NSEL had financed IBMA's trades, says forensic audit report

The observation that no evidence of paired contract money invested for e-series could quicken settlement

The National Spot Exchange Ltd (NSEL) had provided loans to the group's trading arm Indian Bullion Markets Association (IBMA) to trade in e-series and other paired contracts on the exchange.

According to a forensic audit report by Choksi & Choksi filed to the Forward Markets Commission (FMC), there were 17 instances in which credit balance in IBMA's account (from which the payment for the purchase was made) was insufficient to purchase physical commodities. These commodities were converted into e-series units. The payment was made from loans taken from NSEL; subsequently, these loans were repaid.

However, NSEL said the auditors had digressed beyond the terms of reference. The report said IBMA's share in the e-series volume was 95 per cent. It added IBMA was acting as a market making agency and providing two-way quotes/intra-day square-off facility, under exemption given to the exchange for one-day forwards.

The report also features IBMA shareholders and bullion custodians were involved in speculative trades on NSEL. IBMA has been the subsidiary of the NSEL.

The auditor was to find whether money raised through paired contracts was used to buy e-series contracts. But for this, no direct evidences were found. Sources said this was because no separate accounts were maintained.

This finding could help investors of e-series contracts to get the metals they own get rematerialized subject to the high court approval. The auditors finding that there was stock of metals including precious metals with the depositories matching with the holdings of e-series investors will also help settlement of e-series issue quickly.

Replying to auditors' comments, NSEL has said, "There have been no fund pay-in defaults in respect of e-series contracts. It is expected investors in e-series units will be able to realise their investments once the FMC and the courts grant the approval."

The audit report said at NSEL's extraordinary general meeting on February 10, 2012, a loan of Rs 100 crore was granted to IBMA. But as the signature of the chairman on the minutes of the meeting differed with previous signatures, the approval couldn't be authenticated, the report said.

NSEL also paid loan to IBMA for purchase of physical commodities which was later converted into e-series and made from redemption proceeds of investments. These loans were subsequently repaid.

In its response to the auditor, the NSEL said that these loans were taken from NSEL was interest bearing and was repaid time-to-time. Utilisation of loans from NSEL was at the behest of erstwhile director Anjani Sinha of IBMA which was also the managing director and chief executive officer of NSEL. The balance of the NSEL loan to IBMA was nil as on March 31, 2013, it added.

The report further said that NSEL had allocated unique client code (UCC) to two allocated personnel on NSEL’s payroll for specific execution of trades on designated terminal user for IBMA for trading.