NSEL scam: Government should intervene only after probe is complete

The government seems to be overstepping its role in its probe into the Rs 5,600 crore National Spot Exchange Ltd (NSEL) scam, going by reports that it may take over the management of Financial Technologies Ltd (FTIL), NSEL’s parent company. The explanation that government officials reportedly gave was that NSEL was effectively controlled by the key managers of FTIL, including Jignesh Shah, who was arrested in May and later released on bail, as his firm failed to repay investors who lost their money in the scam. But there are many who feel the move would be unfair, as the two firms are unrelated, and it is unjust to punish investors in a software company like FTIL for what has happened in its arm NSEL, which was a commodities trading platform.

The Economic Offences Wing (EOW) of the Mumbai Police, which arrested Shah, had earlier said they had a watertight case against him, and his involvement in major decisions at NSEL, which led to the fraud, has been established. That may give the government some ammunition to pursue a proposed merger of NSEL with FTIL and a subsequent takeover of the latter. Investors who lost Rs 5,600 crore in the scam may be pleased to hear that, since in the 15 months following the scam, only 6 per cent of the money has been repaid. When news of the proposed merger broke out, they rejoiced. FTIL has reserves of Rs 2,400 crore, according to them, which could be used to pay back investors partly. A takeover, they believe, will also prevent any move by the promoters to siphon off money, as alleged by aggrieved investors. In fact, some investors believe the government should have first taken over FTIL and later merged it with NSEL.

However, there is another section of people who argue that it is not in the interest of FTIL investors that they be penalised for no fault of theirs. The company’s shares fell 3.11 per cent by noon on the BSE on Monday, following news reports on the government takeover move. Some feel that while the government is just in pursuing its case against Shah, and is well within its right to probe his role in the scam and penalise him, merging a tainted company with a software firm will harm both the companies. While a section of the media is drawing a parallel with the Satyam scam, the difference here is that the promoter is yet to admit any fraud on his part, and is rather blaming his executives. Investigation into the scam is on, but needs to be strengthened by ensuring better co-ordination between the investigating agencies – the Mumbai police, the Central Bureau of Investigation and the Enforcement Directorate -  as requested by the NSEL Investors’ Forum. It would be appropriate for the government to intervene only when the investigation is complete. Its first priority should be to ensure defrauded investors get their money back, and in full. The rest could wait.