Drushan Engineer and Charu Singh from Ram Manohar Lohiya National Law University, Lucknow, write on the repercussions of the NSEL scam on the Corporate Sector in India.
The 5,400 crore NSEL scam exposed multiple chinks in our security regulatory system. When it was brought to light in 2012, investors who had lost their money wanted to be reimbursed were hindered by a lack of laws enabling speedy restitution. What set this scam apart from others is that in this case, the scam was perpetrated by an Exchange as against individuals. Such a massive regulatory failure provided an impetus to the government to overhaul major portions of the securities framework by merging the Forward Markets Commission with the Securities and Exchanges Board of India, amending the Forwards Contract (Regulation) Act, 1952 and the Prevention of Money Laundering Act, 2002. The Central Government subsequently announced the forced amalgamation of the NSEL with its parents company, FTIL thereby breaking the corporate shell and holding FTIL responsible for the legal liabilities of its subsidy. This has been contested as being illegal and arbitrary, and against the principles of limited liability and separate corporate identity. Since this scam was executed by the Exchange itself, the importance of demutualization as a principles that ensures greater transparency, and reduces the risk for such irregularities is increasingly being viewed as a way forward for stock exchanges around the world. This paper will analyse the features of the scam, the lack of regulation that allowed it to take place, the efforts taken to minimise the losses incurred through the scam and it will also address the regulatory and structural changes that the scam induced in our laws.