Shantanu Guha Ray’s “The Target”: An exculpatory apologia?

An alternative title of the book could be — “Friends turn Foe” and let me explain why. The book reads like a lament, “How could an establishment which first let the chief protagonist, Jignesh Prakash Shah, become a Badshah of Electronic Exchanges, playing fast and loose with the regulatory system, suddenly insinuate that he is the “Bad”Shah. All that Shah did was let people steal right under his watch, from his custody. The investing public may be under some illusion that an exchange is a Public Financial Institution; to Shah it was an unregulated fiefdom, where words such as governance, prudential norms were merely words (Chairman Shankarlal Guru’s son-in-law Nilesh Patel was the first and the largest borrower/defaulter, owes Rs.950 crores). What kind of a state are we, that does not allow a first generation Crony Capitalist make it out like a bandit and become a Robber Barron. Didn’t we let Vijay Mallya flee? Why do we have to single out Jignesh Prakash Shah?

In this back drop it is important to understand what an exchange is and its place in the country’s economic landscape. Much like a bank, the permission to start an exchange is a coveted one. The exchange being a Central Counter Party, a guarantor of all trades that take place on its trading system, its reputation and credentials need to be absolutely impeccable. It is important to note that an exchange going bust is an absolute black swan event. The mammoth financial market meltdown in 2008, or the Lehman crisis as it is popularly known, did not bankrupt any exchange anywhere in the world. The reason is the robust regulatory and risk architecture. Whether the exchange has allowed participants to assume undue risk is constantly under the regulatory scanner, and this ensures that the exchange is always solvent and liquid. In this context it must be said that while NSEL was indeed an exchange, but there was no regulator appointed to oversee or monitor their activities. Let us assume for argument’s sake that the regulator was a few steps behind, Shah being an alleged Czar of Exchanges in the making, should have known that paying out vast sums of money to dodgy borrowing members and not even instituting any internal controls ensuring water tight custody is an unpardonable sin. This defies even common sense.
The foreword invokes Ayn Rand, Mr. Seth seems to be under a belief that quoting Rand and comparing Shah to John Galt would add some shine. Truth be told, Shah actually resembles Floyd Ferris, who attempts to build on Prof Stadler’s work and absolutely ruins it. Mr. Seth’s foreword reads as if it’s written by Wesley Mouch, Tinky Holloway and Bertram Scudder all rolled into one.

The author seems to suggest that the protagonist is being victimized for taking on the “establishment” in the MCX-SX saga, but fails to dwell upon misdeeds of National Spot Exchange Ltd. (NSEL), its parent Financial Technologies India Ltd. (FTIL) and Shah’s vice like grip and absolute executive control of the operations of all his companies. There are enough and more Court orders, Judgments, Regulatory orders which unambiguously state these facts, but the author has chosen to gloss over by citing selectively what is essentially a “Bail Order”. Had the author consulted any criminal lawyer before selectively quoting from the bail order, he would have understood what the legal position of a bail order is. It merely dwells upon questions involving the personal liberty of an accused, and also says categorically at the end that a bail order cannot be used for the purpose of a trial. The author seems to have made a cardinal error in arriving at any conclusion of the guilt of the accused or the absence of it, by speed reading a bail order. The author must peruse the judgment of the Honorable Divisional Bench of the Bombay High Court in NSEL v. State of Maharashtra of October 1, 2015, which categorically states the following.

“…The record further indicates that there are many accommodation entries which resulted into financial mishap due to collusion between the Petitioner and its selling trading members.”

For those who have either not read about or understood what the NSEL scam is about, here’s the gist.

NSEL was a Spot Exchange for trading commodities, which had the recognition from the Government of India, but strangely, no regulator overseeing its affairs. This clearly points to a very friendly “establishment” which grants recognition but fails to regulate the affairs. The exchange accepted money from investors/depositors by issuing an “Electronic Warehouse Receipt” transferring to them title to the goods upon receipt of money, and simultaneously buying the commodity back from the investor/depositor by way of a Repo (Repurchase) transaction, promising the investor/depositor that his/her money will be returned on the said date and the goods will be transferred back to the original owner. Fast forward to July 31, 2013, NSEL announces that they do not have the money to pay investors/depositors, but they will liquidate the commodities held in warehouses under their control, and repay investors. Shah addresses a press conference on August 5, 2013, invokes his personal credibility and assures the world at large that he will liquidate all the commodities and pay back investors/depositors within 30 weeks, failing which he will pay the balance sums with interest. The press conference videos are widely available on YouTube for those interested, but obviously the author seems oblivious to these facts. The facts as they stand today, only 6.5% of the investors/depositors money was returned until September 2014, and thereafter no money has been paid at all.

The author seems to gloss over the fact that barring a few of FTIL ventures, namely, MCX, NBHC, IEX and NSEL, all the others were bleeding cash and were propped up by constant capital infusion by FTIL. The situation was so desperate that they had to find a cash cow and that too soon, if they had to continue the charade of being a serial disruptor/innovator/creator. NSEL was chosen as one such unregulated business which could be milked while the regulators were not looking at it, or the friends in the then “establishment” kept NSEL away from the prying eyes of the regulator.

The Financial Stability and Development Council (FSDC) sub-committee, headed by the then Deputy Governor of Reserve Bank of India raised the issue of a regulatory gap in May 2011 and the fact that since none of the market regulators namely SEBI or FMC regulated NSEL, the spot exchanges cannot be offered the Clearing Services of Banks. It also highlighted that NSEL did not have the Payment and Settlements System license and that they will be constrained to ask Banks to stop providing clearing services to NSEL. The FSDC sub-committee wrote to the Department of Economic Affairs (DEA), Ministry of Finance and highlighted these gaps. The DEA Secretary in turn wrote to the Department of Consumer Affairs (DCA) in the Ministry of Consumer Affairs, and highlighted these gaps and concerns of the FSDC sub-committee. The Secretary DCA then hurriedly writes back around October 2011, stating that they have noted the concerns and are appointing FMC as a Designated Agency for Spot Exchanges and FMC will be substantially regulating these exchanges. If one is familiar with the regulatory architecture in the country, such play of words would have baffled them. It appears this was done for a reason. As soon as FMC was appointed the Designated Agency, and NSEL was mandated to submit reports to them, FMC highlighted to the DCA that there were rampant violations by NSEL and something is surely amiss. The DCA issues a Show Cause Notice to NSEL in April 2012. This begs a question, how can a regulator substantially regulate an exchange when it can’t even issue a Show Cause Notice on its own and why has DCA taken the onus of issuing such Show Cause Notice? Subsequent correspondence, obtained by us through RTI, lays bare the fact that DCA was keen on giving a long rope to NSEL and FMC was not allowed to initiate any action. By then, the stonewalling by NSEL would have made it abundantly clear to FMC that either the stocks do not exist or they are substantially short of the stated/declared quantities. Their stand was vindicated when close to nothing was found in the so called NSEL warehouses once the investigative agencies got into the act post July 2013. It is interesting to note what the Honorable Judge of Bombay High Court said in a recent court proceeding, whether there was a tsunami due to which all the stocks disappeared or whether the front door of the warehouse was locked but the back door was deliberately left open.

On July 10, 2013 Shah and his bunch of lackeys went to the FMC office in Mumbai to allay their fears about news reports suggesting non-existence of stocks in their warehouses and to urge the FMC to not apply stringent regulatory standards on NSEL, much like those applicable to another of its group company MCX. The perverted logic being offered was that NSEL and more particularly spot exchanges being at a nascent development stage need not be fettered with stringent regulations, which would not let them grow and fulfil a national objective. Interestingly, the DCA Secretary was also in attendance and after the bravado of Shah and his lackeys, they came to a conclusion that NSEL should not be allowed to launch new contracts and that they should wind down all outstanding contracts on their respective due dates. It is interesting to note that the friends in the “establishment” took the final decision to take stern action on NSEL a good 15 months after first having issued a Show Cause Notice in April 2012. The flurry of letters, interestingly marked “private & confidential”, make for a very interesting reading, for those who are still in doubt whether Shah was being shielded or was he indeed a “target” as the author would like us to believe.

An interesting trait of the FTIL Group with Shah at its helm was “interpret the law, do not obey the law” and as is their want, they continued business as usual by merely tweaking the contract maturity, until they ran out of funds to pay investors/depositors on July 31, 2013. The Financial Intelligence Unit of the Government of India in their report has highlighted this particular trait. 
It would interest the readers to know that like all Public Financial Institutions, even NSEL was supposed to maintain a reserve in the form of a “Settlement Guarantee Fund” (SGF), much like banks maintain a CRR & SLR. But guess what, on July 31, 2013, it was discovered that they have blown the entire SGF of Rs. 800+ crores, without letting anyone know, despite being legally bound to do so. This is much like a Bank knowing fully well that they are going to run out of funds soon and they pay back some select set of people on a “first come first served” basis, before being busted.

Interestingly, the author quotes Ms. Sucheta Dalal, who had built a formidable reputation for uncovering scams. And true to form, Ms. Dalal did send a stinker to Shah’s lackey Anjani Sinha way before the scam broke out. It surfaced much later that Sinha did provide insipid answers, exposing himself, but Ms. Dalal maintained stoic silence until much later. She is on record to have stated that Shah’s companies have blatantly used the words “National” and that no action was taken on them despite they being purely private business initiatives and the fact that the Registrar of Companies having allowed such blatant misuse, in clear violation of the Emblems and Names (Prevention of Improper Use), Act, 1950.

I seek the reader’s indulgence to narrate an unrelated “factoid”. TickerPlant, a FTIL Group company has advanced an interest free loan to a Moneylife Group company of Rs. 8.80 million, as per publicly available financial records of the company.
It is noteworthy that neither MCX nor National Bulk Handling Corporation (
NBHC), which dealt with third party commodity stocks in their capacity as a custodian, were ever accused of such grave violations.

I guess the regulators did a splendid job by “targeting” the misdeeds of NSEL and thereby exposing the parent FTIL, while both MCX and NBHC are well managed businesses under their new ownership and managements, having being rid of Shah and his lackeys.