MUMBAI: A court under the Maharashtra Protection of Interest of Depositors (MPID) Act has ruled that money from the ₹5,600-crore National Spot Exchange Ltd. (NSEL) scam was used to repay bank loans and may have to be returned to investors. The court rejected the banks’ argument that these repayments were made in the “ordinary course of business.”
The case stems from the 2013 NSEL fraud, where several trading firms, including PD Agroprocessors, raised money through deals that promised fixed returns. These trades were later found to be unsupported by actual stock, leading to defaults and losses of ₹5,600 crore for more than 13,000 investors.
If the money recovered from PD Agroprocessors and its directors, who together owe about ₹680 crore to the duped investors, is not enough, the court has directed the HDFC bank, ICICI bank, IndusInd bank and Kotak Mahindra bank to file undertakings, legally binding promises, that the banks will cover the shortfall.
A key issue in the case was tracking the money trail. The court found that over ₹30 crore in loan repayments to the four banks was made after PD Agro joined NSEL and began using accounts through which investor funds flowed. The court concluded that “all these amounts have come from the trading done on NSEL platform” and that “it is the money of the investors that has been utilised… to satisfy its liability towards the four banks”.
Based on a forensic audit, the court observed that the trades themselves seemed suspicious. It noted missing records such as stock registers and delivery documents, calling the transactions a “farce” from the beginning. The court said the tainted flow of money could be traced back to October 2011.
The prosecution argued that repayments to banks were “malafide” transfers under the MPID Act because they were made using investor funds raised through fraudulent trades. It relied on the forensic audit to show that the company had liabilities of over ₹680 crore and had diverted funds to repay banks instead of investors.
The prosecution also questioned the banks’ evidence, arguing that their witnesses lacked personal knowledge and that repayments were traceable to NSEL-linked funds. The court however said this was not enough to undermine the validity of the loan transactions.
The banks defended themselves by saying they are not ‘financial establishments’ under the MPID Act and had simply received repayments of legitimate loans “in the usual course of business”.They stressed that the loans were sanctioned years earlier (2009–10), repaid in 2011, and that the NSEL default surfaced only in 2013—therefore, the funds could not be treated as tainted.
The banks also claimed that money is fungible and its source cannot be attributed to specific repayments, and that there was no proof the transfers were “without consideration” or lacking good faith.
The court rejected this defence, saying under the provisions of the MPID Act, the key question is not whether the recipient knew the money was tainted, but whether the accused company had transferred it in good faith. Relying on earlier rulings, the court said that even an unaware recipient cannot keep money if it came from fraud, and that the focus must remain on the conduct of the financial establishment that moved the funds.
At the same time, the court acknowledged that proceedings to attach the company’s properties are still ongoing and that it is not yet clear whether those assets will fully cover the ₹680-crore liability. For now the court has asked the banks to commit to returning the amounts traced to them if a deficit arises in the final recovery.
