Investors battle for NSEL merger with FTIL

Investors body writes to Sebi, contesting objections raised by latter

A war of letters has broken out on the issue of whether to merge listed Financial Technologies (FTIL) with its scam-hit subsidiary, National Spot Exchange (NSEL). After FTIL’s recent statement arguing the case against such a merger, the NSEL Investors Forum has written to the Securities and Exchange Board of India (Sebi) and other authorities, making its case for a merger and contesting the key arguments of FTIL against the proposal. The Forward Markets Commission (FMC) has proposed the merger of these two entities under the ‘public interest’ provision in the Companies Act, to enable an early settlement to about 13,000 investors affected by the Rs 5,600-crore payment default.

The Forum points to various forensic audit reports by consultants, report by the registrar of companies, the order of FMC and the chargesheet filed by the city police’ economic offences wing, which had concluded, “NSEL worked under full knowledge and control of FTIL right from the date of inception and the whole scam was perpetrated with full knowledge of the FTIL board.”

WAR OF WORDS

What FTIL says

• Only 781 clients control two-thirds of dues. Hence, no public interest    
• Minority shareholders of FTIL will be affected by merger
• Matter sub judice under several suits
• FTIL has supported recovery efforts from 24 borrowers of NSEL
• No trail traced of investor money coming back to FTIL

What investor forum says

• Number of investors and their dues irrelevant
• Minority shareholders enjoyed benefits of higher profits and dividends due to NSEL; they should pay the price
• Pending litigation does not vitiate need for amalgamation
• FTIL statement misleading, spending crores to defend chairman Jignesh Shah, not to protect investors
• Group companies and related parties have received payouts from NSEL

Calling the FMC’s request to the government on the merger the right move, the Forum said, “We are surprised to see a press release dated 16/09/2014 issued by FTIL, posted on BSE, NSE and FTIL websites and carried by the media. It contains gross misrepresentations and suppression of material facts, with the sole intention of misguiding the government, shareholders and the public at large.”

FTIL had argued that the interest of the 13,000 clients of the brokers who traded on the NSEL platform for higher returns could not be termed ‘public interest', when 66 per cent of the entire amount due was being claimed by only six per cent of the trading clients (i.e 781 persons). It also pointed to the August 22 order of the high court here, questioning if these trading clients were genuine investors.

The investors argue the amount of holding of the investors was not relevant. “All investors, including the 94 per cent small investors as claimed by FTIL, have in fact invested a large portion of their wealth simply because NSEL (which was controlled and masterminded by Jignesh Shah, the FTIL head) and FTIL induced them to invest, promising safe fixed return arbitrage (with full knowledge of FTIL). These small investors are now virtually on the street. Apart from these, commodity trade in India has fallen by nearly 60 per cent in the past year, clearly showing that investors have lost interest in commodity exchanges, thereby affecting the commodity trade and economy in general. This is nothing but public interest,” the investors said.

Also, they said, there was about Rs 1,600 crore income tax due to the exchequer out of the proceeds of the NSEL investment. Elsewhere, investors tried to use the same argument used by FTIL, when they said a few large investors controlled the retail shareholding of FTIL. “As per the last annual report of FTIL, out of about 60,000 shareholders, 56,254 are holding 500 or less number of shares. It is only 133 large shareholders who are holding 86.33 per cent of the shares (10,000 shares or more)."

Terming the figure of “60,000 shareholders” nothing but an eyewash, the Forum said, “Equity investment carries inherent investment risk and a shareholder knows he will either sink or swim with the company, which is decided by the acts of its board. All shareholders of FTIL (including small) enjoyed benefits like higher dividend, higher share prices, etc, on the back of bogus profits and bogus trading volume-related software charges derived from NSEL. After adding bogus software charges, about 81 per cent of the consolidated profits of FTIL came from NSEL operations.”

FTIL had also argued that various authorities such as the EOW and enforcement directorate had secured assets worth several hundred crores, from which dues to investors could be recovered. “Assets of the 24 defaulters and the directors of NSEL worth approximately Rs 4,900 crore have already been secured by the EOW for attachment and liquidation under the MPID Act, 1999. Further, we understand that EOW has identified more than 200 properties of the defaulters for attachment,” the NSEL parent had said.