Is it really in interest of the public?

 “Whose door should I knock, when the system turns its unfair back towards me?”

Breach of conduct in corporate governance is quite unsettling, and throws off those who consider themselves protected by the law of the land. Who do these people turn to?

Throwback to 2013 when NSEL case surfaced to shake up the financial roots of India. With discrepancies worth Rs 5600 cr, it not only reduced NSEL into a defunct body, but also unduly brought parent company, FTIL, to bear for flawed corporate governance. Ever since, multiple government agencies appointed to investigate and catch wrongdoers have either fallen off-track or misled by vested interests.

The most unsettling of verdicts has been the proposed merger between FTIL and NSEL that forces 63,000 unassuming FTIL shareholders to cover for irregularities accrued at NSEL.

There has been no explanation whatsoever on this unjust step, which has been issued in “interest of public”. This leaves us with no other explanation but assuming that the Government has been blindfolded, and their faulty system which is making one pay for deeds of others, is on a vacation. Amid setting a baffling example across the globe on handling corporate cases, the Government is also turning a blind eye towards the 63k shareholders of FTIL.

Ideally, the recourse here should center on recovering dues from real defaulters the brokers who are charged with conflicting investor claims and client complaints, rather than passing verdict of a merger. Do we expect the Government to wake up anytime soon?

Overlooking Principles of Justice to Unfairly Punish the FTIL Group

While FTIL and NSEL have been pursuing and satisfying commitments, within the framework available in the lawful sphere, to safeguard rescue and to attend to the interests of the affected constituencies, the behavior that was meted out to them by the various authorities has been pure unfair, in a excessive urgency, contravening and in contradiction of principles of justice that need to be applied to a firm operational towards disaster resolution.

The manner in which the accident at NSEL was handled is a cause of concern. The way it was addressed by various agencies, including the regulatory authorities raises far more important issues that could cause anxiety and disquiet for those people who believe in free markets and fair justice. A complete and comprehensive review of the whole episode what contributed to the crisis and how it was managed subsequently – brings into light the importance of balance and maturity in handling crisis such as this, which unfortunately is in severe shortcoming in this case. In democracies and free markets, crises are not uncommon. If the authorities go into excessive overdrive, demolishing everything that is remotely connected with the issue in the name of resolution of the crisis, the image and ability of India to emerge as a major and mature economic power will come into serious doubt and dispute.

There is so much of misconception, misinformation, misreading, misunderstanding and misinterpretation around the whole crisis that it has made it into a sordid drama where players who should have taken the responsibility of finding a solution to the crisis went beyond their brief, leading to a complex situation arising.

The NSEL accident is not something that the world has not known in the past or that has never taken place. The context of the crisis is also not something so unusual. The question that only comes to mind is how and why there was so much hurry on destroying a vast ecosystem that has great potential to grow and contribute to India’s progress, which was carefully built over long years, in the name of solving a crisis just to fulfill the demands of a few high networth trading clients who themselves are also to be blamed, in the first place, for the crisis to happen?

The way it was dealt with raises more questions than answers. Here are a few that are quite puzzling and perplexing.

NSEL: Comment of the Chairman,FMC

COMMENT OF THE CHAIRMAN FMC
NSEL has little capital to pursue recovery of funds from defaulters

NSEL Response:

a) NSEL has used its entire equity capital of Rs 45 crore and reserves of Rs 145 crore by July 31, 2013
b) Though NSEL has used all its reserves for pay-out to affected member brokers, FTIL is supporting NSEL in its recovery efforts and is providing all other support in terms of finance, manpower and
infrastructure. Hence, the argument of "NSEL has little capital" does not hold good
c) NSEL has already paid Rs 179 crore to make payment of 50 percent of dues to 7053 small trading clients with receivables of less than Rs 10 lakh after taking a without prejudice loan from FTIL
d) NSEL has to receive Rs 103 crore from NAFED since one year. NAFED is willing to pay about Rs 68 crore or so as settlement, whereas NSEL is in discussion to realize more
e) All NSEL employees have been receiving their salary, increments, and bonus on time
f ) Currently, 781 clients (6 percent collectively) have to receive 69 percent of the total outstanding dues. Moreover, seven defaulters account for 85 percent of total outstanding dues. Similarly, out of 148 brokers, 30 brokers account for over 68 percent of total dues
g) The appropriate course of action should be to concentrate on recovery from 22 defaulters collectively by NSEL, investigative agencies and the government machinery

NSEL: Actions taken

There are several other corporate irregularities on which hardly any action appears to take place, whereas excessive zeal and persuasion was shown in punishing FTIL.

Recently a group of investors in a Mauritius -based reality fund of a venture capital firm that is a part of the leading financial conglomerate in India is seeking damages of US$103 million for losses suffered by them. A leading pharmaceutical firm was imposed US$500 million in penalties by the Federal Drug Administration, after pleading guilty to felony charges relating to manufacture and distribution of certain adulterated drugs. In view of such practices by some companies, US Chamber of Commerce ranked India at the bottom of 25 countries in terms of protection and enforcement of intellectual property rights.
Companies with false promises during IPOs, pledging securities already pledged, fudging accounts and indulging corruption are many. Micro finance companies charging usurious interest rates that forced farmers to commit suicides are not uncommon in India. Vanishing companies is a trend that happened in front of the very eyes of the government authorities and regulators. Government and regulatory authorities in all these case have been following up gradually in accordance with the current legal framework and conventions. Nowhere forensic audits by multiple auditors were conducted and irreversible regulatory action taken when the issue is under investigation and sub judice for which outcome has yet to come. No instances of any promoter or CEO of corporate group put under custodial interrogation for a mistake that has happened in one of its subsidiaries.

Is it not important that India too should have a system that respects fair treatment of all? More so when dealing with a group such as the Financial Technologies that has the distinction of making stellar contribution to the growth of financial markets in India.

Periodic briefings to Government by NSEL

The senior management of NSEL has been meeting with the MAC appointed by the FMC on a
weekly/fortnightly basis. These are very structured meetings with minutes and action taken reports. In all, 25 committee meetings took place, between October 9, 2013, and August 8, 2014, wherein 246 agenda items were dealt with. In some of these meetings, the FMC representative also participated. All meetings were hosted at NSEL’s office and were provided with detailed agenda notes  and electronic display of further details.
Additionally, NSEL compiled and sent a detailed weekly report to the FMC, which summarized all
recovery, settlement pay-outs, legal and court cases, e-Series updates and any important developments of the week.
Thus, despite being fully aware of the various continuous efforts made by NSEL for recovery of the dues from the 22 defaulters, the FMC’s allegation of ‘no progress in recovery’ is surprising.

NSEL cooperates completely with investigating agencies

• NSEL has provided personnel and IT support to both the EOW and the Competent Authority constituted under the MPID Act in order to speed up the recovery process and assist in the ongoing
investigation. Voluminous data has been shared with both agencies | entities and four draft proposals
have been submitted to the Competent Authority in consultation with the MAC for submission to Court for the sale of commodities and properties of four defaulter members.
• The Exchange has deputed staff at the EOW to assist recovery meetings with defaulters.
• The MAC constituted by the FMC met every week/fortnight at the exchange with active participation from NSEL to review recovery proceeding. However, the same has been recently wound up by the FMC in light of the high powered Committee constituted by the Bombay High Court.
• Interaction with client groups and member groups for information, clarifications or recovery are held periodically.
• Coordination with RBI, CIBIL, banks and various government agencies to get more information and data on defaulters to make recovery case stronger is an ongoing process.

NSEL: Mature way of solving the crisis

• NSEL had a valid and legal business model

• There was no omission or commission on part of the NSEL Board

• The crisis was solvable, but was blown out of proportion by the action of the FMC, which focused on disciplinary action first, even prior to an investigation, and left out recovery and action against

defaulters completely

• FMC has been changing its stance in NSEL matter even before the crisis erupted. When on July 19,

2013 it replied to the Government that the 2007 exemption was a general exemption, then where did

the question of illegality arise for suspending the trading of NSEL?

• Due to a conspiracy, the NSEL crisis was treated differently than any other previous crisis in the financial sector including the manner in which the FMC treated other spot exchanges and NSEL

• When NSEL suspended its trading, there were 46,000 trading clients with outstanding, out of which

33,000 trading clients in e-Series got their full payment and out of the remaining 13,000 trading clients more than 50% of them, around 7,000 trading clients, were paid more than 50% of their outstanding from the loan provided by FTIL

• Comprehensive investigation by the EOW has revealed that the entire outstanding dues of the trading clients are with the 22 defaulters