Regulatory action likely against NSEL audit firms

FMC likely to issue advisory on lapses by audit and consulting firms associated with NSEL

After passing the ‘fit and proper’ order against National Spot Exchange (NSEL)-promoter Financial Technologies India Limited, the Forward Markets Commission (FMC) plans to move against audit firms and consultants associated with NSEL. The market regulator would issue an advisory on these agencies. “These entities do not fall under our jurisdiction. We can’t issue a show-cause notice to them. But, we will issue an advisory to the entities regulated by us against these firms,” a senior official at the regulator told Business Standard.

The advisory is likely to detail the role of these firms and could   include a bar against hiring their services in the future. FMC is also separately writing to the Institute of Chartered Accountants of India, to take action for the lapses.

In the order against FTIL and its directors Jignesh Shah, Joseph Massey and Shreekant Javelgekar, the commission noted how Shah had been named as one of the key management personnel in all the annual reports of NSEL until 2011-12.

“Curiously, in the balance sheet of NSEL for 2012-13, Shah has not been shown to be one of the key management personnel. Such an exclusion of his name from the list of key management personnel coincides with the exit of former statutory auditor S V Ghatalia & Co and induction of Mukesh Shah, who happens to be the maternal uncle of Jignesh Shah, as the statutory auditor for FY 2012-13. The appointment as statutory auditor of NSEL was inappropriate and questionable in the prevailing circumstances,” the commission had said.

Mukesh Shah had asked stakeholders not to rely on the NSEL accounts for FY 13 after the Rs 5,600-crore payment crisis. Following this, Deloitte, the statutory auditor of FTIL, also told that the FY13 accounts cannot be relied upon, as a significant portion of the parent's profits came from NSEL operations.

The official, quoted earlier, said, “There was a report given to Geojit by a consultant which said the NSEL warehouses were accredited by WDRA, which was not the factual position. We will go into such cases.”

Investors have pointed to some incorrect assertions by EY’s financial risk services, in a report titled ‘Risk-based review of commodity financing business’. The September 2012 report, commissioned by Geojit Comtrade, a brokerage firm which traded on NSEL, pointed to various risks and suggested measures to Geojit. EY, Deloitte and Mukesh Shah have denied allegations of wrongdoing and have maintained that they had followed applicable rules and procedures on the NSEL. They have refused to discuss the matter in detail, citing client confidentiality.