Evaluating Corporate Governance Fraud: A Case of National Spot Exchange Limited
IOSR Journal of Business and Management (IOSR-JBM), Volume 18, Issue 12, December 2016
9 Pages Posted: 17 Dec 2016
Date Written: December 13, 2016
Organization: NSEL (National Spot Exchange Limited) is the domestic level, institutionalised, electronic, apparent spot trading platform for commodities. It is an organized market place, set-up to make over the commodity market by way of minimising the cost of inter-mediation and thereby optimizing marketing efficiency. It is first of its kind of institutes and right from the beginning it was acclaimed to be a tool to revolutionize the commodity market. But it did not lost long as just after five years from its evolution with the NSEL appearing as an institutionalized but opaque and secretive den of speculation and possibly fraud turned all acclamation to be a myth.
Problem or Issue Addressed: The problem which will addressed in this case study is about the fraud which erupted due to the regulatory negligence of government, auditor’s inability and lack of corporate governance. The NSEL failed to pay to its investors who have invested in commodity pair contracts. And it was subsequently found that most of the of underlying commodities never existed and buying and selling of commodities like Steel, Paddy, Sugar, Ferrochrome etc. was being conducted only on paper. Later on it was found that some of the warehouses mentioned on NSEL website did not exist and even the SGF (Settlement Guarantee Fund) which was supposed to be about Rs 839 crores (about $ 140 Million) as on 29 July 2013 vanished into thin air.
Goals: The basic focus of the case to help understand the eruption and causes of a regulatory fraud. In this case study we are trying to evaluate eruption, causes, mechanism and consequences of 5600 crore rupees commodity market fraud. Further regulatory changes needed to be taken to avoid such kind of frauds in future are also debated upon.
Results: The basic cause for the eruption of such kind of frauds is lack of regulation in these types of commodity markets. The lack of regulation on behalf of our auditors who come out clean handedly from all such type of frauds are main causes for such type of frauds. Further, it is quite evident that there are only four persons in the board and two of whom belong to FTIL, so it was pretty obvious that most of the decisions will be taken in the interest of FTIL who is the promoter company and there is very mere chances that any of the directors are going to talk about the interest of the investors. This happened because of very weak corporate governance mechanism in place to keep in check the promoters of the exchange.
Lessons Learned: The case strengthens the need of vigilant regulatory systems in both private and public institutes. Further there is an urgent need to improve corporate governance in these institutions so that decisions will not be taken in the favor of majority of shareholders. Also the case highlights that there is a strong need to redefine the role of auditors to avoid such kind of frauds in future.
Keywords: Regulatory fraud, Corporate Governance, Spot exchange
JEL Classification: B24, B25, B26
Suggested Citation: Suggested Citation