After more than a decade battling rivals and regulators, the bull run of billionaire Jignesh Shah comes to a catastrophic end

01 November 2014

ON 8 JULY 2003, Arun Shourie, then the minister in charge of privatising state-owned industries, made a remarkable speech in memory of Dhirubhai Ambani, who had died a year earlier. In a previous avatar as the editor of the Indian Express, Shourie had published a series of stories that characterised the Reliance founder as a buccaneering industrialist. That day, however, Shourie was looking through a different prism. “My acquaintance with Dhirubhai went through an almost 180-degree turn over the years,” he said. “I first learnt about him through the articles of my colleague S Gurumurthy. The point of most of those articles was that Reliance had done something in excess of what it had been permitted to do: that it had set up capacities in excess of what had been licensed, that it was producing in excess of those capacities.”

Shourie then described his turnaround, bolstering himself with laissez-faire logic: “Most would say today that those restrictions and conditions should not have been there in the first place, that they are what held the country back. And that the Dhirubhais are to be thanked, not once but twice over: they set up world-class companies and facilities in spite of those regulations, and thus laid the foundations for the growth all of us claim credit for today; second—and I am just paraphrasing Professor Hayek on how law evolves—by exceeding the limits in which those restrictions sought to impound them, they helped create the case for scrapping those regulations, they helped make the case for reforms.” In one short speech, Shourie had remoulded Ambani into an ideal to be emulated.

Four months later, Mukesh Ambani, the elder heir to the Reliance empire, put through a buy order for a gold futures contract, formally marking the beginning of trading at the Multi-commodity Exchange, or MCX, one of the country’s first electronic platforms for trading commodities such as metals and oil. The venture was created by Jignesh Shah, a 36-year-old entrepreneur from a middle-class Gujarati steel-trading family, who was already living Shourie’s message.

The Bombay cotton exchange, circa 1946. “Markets are an obsession,” Shah told the Financial Times. Their history fascinated him.
Margaret Bourke-White / The LIFE Picture Colection / Gety Images

Like Dhirubhai, Shah started small but dreamed big. He claims he read voraciously as a child—especially adventure books and the autobiographies of industrialists and innovators. Before he was ten years old, he apparently saw a path for himself. “I was very clear that I would do engineering,” he told the financial journalists Sucheta Dalal and Debashish Basu in 2006. “I don’t remember why, but I was very clear that I would do electrical engineering, after which I would go to the US, complete my MS, work there and later start my own business.” As early as 1995, he later told the Financial Times, “I thought that, though people were saying it was not possible, let me be a billionaire at under 40 years of age from India, doing business in India.”

Pursuing his vision over two decades, Shah created one of India’s few truly innovative companies, Financial Technologies India Limited, whose proprietary technology acts as the circulatory system for four out of every five financial trades in the country. In the process, according to government officials, rivals, and even colleagues, Shah cultivated regulators, took on bureaucrats and ministers who opposed him, and fought endless battles with competitors, successfully navigating—and at times manipulating—an environment plagued by bureaucratic apathy, cronyism and the abuse of political power.

For many years, Shah followed a trajectory similar to Dhirubhai’s. According to Forbes,at his peak, in 2008, Shah was the 1,014th richest person in the world, with a net worth of $1.1 billion. The following year, MCX overtook the venerable London Metal Exchange to become the sixth most active commodities bourse in the world, and saw more than $1 trillion in trades. Around the same time, Shah set up more than a dozen other exchanges in a string extending from Singapore to Botswana. “Jignesh used to compare himself to Jeffrey Sprecher of Intercontinental Exchange,” one of Shah’s earliest financial backers, who is a former director of Financial Technologies told me. “He used to say, ‘We both have the same initials. He is capturing the West and I will rule the East.’”

Today, this march has been rudely halted. In July 2013, the Indian government froze trading on one of Financial Technologies exchanges, the National Spot Exchange Limited, for violating the conditions of its charter. For over four and a half years, the NSEL had operated in the crevices between government agencies, seemingly regulated by multiple bodies, but effectively overseen by none. It became a merry-go-round of financiers and borrowers, spinning faster and faster until it went out of control. “Ultimately, a cheque bounced somewhere,” a senior journalist with a leading financial daily told me. “And the chain broke.” The shutdown led roughly two-dozen members of the exchange to default on payments worth nearly a billion dollars, leaving 13,000 investors in the lurch.

This May, Shah was arrested by the Mumbai Police’s economic offences wing on charges of criminal conspiracy and misappropriation relating to the supposedly illegal contracts traded on the bourse. A subsequent cascade of regulatory actions forced him out of almost every business he ever built. Then, on 21 October, two days before Diwali, the finance ministry invoked a rarely used legal provision that will force Financial Technologies to merge with the NSEL, of which it owns 99.9 percent. This will saddle Shah’s flagship company with the balance of the defaults—a burden that will likely crush it. On the day of the announcement, the value of Financial Technologies’ stock crashed by 20 percent, before the free fall was automatically suspended. Even Shah’s home in Mumbai’s seaside Juhu neighbourhood—15 kilometres from the middle-class suburb where he grew up—is now on the verge of being seized.

This May, Shah was arrested by the Mumbai Police’s economic offences wing on charges of criminal conspiracy and misappropriation connected to the NSEL default. A subsequent cascade of regulatory actions has forced him out of almost every business he ever built.

By all accounts, Shah—whose round face is capped by a quiff reminiscent of vintage Bollywood—has a keen sense for a certain kind of history. He particularly admires, and sees himself in, two kinds of people—institution builders and sharp traders. Every year, he reads the authorised biography of JRD Tata, and the Sony co-founder Akio Morita’s autobiography, Made in Japan. Another businessman he reveres is the nineteenth-century cotton and bullion trader Premchand Roychand, a founding member of the Bombay Stock Exchange, where Shah got his first job out of college. Roychand once issued a cheque for stock worth Rs 11.5 crore. “In 1994, when we calculated the present value, it worked out to Rs 850 crore—a single pay-in cheque of that much,” Shah told Dalal and Basu admiringly. What he didn’t mention was that Roychand went bust when the bubble burst on what was essentially an unregulated market, linked to commodities prices, that Roychand helped create.

Traders on the floor of the Bombay Stock Exchange in the early 1990s. Shah’s first job out of college was as an engineer for the bourse.
Robert Nickelsberg / The LIFE Images Colection / Gety Images

Shah told the Financial Times in 2007, “I eat, breathe and sleep markets; markets are a passion, markets are an obsession, markets are a hobby.” In a statement to the police after being arrested in October 2013, Anjani Sinha, the former chief executive of NSEL, said, “Jignesh Shah is a great visionary. He dreams big and then plans meticulously to implement it. He works with precision with zero tolerance for failures.” One wonders, then, why he let things go so wrong. “He would manage the tiniest detail, but then let an elephant pass,” the former director of Financial Technologies said.

Perhaps Shah’s millenarian self-conception got the better of his historical sense. Whatever the root causes of the NSEL crisis, however, he believes his success was ultimately unpalatable to certain entrenched interests, including the business elite of south Mumbai and powerful figures within the government. This perception is unlikely to be diminished by the fact that, even if he is personally unpopular, the businesses he built are not: titans such as the banker Uday Kotak are now snaffling up stakes in his companies.

At Rs 5,600 crore, the alleged fraud at NSEL is hardly the biggest in Indian history, and Shah does not directly owe even a rupee of it to anyone. His story is more significant for what it says about India’s attempts over the past quarter century to create a robust market economy fuelled by private enterprise. If Shah was once in the vanguard of that transformation, his current tribulations point to just how much farther there is to go: though he is now under judicial scrutiny, the weak regulatory framework that helped enable the whirlwind of unsecured trading at the NSEL still exists—and the institutions that are supposed to independently oversee the country’s financial markets remain mired in bureaucratic and political mismanagement.

|ONE |

FIVE YEARS AFTER MUKESH AMBANI inaugurated trading on the MCX, the parent company of the New York Stock Exchange picked up a 5-percent stake in Shah’s commodities bourse for $55 million. At the signing ceremony in New York, NYSE officials planned to present Shah with a limited-edition copy of the world’s first share certificate, issued in 1606 by a Dutch company involved in the Asian spice trade. Two days before the event, Shah learned of the gift, and decided to match it with a piece of Indian market history. He procured eight brokers’ badges from the days when exchanges such as those at Bombay and Ahmedabad operated face-to-face in trading pits, through the open outcry system—a system whose demise was sped in no small part by technology that Shah helped develop. Shah had the badges cast in metal and bestowed them on NYSE officials.

For Shah, the NYSE’s gift—and its multi-million dollar investment—was a rare sort of honour. When he graduated from Bombay University with an engineering degree in electronics and telecommunications and went to work for the Bombay Stock Exchange, in 1990, the BSE was looking to automate its trading. This was still in the long infancy of information technology, before the internet’s global spread; buying and selling at the then 120-year-old exchange took place in person, in the rotunda of Jeejeebhoy Towers, on Dalal Street in south Bombay—an area roughly the size of a basketball court, beneath an illuminated dome. The automation project was meant to be a virtual expansion of this trading floor. In interviews, Shah has claimed he did not know anything about financial markets at the time, though he soon became fascinated by them, and by India’s history of commodities trading, which he studied in the BSE library. In 1993, the BSE sent him and several colleagues to study electronic markets abroad. He toured the NYSE, and exchanges in Tokyo and Singapore, as they shifted from pits to electronic platforms—an experience that helped sow the seeds of his success.

The advent of internet technology was only part of the change sweeping through India’s financial sector in the mid 1990s. The BSE’s automation had gained new urgency the previous year when the stockbroker Harshad Mehta was arrested for a Rs 50-billion fraud that involved manipulating the value of the exchange. In the fallout, the brokers running the bourse came under fire for their cabalistic control over the country’s stock market. The government responded by hewing to the course of liberalisation it had set in 1991 under the then finance minister, Manmohan Singh. Instead of moving to nationalise the BSE, as earlier regimes might have done, it broke the bourse’s monopoly by creating a modern competitor, the fully automated National Stock Exchange, and an independent regulator, the Securities and Exchange Board of India.

The NSE was officially recognised as a stock exchange in April 1993. To stay competitive, the BSE was forced to pick up the pace of its modernisation. That September, Shah returned from his trip abroad, and began work on the BSE’s online trading system. The plan was to connect traders from across the country via VSAT, a satellite communication technology similar to the one used for direct-to-home television broadcasts. Originally, the BSE envisaged that each of its satellites would serve only three computer terminals. Shah thought that was ridiculous. “What was the point in having just three connections per VSAT?” he wondered, according to an engineer who worked on the project. “How many VSATs can a broker afford? If the idea was to get as many brokers as possible to connect to the exchange, they should have three thousand or more connections per VSAT.” In addition, to trade between the BSE and its competitor, as brokers now expected to do, would require separate satellites linked to separate sets of computer terminals. The necessary infrastructure would be massive and cumbersome.

It was the kind of technological difficulty that hid a fortune behind it. Shah proposed to create a network of linked computers that would increase the speed and efficiency of the market. A broker could add as many terminals per VSAT as he required, and both bourses would be available on the same terminal. In less than a second, information from thousands of traders across the country would be pumped into, between and out of the exchanges with complete accuracy.

This was a radical proposal, but the BSE had also allowed external companies to bid for the project. It eventually outsourced its modernisation to the Computer Maintenance Corporation, a state-owned company that was later bought by the Tata group. It had missed the fortune that Shah spotted.

FT TOWER, an impressive nine-storey glass-and-concrete office block in the Mumbai suburb of Andheri, was inaugurated in 2010. This is the corporate headquarters of Financial Technologies, the only business Shah may retain control of in the aftermath of the NSEL payments crisis. Next door to FT Tower stands Exchange Square, which houses the MCX, the NSEL, and another trading platform, the MCX Stock Exchange, or MCX-SX, which started operations in 2008. These bourses were once Shah’s most lucrative ventures, but in July this year Financial Technologies agreed to sell its remaining stake in the MCX to Kotak Mahindra Bank, and Shah is also being forced to divest from many of his other exchanges.

In mid September, I visited FT Tower to meet with a company director. A month earlier, after more than one hundred days in custody, Shah had been released on bail by the Bombay High Court. In the lobby, I was greeted by a guest-relations officer who ushered me briskly up to the ninth floor, where Shah and several of the group’s top officials, including the chairman of MCX, Venkat Chary, have their offices. I was shown into what looked like a cocktail lounge—beige leather sofas, shelves of champagne, imported wine and single-malt whisky, and a bar faced with slabs of onyx made to glow like fire by hidden lights. “This is our media room,” my escort said. A uniformed butler in a dollar-green waistcoat waited nearby for orders. Eventually, the director came in. Over the course of several hours, we spoke about Shah and the rise of Financial Technologies.

On 1 January 1995, Shah paid the BSE Rs 15 lakh to break his contract, and the contracts of two colleagues—Dewang Neralla and Ghanshyam Rohira. Neralla and Rohira were among the best programmers in Shah’s cohort at BSE; to get them on board, he had to convince them to turn down offers from Wall Street firms (and the US visas the jobs came with). Shah himself turned down an offer with the financial-services giant Merrill Lynch. According to one of Financial Technologies’ officials, Shah kept evangelising his idea for a start-up: “He kept saying, ‘What will you do in the US? All the action is going to be here.’”

The three men set up shop in a 250-square-foot space on the mezzanine of an office in Fort, an area dense with corporations, banks and the towering BSE building. Most technology start-ups, including big multinationals entering India for the first time, preferred to be in Andheri, which has a special economic zone, complete with modern communication infrastructure and tax concessions. Fort was expensive and the space was cramped, but it had one great advantage. “If a client called, we could be in their office in 15 minutes,” the director said. “Those in Andheri would take at least an hour and half to reach.” Giving face time to clients was a crucial edge for a new company competing with giants such as IBM, TCS and Teknekron. But the biggest challenge was building a product that could handle a multi-billion-dollar stock market beating at roughly ten thousand transactions per second.

During the BSE’s modernisation, Shah and his colleagues had been able to scrutinise the competition. “Even global players like Teknekron and Compaq lined up for the beauty parade,” the Financial Technologies official said. “We had the advantage as a client to go ahead and dissect their systems.” A key component of these was the information bus, a software program that consolidated transactions from across the market on a single screen, in real time. The most popular one was built by TIBCO—a Silicon Valley company owned by another tech wizard from Mumbai, Vivek Ranadivé—which had digitised most of the brokerage firms and trading floors on Wall Street.

Shah was inspired by what TIBCO had done in the United States, but Financial Technologies could not afford to license its information bus in India. So the company wrote its own programme. They called it the “Baba Bus,” after Rohira, who was said to behave like a hermit. His bus was a far-sighted piece of code, written for TCP, a new internet communication protocol that was unsettling the established technology, X.25. “It was a call we took at the time,” Neralla said. “And we were proven right.”

Meanwhile, Shah was spending hours at brokers’ offices, building relationships and trying to understand more about what they wanted in a trading terminal. In his statement to the police following his arrest, the former NSEL chief executive Anjani Sinha said that, while working at the BSE, Shah had spent more time buying and selling on the exchange than developing its electronic platform. “He used to share with us so many stories relating to his trading experiences at BSE,” Sinha said.

Shah understood that traders were constantly on the lookout for opportunities to arbitrage—buying stocks in one market to resell at a higher price in another. These opportunities pop up continually but often only very briefly, in different places, like bubbles at the surface of a glass of soda water. Because of the frequency of their trades, arbitrageurs also build trading volumes, making exchanges more active and thus more profitable. When Financial Technologies launched its marquee product, the broker terminal software ODIN, it had two unbeatable features. First, traders could see both the NSE and the BSE simultaneously on the same screen, allowing them to arbitrage effectively between the two exchanges. Second, trades could be made swiftly even over a dial-up connection as slow as 2.4 kilobits per second. This meant that the long tail of traders without cutting-edge internet connections could also take advantage of arbitrage opportunities. In addition, many of Financial Technologies’ competitors were using the expensive Unix operating system; Shah and his team went with Windows, which made ODIN cheaper, lighter and easier to install than other trading software. It was a boon for brokers and bourses alike.

Even though they had developed the technology, there were still hurdles to cross, the director said. Financial Technologies had to register itself with the NSE, which required it to secure bank guarantees worth Rs 50 lakh—a huge sum for a start-up in the late 1990s, when banks were still being buffeted by the Asian currency crisis that broke out in mid 1997. “Luckily, we had a friend in the commodities market whose father-in-law had good contacts in Union Bank. He helped us get a bank guarantee on concessional terms,” another Financial Technologies director said.

Before ODIN could connect with the NSE, the exchange also needed to open up its programming interface to allow the software to connect with its platform. Even though it also owned a competing company, the NSE agreed to give Financial Technologies access. It was the last time the NSE cooperated with Financial Technologies, the director said.

Neralla made the first installation of ODIN on 29 April 1998, for a Gujarat-based broker called Growth Avenues that hoped to become India’s Charles Schwab, the mammoth US brokerage firm. “Speed was important. The entire thing was up and running in maybe four hours,” a Financial Technologies official said.

Speed also won Financial Technologies its crucial business breakthrough. ICICI was looking to launch ICICI Direct, an online platform that would allow its clients to trade from home. According to two Financial Technologies directors, the bank was inclined to go with a particular multinational company—but it was also keen to be the first institution to offer this service, and it knew that others were in the race. Shah apparently persuaded ICICI to hold an impromptu competition: the multinational and Financial Technologies would bring their systems to the bank’s headquarters the next morning, and whoever was able to connect to the exchange faster would get the contract. Financial Technologies won the competition, and the contract, hands down.

Shah then scored a branding coup. He convinced ICICI to declare that its platform was “powered by FT engine”—a message that every trader would see on screen. The next year, Financial Technologies claimed 18 of the twenty trading-platform deals in the Indian market. Since then, in every product that Shah has created and every market he has entered, the emphasis has been on arbitrage—across time, geography and regulations.

|TWO |

OF ALL THE DOMAINS OF THE INDIAN ECONOMY, by far the most unreformed is India’s agricultural sector. In most states, restrictive laws have put farmers of certain agricultural commodities in thrall to local oligopolies with the power to dictate prices. These polices have remained largely beyond central reform. For other agricultural products, massive government subsidies have kept consumer prices artificially—many would argue unsustainably—low. This has prevented the development of the sort of market in which small and medium-sized farmers can flourish, long-term commercial relationships can develop, and realistic prices can emerge. Businesses and governments have been reluctant to make the sorts of investments in infrastructure that would help keep prices stable and allow the sector to thrive. In a country where two-thirds of the population still relies on farming for its livelihood, these issues are particularly acute, though they don’t admit of easy solutions. Ultimately, however, if the country wants a modern liberal economy that extends to the agricultural sector, a healthy commodities market is of existential importance.

Although the economic liberalisation initiated in 1991 brought change to some parts of the economy, official approaches to the agricultural sector were ambiguous and often contradictory. By 1994, reforms across the economy had ground to a halt in the face of growing political instability within an alliance government led by the Congress party. Two years later, a rickety coalition came to power under HD Deve Gowda that included many parties critical of the thrust of Manmohan Singh’s policies. The opposition Bharatiya Janata Party, ostensibly committed to swadeshi economics, was the largest single party in parliament. Against this backdrop, on the last day of February 1997, Gowda’s finance minister, P Chidambaram, gave a rousing budget speech; among other reforms, he called on state governments to follow the centre’s lead on agriculture and “abolish as many controls as possible.” A decade later, the economist Swaminathan Aiyar wrote that Chidambaram’s reformist vision—widely hailed as the “dream budget”—was “so compelling that it was adopted by all successive governments.”

The then finance minister, P Chidambaram, opens equity trading on Jignesh Shah’s stock exchange, the MCX-SX, in 2012.
Paul Noronha / The Hindu

The year after the dream budget, Atal Bihari Vajpayee came to power at the head of a BJP-led coalition. Within months, his government initiated a plan to set up an electronic exchange for commodities futures—contracts in which buyers pay for goods that are delivered up to several months later. The goal was to create a nationwide market that would help the agricultural sector hedge against price instability by fixing the value of crops and other goods in advance of their production. From the beginning, however, the government’s attempts were marred by an opacity—at the level of both policy and process—that has since come to characterise many of the country’s attempts to establish and regulate markets. At the centre of this morass, for nearly a decade, has been an escalating rivalry between Financial Technologies and the NSE—a contest that has derailed government policy and hampered the regulatory process.

Things got off to an inauspicious start when Vajpayee’s government invited several institutions to apply for a licence to start an exchange. According to Narendra Gupta, ICICI’s chief of strategy at the time, the process was informal and lacked clear guidelines. Ultimately, this and several other irregular attempts to start an exchange floundered.

In 2001, the government finally initiated a more open, formal application process for nationwide commodity exchanges. Financial Technologies, and a second consortium led by the NSE and ICICI, were among the applicants. But neither was successful. Gupta, who was leading the consortium’s efforts, said its application was rejected by the consumer affairs ministry because ICICI was majority-owned by foreign investors. Financial Technologies was told its proposal was not concrete enough.

Shah was livid. He told Sucheta Dalal and Debashish Basu in 2006, “I went and asked the concerned officer and he said, ‘Yours is in the proposal stage,’ to which I said, ‘But you asked for proposals. You can’t expect me to invest 30 crore without a licence.’ He said, ‘No, we don’t want to take risks.’ We aggressively followed up with the economic advisor, secretary, joint secretary and the minister.”

Gupta told me his company also kept pushing for a licence: “We were in Delhi every other day, meeting people in the ministry and the Prime Minister’s Office. But for over a month, the minister”—Bihar’s Sharad Yadav—“did not relent and kept the file with him. The file even travelled with him.” After about six weeks, Gupta heard that Yadav had finally given the green light to the company’s bourse, which became the National Commodities and Derivatives Exchange, or NCDEX.

According to Shah, it was a World Bank consultant who eventually stepped in and advised the government that four applicants—including Financial Technologies and the NSE consortium—should be allowed to create competing exchanges. “Finally,” he told Dalal and Basu, “on 14th February 2003, we made it.”

IF SHAH WAS KEEN TO BUILD HIS OWN EXCHANGE, perhaps one of the reasons was Financial Technologies’ balance sheet. Although the company began the millennium as the market leader in trading software—according to its website, more than ten thousand traders had licensed ODIN by 2004—it posted losses of more than Rs 9 crore in fiscal year 2002, and had written down its capital by more than Rs 18 crore. According to the police statement made by Anjani Sinha, the losses were “incurred in international ventures.”

Shah knew that an active electronic bourse, charging a fee for every transaction made on the platform, would be a cash cow. In an interview to Business Standard in 2005, he said that his aim when he started Financial Technologies was to create products that would “attack all high-transaction-density markets, whether commodity, equity, currency or bond.” Creating the market itself was a logical next step.

Gaining first-mover advantage over Financial Technologies’ competitors was essential. “We knew we could not take on the NSE on equity”—the stocks traded on that bourse and the BSE—“because once an exchange establishes liquidity and volumes, it is very difficult to shift,” the Financial Technologies director I met at FT Tower told me. “In the exchange business, equity is just 13 percent, and others such as currency and commodities form the rest, which is where we wanted to enter.” The NSE, he added, “was hell-bent on stopping us.”

In November 2003, a month after the MCX opened trading, the NCDEX also went live. From the beginning, they were two very different beasts. While the NCDEX focused on agricultural futures, the MCX built up contracts in commodities such as gold, other metals and oil, which were heavily traded on international exchanges.

For Financial Technologies, it was a canny move. By mirroring the contracts of foreign markets such as the London Metal Exchange and the New York Mercantile Exchange, the MCX’s prices would follow international trends. This had several important consequences. First, it meant that the exchange was extraordinarily unlikely to be charged with price manipulation—an accusation that would otherwise have been easy to fling at a start-up with no experience in the commodities business. This helped the MCX gain immediate trust with brokers. But the closely pegged contracts also created a huge volume of relatively risk-free arbitrage opportunities, because traders could take advantage of momentary discrepancies between the MCX and its various international analogues while remaining confident that local prices would soon gravitate toward their international benchmarks. Because of the time differences between Mumbai and the West, these opportunities continued late into the night, and the MCX stayed open until 11.55 pm to let traders exploit them.

Its choice of commodities, its appeals to traders, the mirror contracts—all this gave the MCX a huge edge over the NCDEX when it came to recruiting members and generating trades (to say nothing of transaction fees). This raised the hackles of its competitor, which complained to the government that Shah’s exchange was doing nothing to help determine prices, an integral function of markets. “Nowhere in the world would you find the contracts of one exchange traded on another,” a former NCDEX official told me. “But here the regulator allowed it.” Within three months, Shah’s exchange had a turnover of Rs 100 crore; within seven months, Rs 300 crore. By the end of 2006, its turnover in a single day sometimes crossed Rs 9,000 crore—three times the business its competitor was doing. In a forensic audit report conducted in the wake of the NSEL payment crisis, the accountancy firm PwC stated that from 1 April 2003 to 31 March 2012 a quarter of Financial Technologies’ revenues came from the MCX, peaking at Rs 141 crore in financial year 2013.

In contrast, the NCDEX had focused on the risky, difficult task of building a marketplace for agricultural commodities. This was, after all, the role the Vajpayee government hoped the exchanges would play. By and large, agricultural commodities are perishable goods whose prices are determined by domestic factors, including the various economic regimes and oligopolies at work in different states. The NCDEX had to keep an eye on the quality and quantity of commodities from all over the country, and ensure that they were available in approved warehouses at the contractually stipulated time of delivery. Its trading volume was slow to develop, while its operating costs were comparatively huge. At one point, the NCDEX was blindsided by accusations of price manipulation, and then of substandard delivery. This cost the managing director and business head their jobs, and damaged the bourse’s credibility.

One commodity in particular became the focus of antagonism between the two exchanges. The economist Madhoo Pavaskar has advised several futures exchanges in the country, and was highly influential in shaping Shah’s bourse. “I advised him to start with bullion,” Pavaskar told me. “At the time, there was a lot of informal bullion trading in Mumbai that ran into lakhs of crores. That could move to the exchange platform.”

Shah did his homework. He and his team spent six months meeting jewellers and gold merchants in Mumbai’s Zaveri Bazaar and Delhi’s Meena Bazaar. They found that, unlike the 24-carat gold traded internationally, Indian jewellers preferred 22-carat gold. Shah and his team also developed creative answers to technological challenges. The Indian Bullion and Jewellers Association is located in Zaveri Bazaar, the biggest gold market in the country. The bazaar is a congested warren, and the association’s merchants operated out of tiny rooms that were impossible to connect to the exchange via satellite. Financial Technologies contracted with Reliance Communications to install a small microwave antenna on top of the association’s office building, and connect the merchants’ terminals using what was essentially a mini telephone exchange. The merchants could now trade on the MCX without leaving their burrows.

The NCDEX arguably showed less sense. According to its former official, it originally launched a 24-carat gold contract that—perhaps predictably—failed to attract traders. When the exchange switched to a 22-carat contract, the MCX accused it of violating its copyright. According to the Financial Technologies director, the NCDEX had plagiarised their contract, “including even the spelling mistakes.” The MCX protested to the government. “We argued that we should at least be given a 66-month lead time, but it refused.”

The NCDEX now turned aggressive, slashing transaction charges on gold trading. The Financial Technologies director said the company again complained to the government, but was ignored. Acrimony between the two exchanges grew. Finally, a meeting was called at the Taj Land’s End hotel in Mumbai’s Bandra area. According to a former MCX official, its rivals refused to yield on free trading in gold. But the former NCDEX official—who claimed that his company called the meeting because competition between the bourses was becoming overly aggressive—said Shah kept raking up frivolous issues. “He made sure that there was no compromise.”


ON 9 SEPTEMBER 2013, as the ramifications of that July’s NSEL payments default were still becoming clear, the economist Ajay Shah posted a short opinion piece on his blog. Shah is a professor at the National Institute for Public Finance and Policy, and served as a consultant to the finance ministry between 2001 and 2005. In the piece, he said that the country had a “crisis on our hands,” and called for a merging of India’s two most important financial markets regulators—the Securities and Exchange Board of India, or SEBI, which oversees securities, including the shares of publicly traded companies; and the Forward Markets Commission, or FMC, which oversees futures.

Policymakers and economists had been debating the advantages of a unified regulator since the 1997 currency crisis. By 2003, “we were well on our way on getting this done,” Shah wrote. “However, once the UPA government came to power in May 2004, and Sharad Pawar became the minister in charge of Consumer Affairs, it became infeasible to shrink his turf. By that time, substantial commercial interests had developed which wanted to preserve the existing arrangement, with regulatory capture of FMC.”

Regulatory capture is a case of gamekeeper turning poacher—of a public body controlled by the industry it is supposed to oversee. In 2004, the two main exchanges regulated by the FMC were the rival bourses of the NSE and Financial Technologies. For anyone familiar with Ajay Shah’s opinion pieces, it would have been clear that he meant that interests aligned with the MCX were dominating the FMC. If he didn’t come straight out and say this, he had good reason. Financial Technologies had had him in its crosshairs since at least 2009, when he wrote an article in the Financial Express essentially alleging that the commission had been captured by Financial Technologies and the MCX.

At the time, Ajay Shah was a board member of the NCDEX. Jignesh Shah’s exchange quickly slapped a defamation suit on him in a Mumbai court. Over the next two years, Jignesh Shah’s companies filed two more suits against Ajay Shah, one in Kolhapur and one in Surat—not the easiest places to make court appearances for someone based in Delhi. One of the cases is stalled on a technicality, and another was quashed. The third is set to be withdrawn after the MCX board recently decided that the litigation was costing too much.

In the course of reporting this piece, I interviewed roughly thirty industry players, including regulators, retired and serving bureaucrats, and a former minister. The picture that emerged was clear but contested. There was a widely shared opinion that the finance ministry, which oversees SEBI, was allied with the NSE and the NCDEX. Likewise, the consumer affairs ministry, which oversaw the FMC, was seen as favourable to Financial Technologies and the MCX. This state of affairs largely persisted until the commission was brought under the finance ministry in September 2013. But in response to every accusation of undue influence came a volley of denials and counterclaims.

When it came to accusations against Jignesh Shah, the former NCDEX official I spoke with was the most categorical. “Jignesh had the FMC eating out of his hands,” he claimed. “They just wouldn’t hear us.” If the NCDEX applied to introduce new contracts, the regulator wouldn’t even register it, he said; but within a couple of days, the MCX would apply, and its proposal would be cleared like a shot. “The person who used to do that eventually joined the MCX,” he said, without naming the bureaucrat in question. In early 2009, the FMC stepped in on the gold dispute and forced the NCDEX to raise prices. A top official at the FMC told me that the MCX may have received favours in the past, “but I don’t think the FMC was so compromised that it would do anything that the MCX wanted.”

It’s true that many of the senior officials in the Financial Technologies group had close relationships with regulators and politicians. Venkat Chary, the company’s chairman, was a principal secretary in the Maharashtra government when Sharad Pawar was the state’s chief minister, and had also been the chairman of the FMC. Rohit Khatua, the vice president of institutional relationships at the MCX-SX, is the son of BC Khatua, another former chairman of the FMC. Ashok Jha, the chairman of the MCX-SX, was formerly the secretary of the finance ministry’s economic affairs division, which now oversees the FMC. A handful of other Financial Technologies officials also served in the government.

Of course, proximity doesn’t equal impropriety. The Financial Technologies director I spoke with denied that the group enjoyed political patronage. Instead, it “lacked expertise,” so it hired “top notch talent with impeccable credentials and integrity,” he said. “Do you think people like Venkat Chary and Ashok Jha will do anything out of line?”

He added that the group didn’t feel the need to have relationships in the government until mid 2007. That June, income-tax authorities raided Jignesh Shah’s offices and home. “That rattled us,” the director said. “We did not even know whom to call. We knew nobody even to check why we were being raided. That is when we decided that we should at least have some relationships in Delhi.”

Two directors in the Financial Technologies group told me Shah had the backing of several top politicians and bureaucrats in key ministries. According to them, these bridges were built and maintained by Sunil Khairnar, a close friend and business associate of Shah who became involved with the MCX around 2006. The PwC audit following the NSEL default found that nearly Rs 18 crore had been transferred from the MCX to various companies owned by Khairnar. It could find no valid reason for the payments. The Financial Technologies director told me that two-thirds of the money was for corporate social responsibility initiatives, and the rest was for Khairnar’s advisory services.

Two people in the Financial Technologies group who worked with Khairnar told me that he ran the group’s entire Delhi operations. Shah had so much confidence in Khairnar that company officials were told that if they had any work to be done in Delhi, it should be done through him. “Shah even instructed them that they should share their Delhi itinerary with Khairnar, and when they meet government officials they should take him along,” one of the Financial Technologies officials said.

The Financial Technologies director argued that if the group really did have such powerful connections, “this sort of thing”—the criminal charges, arrests and corporate takeovers—“would not be happening.” He said company officials were asked to take Khairnar along to meetings because Khairnar had deep knowledge of the financial sector and was intellectually sharp. According to one senior bureaucrat, and to a Financial Technologies official, Shah merely created the illusion of being close to power.

WHATEVER THE CLAIMS MADE about Financial Technologies’ intimacy with the government, there are also allegations on the other side.

According to a former finance ministry official, the government became alarmed by the state of the electronic commodities exchanges in late 2007, when the prime minister received an IB note that warned of a growing monopoly: the MCX was handling nearly 90 percent of trades. At the time, Sharad Pawar, whose Nationalist Congress Party was a crucial member of the UPA coalition, headed the agriculture and consumer affairs ministry, which oversaw the FMC. As a result, it would have been difficult even for the prime minister to influence the commission, and thus the exchanges. Instead, finance ministry officials were sent to speak with the directors of banks and financial institutions who owned stakes in the NCDEX. They told the ministry that the bourse was hamstrung because there were too many owners. One of them called it the “Draupadi Exchange.”

The finance ministry decided to pursue a strategy similar to the one it had used in the early 1990s, when it broke the monopoly of the BSE: it moved to strengthen the MCX’s competition. In a confidential note on the subject, dated 19 December 2007, KP Krishnan, then the joint secretary in charge of capital markets, wrote: “In the last fifteen months NCDEX performance has suffered significantly. The decline has been quite sharp in the last few months and all the indications suggest that the situation is set to worsen.” Over the past two years, he went on, the NCDEX’s overall market share had dropped from more than half to barely 13 percent. “The view of many key shareholders and directors is that the only way to revive NCDEX,” he continued, was to ensure that the NSE took “an active role in the management” of its younger sibling.

In a confidential 2007 note, the bureaucrat KP Krishnan asked the government to strengthen the private-sector NSE.

He added, “A key perquisite for this is for NSE to become the single largest shareholder in NCDEX.” At that time, the NSE had a 15-percent stake in the commodities exchange, as did two state-run companies—the Life Insurance Corporation of India, India’s largest insurance company, and the National Bank for Agriculture and Rural Development, the country’s apex development bank. Krishnan recommended shifting this balance by requesting that the public-sector companies sell a third or more of their respective holdings to the NSE.

“The immediate need for this,” Krishnan wrote, “arises from the desire to revive NCDEX which must be done as early as possible so as to provide credible competition to MCX.” The note was signed by the finance ministry secretaries Vinod Rai and  D Subba Rao, and by the finance minister, Chidambaram.

In June 2010, a Delhi-based lawyer named Jagannath Prasad unearthed Krishnan’s note using the Right to Information Act. This apparently brought the note to the attention of Sharad Pawar. According to the Financial Express, a displeased Pawar then wrote to the finance minister to complain that his officials had “expended considerable effort to prevail upon two public sector entities … to divest parts of their stakes in NCDEX in favour of NSE, which is a private company.” Two years later, Venkat Chary filed a formal complaint with the consumer affairs ministry, and various other authorities, including the prime minister, chief vigilance commissioner and the Central Bureau of Investigation.

The NSE website says the company was started by leading financial institutions at the behest of the government. But it makes no bones about being private. For example, it has gone to court to fight an RTI order from the Central Information Commission, contending that it does not come under the purview of the RTI Act because it is a for-profit company and not a government institution.

Jignesh Shah was furious when he came to know about the note. Although the proposed stake transfer never went through, Shah firmly believes that Krishnan has acted as an agent of the NSE and its offshoots. Pawar’s view was also echoed by the Financial Technologies director I interviewed. “The NSE has also played dirty,” he said. “It postures itself as a government company but doesn’t have an iota of government ownership. It is the only government-backed private monopoly in the country.”


"THE STOCK EXCHANGE BUSINESS is exploding the world over,” the financial journalists S Srinivasan and Pravin Palande wrote in the 21 May 2010 issue of Forbes India. “Global trading volumes have reached an unprecedented $500 trillion, or nine times the world’s GDP. Each transaction fetches a risk-free fee for the exchange. Volumes are growing at 20 percent a year and core profits … can be as high as 60–80 percent.” The article speculated that the $4-trillion turnover of Indian exchanges “could balloon to $10 trillion by 2014.”

While the rivalry between the MCX and the NCDEX was playing out, Shah had been working at full bore to capture some of this bounty. He began setting up his circuit of international exchanges. Around the same time, Financial Technologies and the MCX applied to SEBI for the right to start a national stock exchange, the MCX-SX. This bourse soon became the centre of yet another conflict between Shah and the NSE.

Within a year of its launch in the mid 1990s, the NSE had overtaken the BSE to become India’s biggest stock market, and had dominated this arena ever since. But in September 2008, SEBI gave the MCX-SX conditional permission to open currency-futures trading for one year. This brought the new bourse into direct competition with the NSE.

Forbes India pitched it as a battle between two very different pugilists. The NSE, Srinivasan and Palande wrote, “has an impeccable pedigree, with the country’s best-known public and private institutions as well as marquee foreign financial giants as its shareholders.” They continued, “On the other corner is MCX-SX, India’s newest stock exchange promoted by the Financial Technologies group of Jignesh Shah, a maverick businessman … To run the stock exchange he has put together a team of aggressive strategists and technology experts who share his love for a good fight.”

In the view of those close to Shah, that fight had erupted at least as early as 2007, when Shah’s home and offices were raided by tax authorities. According to them, the raid was engineered by his foes in the finance ministry to stymie the MCX-SX. The impression that the raid had ulterior motives was reinforced four months afterwards, when the finance ministry told SEBI that Shah, Financial Technologies and the MCX should be prevented from holding shares in stock exchanges at least until the income tax case was settled. Over the next four years, much of the contest between the NSE and Financial Technologies unfolded at the highest levels of the country’s stock exchange regulator, itself the object of important conflicts within the United Progressive Alliance government.

At the time of the raid, SEBI’s chairman was M Damodaran, a bureaucrat from the Tripura cadre. Towards the end of his tenure, which finished three months later, his relationship with the finance ministry, under Chidambaram, had deteriorated to such an extent that all communications broke down. Although Damodaran was eligible for another term, it was ultimately denied.

The process of appointing CB Bhave as SEBI chairman went against everything the regulator was supposed to be.
Goh Seng Chong / Blomberg / Gety Images

The process of replacing Damodaran went against everything that an autonomous SEBI was supposed to be. The search committee appointed to find a new chairman recommended two names, but none of them suited the finance minister. Instead, Chidambaram put forward the name of CB Bhave, the managing director of the National Securities Depository Limited, which stores investor’s shares in electronic form. Bhave hadn’t even been considered by the committee. He was a problematic choice: as head of the NSDL, he was under investigation for failing to stop a fraud connected to the initial public offerings of two retail banks. What’s more, the investigating agency was SEBI—the very regulator that Chidambaram nominated him to lead. Bhave himself tried to back out of the nomination, citing the threat of regulatory action hanging over his head, but Chidambaram insisted.

In response to an RTI request filed in January 2011, the finance ministry allowed me to inspect a letter from Prime Minister Manmohan Singh approving Bhave’s appointment. In it, Singh displayed a characteristic complacency. He began by making a compelling argument for extending Damodaran’s term: “The capital markets are passing through difficult times and in this background, any instability at the top would prove harmful to SEBI’s functioning as an independent regulator. Therefore, there is considerable merit in having Mr Damodaran continue as Chairman, SEBI, particularly since he is eligible to be considered for another term.” Several high-ranking members of Singh’s government had also praised Damodaran’s performance, the letter acknowledged.

But Chidamabaram had raised concerns about Damodaran’s willingness to row in the right direction, the prime minister wrote. The letter continues, “At a time when the capital markets are passing through considerable turbulence, it will not be desirable to have as chairman, SEBI a person who does not enjoy the confidence of the Finance Minister. Therefore, keeping in view the totality of all facts and the relative merits of the two candidates in the current scenario, I approve the appointment of Shri CB Bhave as Chairman, SEBI.” Bhave took over the regulator in February 2008.

That August, two months before the MCX-SX inaugurated trading of its currency futures, the NSE waived its transaction fees for similar contracts. Shah’s stock exchange was forced to follow suit. With a range of highly profitable contracts of other types already trading on its platform, the NSE could easily cross-subsidise its offer. But the MCX-SX had no other revenue streams, and was hit hard by the price war. It complained to SEBI, but the regulator was “uncooperative,” the Financial Technologies director said. Finally, SEBI told the group informally that it would not take any action, and that the MCX-SX should approach the “appropriate authority.” Eventually, the MCX-SX complained to the Competition Commission of India that the NSE was trying to exclude it from the market and kill off competition. The commission ruled against the NSE, and asked it to pay a penalty of Rs 55.5 crore. The case is now in the Supreme Court.

A month after trading opened on the MCX-SX, a small group of Pakistani-trained terrorists attacked Mumbai, holding parts of the city hostage for three days. As soon as the siege ended, Manmohan Singh’s cabinet was reshuffled. The home minister, Shivraj Patil, was replaced by Chidambaram, and Pranab Mukherjee, the Congress’s senior-most leader, took over the finance portfolio. Along with Mukherjee came his long-time advisor, Omita Paul, a powerful presence in the ministries that Mukherjee had previously headed.

In 2011, Omita Paul and Pranab Mukherjee allegedly began turning the screws on SEBI officials. Tremendous pressure was placed on the chairman to “manage” certain cases, the SEBI member KM Abraham wrote. The allegations were denied.
Sanjay Rawat / Outlok

When Mukherjee and Paul took over the finance ministry, Bhave was less than a year into his term. In the eyes of the Financial Technologies director and many of the group’s other executives, SEBI under Bhave was largely favourable to competition, though it eventually grew hostile to the MCX-SX.

Originally, SEBI had given the exchange a one-year licence on the condition that it would comply with the regulator’s ownership rules by the end of that period. According to the regulations, the promoters—Financial Technologies and the MCX—could not hold more than a 5-percent stake in the exchange, which also had to maintain a net worth of Rs 100 crore. This put the group in a quandary. Even if it acceded to relinquishing most of its stake in the new exchange, it could not raise enough outside capital; few people wanted to pay good money for shares in an unfledged bourse.

Eventually, the group came up with an unconventional, financially sophisticated workaround. Instead of raising funds by selling its shares in the exchange, it extinguised some of its shares, and issued warrants, which constituted only a future claim to ownership. This technically reduced the group’s stake in the MCX-SX and helped give the exchange the necessary valuation, while still preserving the exchange’s economic value for the promoters. “SEBI made a mistake,” the Financial Technologies director told me. “They did not anticipate that we could restructure the capital and still maintain the net worth.”

In June 2010, the reconfigured MCX-SX applied for a licence renewal, and sought permission to expand the range of its contracts. SEBI did not respond. The next month, the MCX-SX filed a writ petition asking the Bombay High Court to direct the regulator to make a decision. The court ordered SEBI to take a call by the end of September. In August, the regulator renewed the MCX-SX’s licence for another year. But then, on 23 September, seven days before the court’s deadline, the SEBI member KM Abraham passed a 68-page order rejecting the bourse’s application to expand into equities, the NSE’s bread and butter. The MCX-SX took the regulator back to court.

Shortly afterwards, Paul and Mukherjee allegedly began turning the screws on Abraham, and on Bhave’s replacement as SEBI chairman, UK Sinha. In a scathing letter to the prime minister dated 1 June 2011—six weeks before his term at SEBI ended—Abraham alleged that Mukherjee had unduly interfered with SEBI’s work, and that Sinha had come under tremendous pressure to “manage” some cases, including those of the Sahara Group, Reliance Industries, the Bank of Rajasthan and the MCX-SX.

“I am submitting the following with considerable anguish and pain,” Abraham told the prime minister. “I have been exposed to, what I believe sincerely, are attempts to harass and intimidate me in the discharge of my duties.” SEBI was “under duress,” he added, “and under severe attack from powerful corporate interests. … I believe these insidious attempts are orchestrated from the office of the Union Minister of Finance.”

According to Abraham, Sinha communicated to him, directly and indirectly, that pressure was coming from the “Big Man” and the “Lady”—that is, from Mukherjee and Paul. At one point, Sinha asked him if there was the “possibility of any compromise in the orders” that he had issued against Shah’s exchange the previous September. When Abraham explained to him that the matter was before the Bombay High Court, the chairman allegedly instructed SEBI’s legal director to let him vet the affidavit that the regulator would have to file. “I have never come across any instance and indeed it is extremely unusual for a chairman to express a desire to vet the affidavit to be filed on behalf of SEBI in High Court,” Abraham told the prime minister. (Based on Abraham’s letter, a public-interest lawsuit was filed in Delhi against Paul, but it was thrown out. Sinha also issued a vociferous denial, attributing Abraham’s letter to specific professional grievances.)

At another point in the letter, Abraham reflected that his three years heading investigations at the regulator had made him “deeply conscious of the fact that the securities market in India is still fragile. … Several attempts continue to be made by powerful groups to misappropriate wealth both individually and at a corporate level, exploiting the vulnerability of this fragile ecosystem.” All of this does not always result in scams, Abraham added. Most of it, he wrote, “gets finely obfuscated,” and is hence beyond “regulatory reach.” It was a prescient warning.


IN 2005, shortly after Sharad Pawar took over the ministry of consumer affairs and the process to set up a unified regulator for the country’s financial markets collapsed, Jignesh Shah established the NSEL. The bourse was initially promoted in public as the “National Spot Exchange for Agricultural Produce.” It was meant to fulfil many of the essential roles of a market, improving efficiency and reducing the cost of business by electronically linking buyers and sellers across the country.

On 5 June 2007, Pawar’s ministry issued a Gazette notification exempting all one-day contracts from the provisions of the Forward Contracts (Regulation) Act, 1952, the primary law governing India’s futures market. These “spot” contracts for commodities work in a similar way to cash-on-delivery transactions on Amazon or Flipkart; the contracts can only be traded on the day they’re issued, though payment for and delivery of the goods they represent can be made at some later point.

The ministry laid down two essential conditions for the exemption, which covered the contracts that were to be traded on the NSEL. First, there could be no short sales—selling something in the hope that the price will fall and you can buy it back at a profit. This is a high-risk form of speculation with a theoretically infinite downside. Second, all the trades eventually had to result in delivery. If honoured, these two stipulations were good enough to considerably reduce the risk that the bourse would function more as a casino for speculators than a marketplace for farmers, traders and processors of raw material.

But the exemption also seemed to place the NSEL and other spot exchanges beyond the ambit of any regulator. Because the contracts were for commodities, they did not fall within SEBI’s domain. But they were not technically futures, so they did not fall under the Forward Markets Commission either. And that meant no one outside the exchanges would know whether the ministry’s conditions were really being met.

In the months leading up to its launch, in 2008, the NSEL’s regulatory status came under intense discussion at the highest levels of the government. In early June, Chidambaram directed his subordinates in the finance ministry to assess the bourse’s oversight. A request for clarification was sent to the consumer affairs ministry. After two months of silence, KP Krishnan, then the joint secretary for finance, sent a reminder to the consumer affairs secretary, Yashwant Bhave. A week later, one of Bhave’s deputies wrote back to say that the ministry’s Forward Markets Commission had no jurisdiction over national spot exchanges. Neither did SEBI. On 15 October 2008, in the midst of this regulatory confusion, Shah’s new bourse went live.

Two days later, Chidambaram wrote directly to Pawar, expressing concern about the NSEL’s ownership. In response, Bhave wrote to his counterpart in the finance ministry. His letter, dated 2 November 2008, was a classic of bureaucratic ingenuity. It began by saying that the centre does not intervene in agriculture markets because that is a state subject, but added that the government has been “advising and guiding states in drawing up a broader and uniform contour of development and liberalisation of these markets.”

According to Bhave, the exchanges fell within the remit of state-level agriculture departments, which received reports on the bourses’ trading volumes and transaction fees. Therefore, Bhave said, “commodity spot exchanges cannot be said to be a completely unregulated entity.” This state-level supervision was hardly enough to detect fraud, but Bhave warned that any attempt to create national oversight for the bourses would “not be a desirable act.” Instead, he suggested the two ministries sit together to iron out the regulatory issues within this framework. But before any headway could be made, the government was thrown into chaos by that month’s attack on Mumbai.

For the next five years, the NSEL existed in a regulatory twilight zone created by the 2007 Gazette notification. The NSEL cleverly took advantage of this lack of oversight, using it to launch a range of highly profitable but potentially disastrous financial innovations.

ON THE OPEN MARKET, rice paddy is often sold in quintals, a unit of weight equivalent to 100 kilograms. If you buy a quintal of paddy from me for Rs 1,000, it’s a purchase. If you buy that same quintal hoping you can resell it in the future for Rs 1,200, it’s an investment. But if you buy that quintal from me for Rs 1,000 knowing you will sell it back to me in the future for Rs 1,200, it’s effectively a loan—I have just borrowed Rs 1,000 from you at an interest rate of 20 percent.

But now imagine the paddy you bought from me only exists on paper. If I fail to pay back the Rs 1,200 at the end of the loan period—if I default—then you’re out Rs 1,000, and all you have to show for it is a worthless receipt. However, if we trade through an exchange, then in addition to facilitating the deal—by bringing us together in a room, or across the internet—the bourse guarantees that the paddy is real. This was the basic idea behind the paired contracts—one for today’s purchase, and one for the future sale—that eventually sunk the NSEL.

There are a number of stories about how the NSEL developed this product. Some involve murabaha, a Sharia-compliant financial product that he learned about when trying to launch an exchange in Bahrain. Others involve a financing system called vyaj badla, which used to operate on the BSE. The Financial Technologies director told me that the idea was suggested by a Chennai-based private trust that works on financial inclusion as a way of providing short-term loans to farmers and agricultural wholesalers.

According to the legal definition of a spot contract in India, settlement—that is, payment for and delivery of the underlying commodity—has to occur within 11 days of a sale. Anything with a longer settlement period is considered a futures contract. In the eyes of the Forward Markets Commission, spot exchanges are not allowed to trade in these products, technically known as non-transferable specific delivery contracts, or NTSDs. But 11 days isn’t quite long enough for buyers to take full advantage of the financing opened up by pairing. To make these trades more attractive, the NSEL wanted to launch products with settlement periods of up to 36 days. According to the exchange, its right to offer these came in 2007, when Pawar’s ministry exempted it from the Forward Contracts Regulation Act.

In November 2010, the NSEL sought to register its long-term contracts with the FMC—a sign that it believed it was operating within the letter of the law. That same month, without a response from the commission, the contracts went live. They quickly took off, helping to boost the exchange’s annual turnover by more than 50 percent in the course of a year.

The NSEL was also offering other products that attracted the attention of regulators. The month before the paired contracts launched, SEBI had informed the Reserve Bank of India that the bourse was offering trades in gold, silver and other metals that did not come under the purview of any regulator. On 24 May 2011, officials from SEBI, the RBI, the FMC and other regulators held a subcommittee meeting of the Financial Stability and Development Council, in which they discussed oversight of Shah’s spot exchange. Neither SEBI nor the FMC claimed jurisdiction over the bourse. After the meeting, the finance secretary, R Gopalan, wrote to the consumer affairs secretary, Rajiv Agarwal, expressing concern that the NSEL’s activities might be unregulated, even as volumes on the exchange grew exponentially.

Two months later, Agarwal replied to Gopalan that the ministry, which had been headed by KV Thomas since January, had given the FMC authority to monitor spot exchanges for compliance. Agarwal also asked the finance secretary to exempt such bourses from certain statutes that mandated RBI oversight. But uncertainty continued to reign.

Ramesh Abhishek became acting chairman of the FMC on 1 August 2011. Though the commission had been granted powers to monitor spot exchanges, it recognised that these were not sufficient. Under Abhishek, the commission wrote to the ministry again, asking it to grant it proper regulatory powers. The government’s reply finally came in February of the following year. It said that the commission could demand any information it wanted from the exchanges. The exchanges, however, were under no obligation to respond.

After the government’s reply, Abhishek went ahead and requested records from Shah’s spot exchange. “Going through the data provided by the NSEL, we found that its rules did not prevent short sales of commodities and its members were doing short sales,” Abhishek told me when we met in his nondescript Mumbai office this July. He said they also discovered that the exchange was offering contracts with settlement periods longer than 11 days. According to the commission, this meant the exchange was allowing futures trading without its permission. In a letter dated 2 August 2012 from the commission’s economic advisor, Usha Suresh, to Brij Mohan, a director in the ministry of consumer affairs, the commission argued that Shah’s bourse was violating the specific conditions laid down by the ministry while granting exemptions for one-day contracts.

The NSEL, however, replied that there was no short selling because it made sure that the underlying commodities were in warehouses. As for the settlement period, it admitted that the contracts could be fulfilled after more than 11 days. But it maintained that the exemption granted in 2007 extended to all the provisions of the 1952 regulatory act, including the 11-day rule, and the government had never specified another settlement period.

I raised the latter point with Abhishek. “Fair enough,” he admitted. “It was true that the time frame for actual delivery was never mentioned anywhere.” According to the commission, however, the exemption did not extend to the rule about settlement periods. “The critical part here is that it was a view of the FMC that was being countered by NSEL, and the ministry had to take a decision,” he said.

There was also the fact that the NSEL had attempted to register its paired contracts with the commission in November 2010. In reply to an RTI request filed by a representative of some NSEL investors, the commission’s chief public information officer stated, “As per our records, no application has been made by NSEL under section 14B of the FCRA 195 for regulation of NSEL NTSD contracts.” That reply directly contradicted the letter sent by Suresh to Mohan, which acknowledged that the exchange had indeed sought permission to offer such contracts.

“It was up to the ministry to decide whose view was correct,” a senior official at the FMC told me when I met him in August. “Till date, it has not done so.”

Instead, for nine months after Suresh’s letter was sent, there was silence from the ministry. Finally, in June 2013, it issued a show-cause notice to the NSEL, asking the exchange to clarify the status of its contracts. On 10 July, Anjani Sinha, at that time still the NSEL chief executive, met the consumer affairs secretary Pankaj Agrawala and explained the bourse’s position. Agrawala appears to have told Sinha about an impending withdrawal of the Gazette notification that allowed the NSEL to function; after the meeting, Sinha followed up with a letter in which he stated that this would lead to a “huge crisis and chaos and as there would be a run on the spot exchange.” He added, “Any decision to abruptly withdraw gazette or to stop running contracts is equivalent to capital punishment.”

|SIX |

IN ONE OF THE MANY MARKETING brochures urging investors to put money into NSEL trades, a brokerage firm called Arihant Capital Markets Limited wrote in bold letters: “Earn handsome risk-free returns between 13-17 per cent p.a.” Below that, the brochure read: “What’s more? You even know the exact return before executing your contract.”

In the two and a half years between the advent of the NSEL’s paired contracts and Sinha’s meeting with Agrawala, brokers shoveled thousands of crores of investors’ money into buying and selling commodities ranging from raw wool to platinum, pushing the bourse’s turnover to Rs 2.96 trillion—or nearly $50 billion—in the financial year that ended in March 2013.

Sinha’s follow-up letter was dated 12 July. The consumer affairs ministry squeezed the trigger the very same day, forcing the NSEL to stop issuing fresh contracts. As Sinha had predicted, a crisis erupted. By the end of the month, payments on the exchange had ground to a halt, and delivery had ceased on underlying commodities. The NSEL had stopped functioning completely.

What was the rationale for shutting the exchange down? A week after the NSEL’s supply of fresh contracts was shut off, the FMC wrote to the consumer affairs ministry that the “Gazette notifications issued by the government granting exemption under section 27 … provide for exemption from operation of all the provisions of the said Act.” In other words, the commission acknowledged that the NSEL was perhaps not breaking the law with its long-term settlement contracts. The commission also made it clear that it was not the exchange’s regulator. It further said that, as unregulated entities, spot exchanges could do pretty much whatever they wanted without violating any law. This created the potential for any number of unchecked risks, and the commission argued that “forward trading in unregulated entities is not in public interest.”

On 4 August, the stakeholders met at the Trident Hotel in Mumbai. The hall was arranged like a courtroom, with commission members in the middle, NSEL officials and defaulters on one side, and investors and brokers opposite them, according to the Financial Technologies director. The exchange and the defaulters assured the room that, although payments had not been made, the underlying commodities were still in warehouses. These goods were apparently worth more than Rs 6,000 crore—more than enough to cover the Rs 5,600-crore outstanding balance. But the NSEL also admitted that it had depleted its settlement guarantee fund, an important form of insurance against defaults. Three days before, it had claimed that the fund contained Rs 860 crore, but by the 4th, the fund only held Rs 62 crore.

Within days, however, it became clear that the warehouses were empty. Six weeks later, the accounting firm Grant Thornton conducted a forensic audit of the NSEL. Its investigators visited ten warehouses, but were denied access to half of them. In its report, the auditor found that most warehouses had overstated their capacities; conversations with the staff of some facilities revealed that there had been no movement of goods for at least two years. What appeared to be a fast-growing commodities exchange was laid bare as a financing mechanism that helped investors make easy money.

In late 2013, the FMC practically took control of the board of the MCX by appointing the retired bureaucrat Satyananda Mishra as independent director and chairman. It also appointed several other former government officials to the board. Senior executives from the State Bank of India, the

According to the Financial Technologies director, the group appointed an investment banker in March 2014 and got four bids for its stake in the MCX: the Chicago Mercantile Exchange offered up to R650 per share, Reliance ADAG was willing to pay between Rs 700 and Rs 750, and Kotak Mahindra Bank bid Rs 600 per share.

On 6 May, just as the bidding process was taking off, the FMC amended the ownership rules for commodities exchanges. The revision capped individual shareholding at 5 percent. Investment by a foreign entity was also capped at 5 percent. Only a commodity exchange, stock exchange, a depository, a banking company, an insurance company or a public financial institution would be allowed to hold up to 15 percent. That effectively meant only Kotak Mahindra Bank could bid for Financial Technologies’ share in the MCX.

The following day, Shah was arrested. Two days later, the MCX sent out a resolution to its shareholders that would in effect allow the board to appropriate Financial Technologies’ 26-percent holding in the company. Financial Technologies could not vote on the decision, because its voting rights had been cancelled by the reconstituted MCX board. The resolution was passed in June.

The former director of Financial Technologies told me, “It was akin to Vladimir Putin taking over Yukos and putting Khodorkovsky in jail. First declare someone unfit, then remove their nominees from the board, then don’t give them enough time to sell their stake, and finally appropriate the shares. It has never happened in Indian corporate history before.”

ON DIWALI EVENING, the nation’s stock exchanges open for an hour-long special session called Mahurat trading. The fifth day after Diwali is celebrated, especially by Gujarati businessmen, as Labh Pancham, or “the profitable fifth.” This day is considered the most auspicious for beginnings. Jignesh Shah’s foray into the commodities business started on Labh Pancham in 2003, when the MCX began mock trading.

Eleven years later, the same commodities business threatens to sink him. If the government is able to follow through on the decision it announced two days before Diwali—that it will invoke a rarely used provision in company law to merge the NSEL and Financial Technologies—the Rs 5,600-crore liability for the payments crisis will be transferred to Financial Technologies, likely bankrupting it. As this story was going to press on Labh Pancham day, the media began reporting a move by the government to take over Financial Technologies’ board and gain full control of the company.

The technical details of what went wrong at the NSEL have been discussed threadbare in the country’s business press. A glancing look at the headlines might leave the impression that Shah is an Indian Bernie Madoff. The reality is, of course, more complex. Perhaps few people have stated it as clearly as the Bombay High Court judge Abhay Thipsay. In a 22 August order granting Shah bail, Thipsay wrote that the NSEL’s “improper and wrong working” created the opportunity for “unscrupulous borrowers” to siphon away money from traders. He added that those calling themselves “investors” were aware that the trades on the NSEL were not genuine.

Headlines imply that Shah is an Indian Bernie Madoff. The reality is more complex. In a 22 August order granting Shah bail, the judge wrote that the NSEL’s “improper and wrong working” created the opportunity for “unscrupulous borrowers” to siphon away money.
Vivek Prakash / REUTERS

“In the zeal of opposing the applicant’s application for bail,” Thipsay wrote, the government had “conveniently ignored that the funds had not come to NSEL, but had gone to such borrowers.” He added that the investors’ “expectation is not that the money gone in his pocket should be taken out by him, but the expectation is that he having been instrumental in the duping of investors by the borrowers be made to pay to the investors as he has sufficient means to do so.” The judge also doubted whether the act under which Shah’s assets were snatched away could be applied in this case.

Ultimately, the fate of Shah and his businesses matters less than how the government responds to the shortcomings of governance laid bare by his case—and by his two-decade journey as an entrepreneur in India. And there are now some signs that the country will finally strengthen its regulatory framework. According to a finance ministry official, the government is moving ahead with a plan to replace the country’s tangle of legislation governing the financial sector with a new, streamlined law. A commission headed by the retired Supreme Court justice BN Srikrishna has recommended, among other things, creating a unified regulator for all Indian markets. The proposal is likely to be tabled in Parliament in the next budget session. The expectation is that it will be implemented by the second quarter of 2016, creating a better-regulated, more open field.

Correction: In the print version of this article, the caption to the fourth photograph incorrectly stated that the then finance minister, P Chidambaram, opened trading on Jignesh Shah’s stock exchange, the MCX-SX, in October 2008. In fact, he opened equity trading on the exchange in 2012. The Caravan regrets the error.

Dinesh Narayanan is a Delhi-based independent journalist. He is the former editor (economy and policy) of Forbes India magazine.

Keywords: business Jignesh Shah billionaire trade regulations financial markets Forbes entrepreneur