Depts kept in the dark about each other

Stock shortfalls went unnoticed as systems were stand-alone, no data migration between different depts

The National Spot Exchange Ltd (NSEL) management deliberately kept different verticals of the exchange in the dark about the state of affairs in other departments. Systems such as warehouse receipts generation, clearing and settlement system were stand-alone and data maintained by these were not reconciled on a regular basis.

“An integrated system would have alerted the staff and word would have got out about the mismatches between warehouse stocks and trades. But since one department did not know what the other was doing, such a huge shortfall went undetected for so long. Except a select few, nobody had any clue of the larger picture,” said a senior regulatory official.

Investors woke up to a rude surprise of insufficient stocks in the exchange’s warehouses, triggering a Rs 5,600-crore payment crisis two months ago. Subsequent audits found a 70-80 per cent shortage in stocks in the NSEL warehouses.

“NSEL appears to have a number of stand-alone systems, with no data migration facilities, even for critical operations. No reconciliations are performed where manual intervention was required between critical stand-alone systems…This indicates significant lapses in the processes involved in business operations, with virtually no checks and controls in place,” said a report by the forensic auditor.

Grant Thornton, which carried out the forensic audit commissioned by the Forward Markets Commission, is said to have found NSEL did not carry out any due-diligence to establish the existence of stocks at member-managed warehouses, upon which trades were being executed.

The audit has also found the lack of control was “manifested in the form of stand-alone IT systems being maintained were neither integrated at any stage, nor was a reconciliation exercise carried out to reconcile the data on different systems.”

Further, the forensic auditors have found the exchange’s systems did not support any management information system reports that would give visibility on the actual commodity stocks supporting the trades.

Regulators have found these aren’t isolated cases of poor governance, but a deliberate ploy by a technology-driven parent company to facilitate wrongdoings with the full knowledge of directors, promoters and holding companies.

When Business Standard asked a Financial Technologies spokesperson why the group, which took pride in its systems and technological innovation, didn’t implement basic information technology systems in NSEL, he said, “The matter in question is part of FMC’s show-cause notice to FTIL and other directors of NSEL. We cannot comment on it before it is replied to and adjudicated by FMC.”