Jignesh Shah arrested: All you need to know about NSEL scam

Update at 6 pm: PMLA court in Mumbai has sent Jignesh Shah to 5-day police custody. 

The Enforcement Directorate (ED) has arrested Financial Technologies India Ltd's (FTIL) founder and former chairman Jignesh Shah in Rs 5,600-crore NSEL scam on Tuesday. 

Shah has been arrested by the ED for non-cooperation with the investigative agencies and will be produced before the Prevention of Money Laundering Act  (PMLA ) court on Wednesday, ANI reported.  

The ED had filed its first chargesheet in the National Spot Exchange Ltd (NSEL) scam in April 2015, Livemint reported on Tuesday.  

In the chargesheet, the ED had allegedly uncovered a criminal conspiracy that led to the Rs 5,574.35 crore scam at NSEL, which was 99.99% owned by FTIL, the news report said. 
 
The enforcement agency had also registered a criminal case against the accused under PMLA, 2002 in 2013 to probe the case, along with the Economic Offences Wing (EOW) of Mumbai police. 

The enforcement agency had prosecuted NSEL and 67 others in March 2015 under the PMLA over Rs 3,721.22 crore of money trail. 

So, what is this NSEL scam and how it came to light? 

The scam came to light in August 2013, when Jignesh Shah-led group company National Spot Exchange Ltd (NSEL) faced a payment crisis, FirstPost reported in August 2014. 

Nearly 18,000 investors had allegedly lost millions by late July 2013 due to the financial irregularities. 

NSEL, a subsidiary of FTIL, started live spot trading in commodities in October 2008. 

The spot exchange was allowed only to trade commodities at prevailing market prices but the company allowed its members to trade 25-30 day buy or sell contracts. 

To put things into perspective, spot trades involve only commodities that are available in the warehouses, while NSEL allowed trading in commodities which were not available in the warehouses. This resulted in violation of norms which went on for four years.  

Taking notice of this violation of norms, the Consumer Affairs Ministry in May 2012 issued show cause notice to NSEL saying that the spot contracts allowed on the bourse violated forward contracts law. 

NSEL after receiving the government's order suspended most spot trading contracts in July 2013 in view of violation of regulatory norms, leading to payment crisis. 

In the following month in August 2013 the Government of India banned trading in e-series contracts of NSEL, which resulted in the complete halt of trading at the exchange. 

Sources said the committee as also other regulators and investigative agencies have found major discrepancies in the data and details submitted by various investors as part of their claims, as against the data submitted by NSEL, PTI reported in April this year. 

These discrepancies include submission of wrong Permanent Account Numbers (PANs), raising doubt about source of funds, while authorisation letters and trade execution documents submitted by brokers have also been questioned, it said. 

A senior regulatory official said the NSEL case is very unique as such because brokers themselves appear to be the real investors.

There are also complaints against some brokers that they created fake ledger accounts in the name of their clients without their knowledge, sources had told PTI in April this year. 

 "It has also been alleged that funds of sister concerns of brokers, which could have been derived from illegal sources, were used to trade on the NSEL platform with an intent to legitimise the said funds, which amounts to money laundering," PTI had said quoting a senior official  as saying. 

The nearly Rs 5,600-crore payment crisis at NSEL came to light in late 2013 and since then, multiple agencies have been probing the matter.