This is a story where a rapid rise led to arrogance and hubris which now appears to be ending in disgrace. Bollywood couldn’t make it up. Jignesh Shah, a man once threatened to become a colossus in world markets, is, as I type, awaiting another bail hearing having been held on remand for some weeks.
The FTIL founder’s fall from grace has been swift and broadly enjoyed by many in the financial community...or as I termed it: “Shahdenfreude” thrives on news of Jignesh’s demise.
The cause of his problems are still not fully resolved although already his empire has shrunk vastly. The Singapore Mercantile Exchange was sold to ICE while the Multi-Commodity Exchange (MCX) stake has been almost entirely sold with more to come on the back of regulatory pressure.
The downfall of Jignesh Shah will doubtless occupy Indian business schools for years to come but it is a valid case study for the whole world and worthy of much greater discussion. National Spot Exchange Ltd (NSEL) was the venture which eventually brought the Shah-sphere tumbling down. Originally, India had been building out a network of spot commodity markets, all part of the attempt to, quite sensibly, replace a bloated incompetent central government regime with a proper free marketplace. Good for farmers, taxpayers and consumers: a win win all round.
However, somewhere on the road to a good place it seems pavings of hellish intentions prevailed. Forward contracts were developed that neatly skirted around the main commodity regulator, FMC, generating all manner of quasi-structured products promising healthy returns, all neatly backed by commodities safely tucked up in lovely warehouses.
One tricky issue was that commodities often weren’t safely within warehouses. Rather existentially, frequently the warehouses didn’t exist. Needless to say it was all bilateral and bereft of a CCP clearing house. Thus a remarkable billion dollar carousel of trades built up and in August 2013, the music suddenly stopped.
Chaos ensued and the wonderful Indian press have devoted countless column inches to the NSEL crisis, quickly rebranded as a scam and now a veritable saga.
Anyway, investors claimed they were offered remarkably high guaranteed returns from the NSEL forward contracts - which remains the financial equivalent to ‘the mythical unbreakable cannon ball hitting the immovable post’ conundrum. One former Indian regulator began his analysis ‘pith perfectly,’ remarking on “NSEL investors, who seem strangely gullible but greedy...”
Jignesh Shah didn’t know a thing of course. We are clear on that because he has at all times claimed profound ignorance of the entire NSEL affair...blaming everything on former CEO Anjani Sinha. Frankly the idea that an almost totally FTIL owned subsidiary could operate so freely without recourse to an owner reputed to have a gift for micromanagement… Well, let’s say it is surprising, to put it mildly.
While not resolved, there have been encouraging signs after a sluggish start. The Mumbai Fraud Squad (EOW) has heroically attached vast sums of assets which will likely make up a lot of the shortfall. Asset auctions will hopefully commence soon. Meanwhile a great many brokers eagerly pinned the blame on the exchange. Soon multiple questions about their own probity. Arrests, bankruptcies and defaults have followed. Whether the idea that some brokers blamed exchanges first while ignoring their own failings is a unique facet of Indian markets, a factor of globalisation or a unique myopia for the sell side, I will leave readers to decide for themselves.
Whether or not he emerges from his several months on remand in the near future, the outlook for Jignesh Shah in financial markets looks bleak. His company remains on the hook for the NSEL shortfall (definitely less than 900 million but probably three figure millions). That’s before we consider possible punitive damages and judicial penalties. His market credibility can safely be presumed to have taken a significant hit. The threat of criminal charges also hangs over Mr Shah although India could take years to resolve the charges.
Finally, a word for the regulators. In true Indian bureaucratic style, they have created multiple shareholder restraints which further precludes the Indian exchanges being part of a vibrant stockholder environment due to all manner of outmoded and ill-considered stake limits. This has not been India’s finest hour.
Patrick L Young (patrick@DerivativesVision.com) has chronicled the NSEL affair daily via ExchangeInvest.com and looks forward to chairing the Mondo Visione Exchange Forum 2014 on November 12th.