Who is Jignesh Shah? (Profile)

Hitting the headlines again, this time for reasons he wouldn't like to remember, Jignesh Shah, arrested Wednesday night, shot into limelight after setting up the Multi Commodity Exchange that started operations in November 2003 and not just grew into India's largest in a short span of six years but also ranks third globally today in terms of contracts traded.

The exchange commands an enviable 86-percent share of commodity futures in India, with over 2,100 members and a whopping 400,000 terminals across 1,900 cities and towns. Its highest daily turnover was logged in April last year and was valued at an astounding Rs.119,941 crore (Rs.1.19 trillion, or just under $20 billion).

This was all Shah's creation. Little wonder, he was named at one point as "Young Global Leader" by the Davos, Switzerland-based World Economic Forum (WEF). This engineer-turned-financial-wizard, also made his debut on the Forbes list of billionaires at a rather young age in 2008 - when he was all of 41.

Headlines had begun to chase him.

Shah was trained in the finer nuances of capital markets at the New York Institute of Finance after a software engineering degree from Bombay University. He got a further hands-on exposure on market dynamics when his overseas postings as an executive of the Bombay Stock Exchange (BSE) in the early 1990s took him to some top bourses at New York, Chicago, Tokyo and Hong Kong.

All this came handy in his first stint at entrepreneurship when he combined his deep knowledge of markets, finance, and software. Financial Technologies, which he started with seed capital of Rs.500,000 (around $8,500) after mortgaging his house, launched a unique and effective software that helped brokers to manage risks. His rise since then was steady and fast, and became exponential after he secured a licence to start a commodities exchange.

Today however he is in the custody of the Economics Offences Wing's Mumbai branch in relation to an alleged scam involving another company he founded, the National Spot Exchange. More specifically, it is a suspected payments default of Rs.5,574 crore (nearly $1 billion) - a value exceeding that of the previous high-profile exchange scam perpetrated by now-deceased rogue dealer Harshad Mehta over two decades ago.

As Shah himself put it in October last year - when investigations were in full swing, forcing him to resign as the vice chairman of his group - the present crisis has destroyed what he had created in a short span of time, ever since his flagship company went public in 1995.

The crisis at the National Spot Exchange, which was first suspected in the first quarter of 2012, relates to non-payment of money or non-delivery of purchased commodities to investors. Although these commodities were traded, there was no physically existence in warehouses.

To simplify further, investors bought commodities through the exchange from sellers. For that, they were given what is called warehousing receipts - an assurance that the stocks physically exist in the warehouses of the exchange. When the time of delivery came, the investors were compensated with monetary returns, rather than physical delivery of stocks.

This cycle continued till such time the regulators felt something was amiss and issued a notice wanting the exchange to come clean on suspected flouting of the law on commodity contracts. Trading was subsequently suspended, but some 15 months after in July 2013, and it is found that the warehousing receipts were allegedly forged.

Scores of investors found they were duped and the empire of Shah that was worth some $1 billion by virtue of his family's 45-percent-plus holding in the Futures Technology group came crashing down to a mere $50 million by September. Criminal cases were filed against the group and its board. One of Shah's associates and the chief executive was arrested and he himself and his associates had to step down. Since then, some 10 people connected with the alleged scam are in custody.

But there is hope yet for investors. The Economic Offences Wing says property and assets worth Rs.5,000 crore has thus far been attached - and that should take care of the bulk of money involved in the alleged scam, estimated at Rs.5,574 crore. As for Jignesh Shah, he is unlikely to fade away from making headlines.

(Arvind Padmanabhan is executive editor with IANS. He can be reached at [email protected])