The NSEL controversy - the game behind curtains!!
The NSEL controversy - the game behind curtains!!
Now days, we get to know about a lot of news regarding many fraud investor schemes or “ponzi” schemes like the “Shraddha scam” of Kolkata. But anyone could have hardly imagined about a big fraud going on in a limited stock exchange of India. We are talking about the much discussed National Stock Exchange Limited (NSEL), the Mumbai based company promoted by Financial Technologies India Ltd. of Jignesh Shah. The July 2013 brought about one of the most shocking revelations in the stock market when NSEL, a commodity exchange market was restricted to deal further by Forward Market Commission (FMC). Let’s just see what led to this decision by FMC.
Since NSEL was a spot exchange let’s first tell you what a spot exchange is? A spot exchange is a exchange market where buyers and sellers deal in commodity buying and selling after paying cash and receiving goods on the “spot”. This means that the contract is immediately executed on behalf of both parties. NSEL was one such exchange but it was an electronic exchange so that buyers and sellers can deal with each other even after being at different places and being anonymous. In such dealings, the exchange stands as a guarantor to either of the party so that if either party does not fulfill its obligation of buying or selling, the exchange can continue with the stock by further buying it from some other party or selling it to someone else. This way the dealings are risk free.
This process is follwed when seller comes to a warehouse designated by the exchange and gives his goods and he gets a warehouse receipt (WR), through this receipt the buyer either buys those goods or keeps it in the store for a certain period and the transaction is completed. Now under the forward contracts act, any “spot” contract must be completed within 11 days(T+11) which means that buyer and seller have to complete the transaction in 11 days and then the contract does not become a forward contract. There are other spot contracts completed in 2 days (T+2). Instead of dealing in T+2 contracts, the NSEL waa dealing in T+25 or T+36 contracts for the same goods which should be dealt within 2 days. This was illegal as such contracts are “forward” contracts and NSEL was not authorized to deal with it.
But it was not just acting beyond authority, NSEL did worse. One can buy T+2 contract and sell the T+25 contract in NSEL and the difference in prices will fetch about 15% annually. For example, if you own a ton of mustard for a month, you can sell it after 25 days when the prices are high for the same commodity. (Some sort of black marketing). This way the exchange attracted a lot of customers who put in huge money to get inflated prices in return. All this came to light, when the transaction defaults started to happen and investors raised their concerns.
Not just this, the big game is yet to come. Actually, the traders on the other sides were allegedly no one else but the 24 promoters of NSEL. Those were the same members who would sell at T+2 and buy back at T+25 and thus offer huge returns. When the FMC, the regulator smelled something fishy in the trading going on, it banned NSEL from any further contracts. Warehouse receipts were being issued without warehouses actually having any stocks. Investigations revealed that there were “benami” investors and owners of warehouses. It is also alleged this scam of such intensity also involves top politicians and corporates. Now, Jignesh Shah, the promoter of NSEL was asked to return the 5500 crore amount to its various investors whose money was invested in the exchange market as the dealings have been banned.
The problem lies in the ambiguity of laws regulating the spot market as there is no body to monitor spot trading. FMC has no teeth to take any punitive action against the fraudulent. The matter is being investigated by ED and many other agencies and the money is yet to be recovered. The latest development in the story is that the ED has attached the assets of defaulters/borrowers of the trade in NSEL and investors are demanding a change in the money laundering act to recover the amount. Infact, no one knows where the money actually is.
The investors are in trouble with this scam but it brings in front of us a bleak picture of financial market of India. With this 5500 crore scam and Sahara like cases still coming in light, it shows that India still needs to have a powerful regulator in financial market and trading so that the perpetrators can be bought to books and investors’ can be regained.
