Business and Economy
NSEL settlement scandal is back in spotlight
The Enforcement Directorate on July 12, arrested prime accused in the Rs.5600 crore National Spot Exchange Limited (NSEL) scam and founder of Financial Technologies (India), Jignesh Shah under Section 19 of the Prevention of Money Laundering Act (PMLA). Shah is the founder of FTIL, which owns 99.99 per cent in the now defunct NSEL
- The NSEL (National spot Exchange Ltd) scam or NSEL fraud is a systematic and premeditated fraud perpetrated in the commodity market on Jignesh Shah owned National Spot Exchange (NSEL) which is based in Mumbai, India.
- The NSEL is a company promoted by Financial Technologies India Ltd and the NAFED (only 100 shares given for misusing the NAFED brand who was touted as a co-promoter).
- The NSEL scam was a Ponzi scheme and is estimated to be a Rs. 5600 crore (around US$0.95 billion) fraud that came out to light after the National Spot Exchange failed to pay its investors in commodity pair contracts after 31 July 2013.
- 13000 investors from India lost about Indian Rupees 5600 Crores when the fraud was discovered and it was found that NSEL had neither the money nor the stocks to pay them back.
- The abrupt suspension in trading activities was triggered by a government directive after it was found that the spot exchange was offering so-called paired contracts.
- In the days to come it emerged that the exchange was in the midst of a huge settlement scam with hardly any commodity to settle the contracts.
What’s at the core of the problem?
- A product that wasn’t approved by the government.
- A spot exchange is not supposed to offer forward contracts, but NSEL, it is now widely believed, offered 20-25 day (and some say 40-day) forward contracts.
- Worse, there have been reports that some of these contracts are so-called “naked” contracts—which means there is no underlying commodity.
What’s the fear?
That there is no underlying commodity is the fear. NSEL says it will sell the commodity and meet its payment obligations, but what if there are no commodities.
Surely, there are warehouse receipts?
Yes, but these have been issued by a group company and there’s no clarity on the presence of commodities.
How were forward trades allowed in a spot market?
- Spot exchanges were allowed to conduct forward trading in one-day contracts (where an individual can keep the contract open for two days), through a special Government notification in early 2008.
- NSEL used this exemption to launch one-day forward contracts with a settlement cycle of 20-30 days.
- But this exemption on forward trades came with the condition that the respective exchanges should not allow short selling.
Two Legal Battles
- Stakeholders – FTIL, NSEL, investor associations, defaulters, brokerages along with the government and its probe agencies.
- The Mumbai Police EOW has also attached assets worth around Rs.5,000 crore of the defaulting trading members. EOW sent a notice to FTIL for freezing all its assets. FTIL has challenged the notice in the Mumbai high court but is yet to get a stay against it.
- Investor associations have focused their action around two legal battles aimed primarily at FTIL.
Solution 1 – NSEL-FTIL merger
- The investor associations are well aware that recovering the money from the defaulters by way of court decrees and injunctions will be a long-drawn affair and so have smartly lobbied for the merger of the defunct exchange with its cash-rich parent entity FTIL.
- The merger would force FTIL to assume all the liabilities of the Mumbai-based spot exchange. The merger would also make FTIL a party to the ongoing litigations involving NSEL.
- Investor groups tasted success in October 2014 when the Ministry of Corporate Affairs (MCA) issued a draft order proposing to merge NSEL with FTIL. The final order was issued in February this year.
Solution 2 – Supersede FTIL
- The other case, which the investor associations are strongly pursuing, is about superseding the board of FTIL so that the government can appoint their own nominees to manage the company’s operations.
- The case is being heard at the Company Law Board (CLB) in New Delhi.
- The merger is easily said than done. FTIL has challenged the forced merger order at the Mumbai High Court, questioning the rationale of “public interest” put forth by the government while invoking Section 396 of the Companies Act, 1956.
FTIL has been arguing that attempt to supersede the board is a clear sign that the government does not want any kind of opposition to FTIL-NSEL merger.
Marans want money-laundering case shifted; ED opposes their bail
The Enforcement Directorate on Monday opposed the bail pleas of former Telecom Minister Dayanidhi Maran, his brother Kalanidhi Maran and the latter’s wife, Kaveri, in a money laundering case connected with the Aircel-Maxis deal.
What is Money Laundering?
- Money is the prime reason for engaging in almost any type of criminal activity.
- Money-laundering is the method by which criminals disguise the illegal origins of their wealth and protect their asset bases, so as to avoid the suspicion of law enforcement agencies and prevent leaving a trail of incriminating evidence.
- The ability to prevent and detect money-laundering is a highly effective means of identifying criminals and terrorists and the underlying activity from which money is derived.
How is money laundered?
Traditionally money laundering has been described as a process which takes place in three distinct stages.
- Placement, the stage at which criminally derived funds are introduced in the financial system.
- Layering, the substantive stage of the process in which the property is ‘washed’ and its ownership and source is disguised.
- Integration, the final stage at which the ‘laundered’ property is re-introduced into the legitimate economy.
What does ED do?
Directorate of Enforcement is a specialized financial investigation agency under the Department of Revenue, Ministry of Finance, Government of India, which enforces the following laws: –
- Foreign Exchange Management Act,1999 (FEMA) – A Civil Law, with officers empowered to conduct investigations into suspected contraventions of the Foreign Exchange Laws and Regulations, adjudicate, contraventions, and impose penalties on those adjudged to have contravened the law.
- Prevention of Money Laundering Act, 2002 (PMLA)– A Criminal Law, with the officers empowered to conduct investigations to trace assets derived out of the proceeds of crime, to provisionally attach/ confiscate the same, and to arrest and prosecute the offenders found to be involved in Money Laundering.
Foreign funds pour in; 3,000 NGOs get over Rs. 22,000 cr.
A total of 3,068 non-governmental organisations (NGOs) received foreign funding above Rs. 22,000 crore in 2014-15, according to government data presented in response to a question in Parliament.
- As much as Rs. 7,300 crore — or 33 per cent of the total — went to NGOs based in Delhi and Tamil Nadu alone.
- In fact, 80 per cent of this funding went to NGOs based in seven States — Delhi, Andhra Pradesh, Maharashtra, Kerala, Tamil Nadu, Karnataka and West Bengal.
- As of July 2016, 33,091 NGOs were registered under the Foreign Contribution Regulation Act, which regulates foreign funding to these bodies.
- As many as 14,222 NGOs were barred from receiving foreign funds in the past four years for violating norms
- The Ministry of Home Affairs is mandated to administer the Foreign Contribution (Regulation) Act, 2010, for regulating the receipt and utilisation of foreign contribution by the associations.
- A ‘person’, as defined in Section 2(1)(m) with the exclusion of those mentioned in Section 3 of FCRA, 2010, having a definite cultural, economic, educational, religious or social programme can receive foreign contribution after it obtains the prior permission of the Central Government, or gets itself registered with the Central Government.
Steel industry seeks extension of MIP
Even as the steel industry is urging the Centre to continue the minimum import price (MIP) protection scheme to guard against increased imports, user-industries have started protesting against any extension of the scheme.
MIP scheme for Steel Industry
- The MIP scheme was introduced in February, 2016 for six months.
- Post-MIP, the industry has been able to marginally improve its viability after a prolonged period of subdued prices and eroded profit margins
- While MIP cannot possibly be an all-encompassing framework for a complete turnaround of the Indian steel industry, it has provided a cushion against surging imports
- The Indian steel industry does not see MIP as a perpetual protectionist step, but as a necessary temporary measure that will allow time for recovery.
- The Indian steel industry’s outstanding loan is estimated at Rs.3,00,000 crore, of which 35 per cent may be stressed.
- MIP was imposed on February 5, 2016 on 173 steel items covering both flat and long products.
- The accelerating imports at predatory prices from three steel-surplus Asian countries has been a major concern for the domestic industry since September 2014.
- Steel imports, which had peaked in July 2015 registering a 114.6 per cent increase year-on-year, started to decline around November 2015 (when a provisional safeguard duty was imposed). Post-MIP it has dropped in range of 24.6 per cent and 43.1 per cent in the first quarter of the current fiscal.
- India is expected to impose an anti-dumping duty of up to $ 557 per tonne on imports of certain steel products from six countries.
- The Directorate General of Anti-Dumping and Allied Duties (DGAD), under the Commerce Ministry, has found that hot-rolled flat products of alloy or non-alloy steel have been exported to India from China, Japan, Korea, Russia, Brazil and Indonesia at “below-normal value”.
Tax is not a barrier to free trade, says SC
A day after Parliament passed the Goods and Services Tax Bill for a uniform comprehensive tax regime to promote hassle-free trade, a nine-judge Constitution Bench of the Supreme Court on tax should not act as a barrier to free trade, commerce and intercourse.
“It is this freedom of trade, commerce and intercourse which allows a trader to move from place to place within the country without obstruction. A trader moves constantly and so long as his fundamental right is protected under Article 19, there is no question of a fiscal restriction being an obstruction,” Chief Justice Thakur.
- Entry tax is imposed by the State governments on the movement of goods from one State to another.
- The Bench is hearing petitions from private manufacturers and companies against the varied entry tax levied by different States.
- The debate was on the contours of Article 301 of the Constitution dealing with freedom, trade and commerce.
- Article 301:Freedom of trade, commerce and intercourse Subject to the other provisions of this Part, trade, commerce and intercourse throughout the territory of India shall be free
- The Bench is hearing on the validity of separate entry taxes on goods mandated by the statutes of various State governments, which did not heed the Centre’s plea to wait for the passage of the GST Bill in Parliament.
Bill to amend Sarfaesi, debt recovery tribunal Acts cleared by Lok Sabha
In an important step aimed to resolve bad loans, the Lok Sabha on Monday passed a bill to amend the existing Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, and the debt recovery tribunal (DRT) Act.
The amendments are aimed at
- faster recovery and resolution of bad debts by banks and financial institutions
- making it easier for asset reconstruction companies (ARCs) to function.
- put in place an enabling infrastructure to effectively deal with non-performing assets in the Indian banking system along with the new bankruptcy law which came into effect earlier this year
Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016
- The government had introduced the Bill in May. The bill was referred to a joint Parliament committee which submitted its report last month. The bill will amend four acts—Sarfaesi Act, 2002, the Recovery of Debts due to Banks and Financial Institutions Act, 1993, the Indian Stamp Act, 1899 and the Depositories Act, 1996.
- The bill will now go to the Rajya Sabha for its approval. The government has accepted all the recommendations of the joint committee.
- The bankruptcy law is now becoming operational. One of the big challenges we face is the enforcement of interest and recovery of bad debts. Securitization law and DRT law need to be amended for quick disposal of disputes
- DRTs were envisaged as an alternative to civil courts and for ensuring quick disposal. But things need to move faster. Procedures in front of DRTs cannot be similar to civil courts
- Indian banks have been under stress with many of them reporting losses and surge in non-performing assets (NPAs) after the Reserve Bank of India (RBI) pushed lenders to classify visibly stressed assets as NPAs after an asset quality review in 2015-16.
- Total stressed assets of state-run banks as of 31 March were at 14.5% of total advances, and according to recent report released by RBI, this may increase further.
- The gross non-performing asset (NPA) ratio of state-run banks may rise to 10.1% by March 2017 from 9.6% as of March 2016, RBI’s financial stability report said, warning that under a severe stress scenario, it may rise to 11% by March 2017.
- Flaws in the existing recovery process have added to the problem of bad loans. For instance, more than 70,000 cases are pending before DRTs.
Salient Features of the Bill
- The bill gives RBI powers to audit and inspect ARCs and the freedom to remove the chairman or any director and appoint central bank officials to its board. The central bank will be empowered to impose penalties for non-compliance with its directives, and regulate the fees charged by these companies to banks at the time of acquiring such assets.
- The bill will also pave the way for the sponsor of an ARC to hold up to 100% stake. It will also enable non-institutional investors to invest in security receipts issued by ARCs and mandate a timeline for possession of secured assets.
- To be sure, RBI already regulates these entities, but the bill expands the regulator’s powers. It also increases the penalty amount that can be levied by RBI to Rs.1 crore from Rs.5 lakh.
- The bill proposes to widen the scope of the registry that will house the central database of all loans against properties given by all lenders.
- It also proposes to bring hire purchase and financial lease under the ambit of the Sarfaesi Act, and enable secured creditors to take over a company and restore its business on acquisition of controlling interest in the borrower company.
- As part of the overhaul of DRTs, the bill proposes to speed up the process of recovery and move towards online DRTs. To this effect, it proposes electronic filing of recovery applications, documents and written statements.
- DRTs will be the backbone of the bankruptcy code and deal with all insolvency proceedings involving individuals. The debtor will have to deposit 50% of the amount of debt due before filing an appeal at a DRT. It also seeks to make the process time-bound. A district magistrate has to clear an application by the creditor to take over possession of the collateral within 60 days.
- Political will is necessary and that seems to be missing. Bankruptcy and insolvency code has been passed. In spite of passage of laws, we have not seen much progress on either curbing black money or on NPAs of banks. Total stressed assets have crossed Rs.8 trillion
- The bill also proposes to amend the Indian Stamp Act to exempt deeds of assignment signed at the time of an ARC buying a loan from a bank from the levy of stamp duty.
- The amendments carry the work forward done in the insolvency and bankruptcy code. Automation will help in increasing the pace of recovery, but this requires an investment. Currently, the problem is that many DRTs from time to time do not have presiding officers.