC while granting bail to Jignesh shah, director of NSEL and promoter of Financial Technologies, which owned NSEL. To the bench's query on Monday, the government counsel replied, “It was NSEL which assured fixed returns of 16 per cent on investment by traders on the commodity exchange. Being a counter-party of trade, assuring quantity and quality of commodity, and settling buyers’ account through a settlement guarantee fund, it is the liability of NSEL to settle the default. Since NSEL offered contracts of T (trading)+25 without taking required permission from the regulator, all contracts under it were illegal.”

He added the Forward Markets Commission had offered exemption for spot trades in commodities under T+2 for delivery in T+11 i.e. within 11 days of trade, NSEL went on to lure traders with fixed interest rates, without having any back-up of physical stocks of commodities. Therefore, all contracts NSEL entered into under this segment were financial transactions and, hence, were deposits. Therefore, the MPID law was absolutely applicable. Under MPID, the attached properties have gradually started being disposed off under the guidance of a panel appointed by the court.

NSEL argued it was only a facilitator. Under MPID, a deposit is required to be called for use by the acceptor. In this case, neither the money deposited by traders was used or retained by NSEL. Yes, it had induced trading between buyers and sellers of commodities, of which the exchange was a counter-party. However, this was what an exchange had been established to do and there was nothing wrong in this. The trades had been backed by physical goods in warehouses recognised by it; some traders had connived with some officials of NSEL in doing some things wrong. Hence, execution of trades could not be considered as deposits. FTIL counsel said, “There was no TDS deducted, instead VAT was paid as commodities were traded. Also, the people who have traded are traders and not investors. Hence this cannot be treated as deposits.”