FTIL chief Jignesh Shah arrested, but why are brokers left free?

Like all Ponzi schemes, NSEL scam was a money making opportunity that went unnoticed for a long time.Those joining and abetting the scheme are participants and not victims. 

The country has seen various scams over the last 20 years but the recent NSEL scandal of over Rs 5,000 crore ( Rs 50 billion) stands out for various reasons.

It is probably the first time an exchange has been accused of perpetrating a financial crime unlike other scams that involved a nexus of rogue investors, company promoters and financers. 

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For an exchange to commit a fraud of such magnitude, it would need the help and active participation of multiple layers.

Members need to be convinced to take membership of the exchange.

These members, in turn, would be required to bring in ‘anchor clients’ who would trade and help finance the financial product.

It would have been impossible for NSEL to pull off the scam without the help of others.  

Financial products of the kind that were being traded need to be explained to the members and clients before they are convinced to participate.

In other words, the entire gameplan and how money will be made has to be clear on day one before a rupee is invested. NSEL case was no different -- everyone knew what was being traded and how money would be made.   

A Business Standard report says that Jignesh Shah, promoter of Financial Technologies and allegedly the brain behind the payment crisis, used the NSEL’s system to launch a’ vyaj This ‘vyaj badla’ system (which is basically a risk-free arbitrage financing product that was in use in the stock markets before Futures and Options were launched) generated returns to the tune of at least 14-18 per cent and during times of high volatility, it was known to have given 30 per cent returns.  

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Brokers and their clients actively participated in the game and made a good amount of money till the government decided to stop it.

Everyone involved in the game knew and should have known of the risk involved. A Business Standard report says that broking houses went a step further and used to frontrun trades and change client’s code to benefit themselves. 

Investigating agencies have finally taken Jignesh Shah, promoter of Financial Technologies into custody, ten months after the scam broke out.

With this, the total number of arrests has gone up to 11. All those in the dock have been working for Jignesh Shah.

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With the brain behind the exchange's payment crisis in their clutches, investigators are expected to spread the net wider.

Reports indicate that NSEL brokers will now face the heat and rightly so.

While Jignesh Shah’s employees had the vested interest of their company at stake, brokers and clients who are playing victim are equally to be blamed.  

In a game of greed, nobody complains as long as they are making money, but when the music stops you find the losers making the loudest noise.

D Arvind Mayaram, secretary of Department of Economic Affairs, whose panel submitted a fact-finding report to the FM and PM, while meeting the ‘aggrieved investors’ asked them a simple and direct question: "You are high net worth individuals and well informed; why did you trade on the NSEL?" The only reason these investors did, was the lure of earning an assured 14-18 per cent.

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Nearly 200 brokers are said to be involved in the scam, and the list includes some of the big names in the broking industry.

Though on the monetary front there is unlikely to be a spillover effect on the stock markets, in terms of reputation and legal scrutiny, there is no reason why these brokers should not face the heat.

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But the role of government and monitoring agencies also needs to be scrutinised. Forward Market Commission (FMC) had warned the government nearly a year before the scam broke out about the wrongdoings in the exchange, yet the government did nothing about it.

Warehouse receipts were issued and traded even though there was nothing in the warehouses.

These warehouses were supposed to be monitored by the government.

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The NSEL scam is like a Ponzi scheme, where only the person who started the scheme gets caught.

Every member of the Ponzi scheme is equally responsible for running it because he participates and promotes the scheme for his personal gain.

For a new member, the person who introduced him to the scheme is as much responsible as the promoter if his money is not returned. 

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It is only when new members stop joining the scheme that it is exposed.

Like all Ponzi schemes, NSEL scam was a money making opportunity that went on unnoticed for a long time.

This shows that those joining and abetting the scheme are participants and not victims, and are also to be blamed for the mess.