NSEL admitted members without KYC documents

Forensic audit finds some members did not put in enough security deposit

National Spot Exchange Ltd (NSEL), in the middle of a Rs 5,600-crore payment crisis, admitted several of its 24 borrowing members without proper compliance with know your customer (KYC) norms and failed in due diligence, a forensic auditor has found.

The refusal by these 24 members to pay their dues triggered the payment crisis in August.

During a forensic audit commissioned by the Forward Markets Commission (FMC), it emerged “25 buyers were introduced on the NSEL platform over the last four years. No due diligence of these buyers was done and buyers with very poor credentials had been introduced into the NSEL system.”

NSEL admitted several of its borrowing members such as N K Proteins, Mohan India, Sankhya Investments, Yathuri, Namdhari Food International, Tavishi Enterprises, Shree Radhey Trading, Metkore Alloys & Industries and Topworth Steel and Powers, when one or more of their KYC documents such as identity proof, address proof, details of promoter group, etc, were not available.

These members account for about Rs 2,700 crore or nearly half of the total dues. Some of these such as Tavishi and Yathuri have gone hostile. Tavishi has even initiated legal proceedings, saying it never received the goods against Rs 346 crore dues shown by the exchange.

In some cases, even the security deposit was not fully received. In the case of Chandigarh-based LOIL group entities and Andhra-based Sankhya Investments, the security deposit was only partially received.

Further, the audit also found LOIL group firms LOIL Overseas, LOIL continental foods and LOIL Health Foods had a common director in Balbir Singh. This was in contravention of Rule 33 of the NSEL rules. Yet, exceptional approval was given for them to trade by the then managing director & chief executive officer, Anjani Sinha, and his juniors, but the grounds of this exceptional approval were not documented, the auditor found.

The report also found no evaluation was conducted on the annual compliance documents collected from members. In the absence of effective monitoring, no penal actions have been initiated. No member was ever barred or deactivated on such grounds.

FMC has issued a show-cause notice based on the findings of the forensic auditor.

An NSEL spokesperson said he could not offer any comments, since the report was confidential.