MUMBAI: The Registrar of Companies (RoC) will blame Jignesh Shah and other directors of Financial Technologies India (FT), for the implosion of its subsidiary, National Spot Exchange (NSEL), and is likely to recommend they should not continue as directors of either FT or NSEL, according to three persons who have reviewed an interim report on the NSEL affair.
“The directors of FT have failed in their fiduciary duty to safeguard the interests of shareholders and creditors by not exercising due diligence and prudence in respect of its subsidiary (NSEL) and should not continue as directors of FT and NSEL,” said one of them.
“The draft report is being finalised and will be sent to the ministry on Friday.”
Currently, only Jignesh Shah, founder of FT, represents promoters on the NSEL board. The 69-page report has based its findings on the minutes of NSEL’s board meetings and other records.
A final report, likely to be submitted in two months, will have details on issues such as whether FT maintained arm’s length while dealing with NSEL.
“The report has urged the MCA to examine the role of the FTIL board and take a view on their involvement in the NSEL case. The RoC has pointed out that the FTIL board of directors should have exercised prudence while discussing a subsidiary like NSEL during the parent company’s board meetings. The agency says Jignesh Shah was a key management personnel at NSEL and commanded fiduciary position for the exchange. It goes on to add that prime facie, it appears that the FTIL board allowed the state of affairs at NSEL to continue, which resulted in the fraud,” a senior ministry official familiar with the draft report said.
Both CV Sajeevan, deputy director (inspection), Registrar of Companies, Mumbai, and T Pandian, Registrar of Companies, Mumbai, declined comment. Pandian said, “Inspection of the books of account and other records are ongoing and I cannot say anything beyond this.”
In response to a query from , television channel, an NSEL spokesperson said, “We have not seen such a report and, hence, it would be unfair to comment on our part.”
The report comes at a time when the roles of Shah, founder of FT Group, Joseph Massey and Shreekant Javalgekar— past directors on NSEL — are being probed by commodity futures market regulator Forward Markets Commis-sion (FMC) and the Economic Offences Wing of Mumbai Police. “The report also highlights that NSEL had several undisclosed related party transactions in which the directors of the exchange were either directly or indirectly interested. These deals were carried out without the approval of the board or the central government and their wrongful disclosure or non-disclosure could lead to fines and even imprisonment under Section 628 of the Companies Act,” added a second ministry official on condition of anonymity.
Under Section 628 of the Companies Act, 1956, making a false statement or omitting material facts is punishable with imprisonment for a term which may extend up to two years. “This Section is meant to protect the interest of the shareholders and has been used only in stray cases. Past precedent suggests that the RoC has found it difficult to implement it successfully but the NSEL case is unique in many aspects,” said a senior lawyer who did not wish to be named.
The RoC report says that since its incorporation in 2005, the NSEL board had met only 46 times. During these meetings, according to RoC, no discussion took place on the ” actual business model” of the exchange.
It also highlights several other alleged violations under the companies act relating to unauthorised loans to group concerns, failure of auditors, rotation of directors and filing of statutory returns for FY 12-13, sources added.
The directors did not bother to examine how NSEL reported an almost five-fold jump in net profit to Rs 124.8 crore in FY13, from just Rs 25.64 crore in FY12.
In October this year, the ministry of corporate affairs had ordered an inspection of the books and accounts of NSEL and FT by the RoC to verify whether any violations were committed by these entities under the Companies Act. FT’s books are being examined by RoC, Madras. Anjani Sinha, former MD & CEO of NSEL, and two other employees arrested by the police last month have been remanded to judicial custody till November 27.
The RoC has criticised the directors for undisclosed related party transactions, saying that this may even lead to their imprisonment under the Companies Act.