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Brokers Were Definitely Guilty in NSEL Fiasco Also: Reader

An alert reader of Capital Mind has called me out on my post that brokers could have been innocent. No chance, he says, and he explains:

I was reading your article on The NSEL Scandal/Scam where you observed that the arbitrage was believable I disagree and wanted to bring to your notice certain facts regarding this issue. I had participated in this market but stopped after I observed the following.

1) In a normal arbitrage (like the yes bank example)  each leg of the trade is actually separate brought together only by the simultaneous execution. However in NSEL One HAD to execute both buy/sell transactions together. It was not possible to execute just one side of the trade. In fact you could not just randomly fireup the terminal and execute these trades. The Brokers would coordinate with the exchange (on the phone) and the exchange would release contracts accordingly.

2) The Fact that there were only one or two counter parties for each commodity was well known to the brokers. In fact they were well aware that the exchange was being used as a irregular financing mechanism. Further almost all the volume in the exchange were these paired trade/arbitrage. There was very little or no actual trading happening.

3) There was no formal settlement mechanism where warehouse receipts were formally exchanged between the broker and the exchange. In some cases they would email you an excel sheet with a list of warehouse receipt numbers. You did not have to mail anything back. The Exchange would adjust the receipts on its own. Even if you wanted it was not possible to get the actual receipt.

4) Most brokerages did not advocate this scheme to their Private Wealth Clients (I mean the real HNI’s not the garden variety 25 Lakhs plus clients) however they were freely pushing the product through their boiler rooms. If the brokerages truly believed in the product why would they not push it to their most valuable clients this was after all the ultimate treasury management tool.

5) Important issues such as VAT etc were ignored by the exchange/brokers.

6) EACH and EVERY broker who called me regarding this assured me that they had thoroughly researched the scheme and in fact most claimed that their own audit teams regularly visited the various gowdowns etc etc.

7) NOT one broker told me that the exchange was not regulated.

In my opinion the brokers  definitely guilty of failing their fiduciary responsibility and ignoring red flags just so they they can get their brokerage. They have very aggressively pushed the product.While I do not know this as a fact I would guess that the brokerage being offered in this market would be quite a bit higher than brokerage in the NSE/BSE.


All the bold is done by me.

Forget everything else and just focus on Point  No. 1. If the concept was that two trades had to be put together simultaneously, it wasn’t an exchange by any standard! Any broker worth his salt would have known there’s something wrong here.

I think the #1 problem is with the NSEL exchange, it’s management, it’s board and it’s promoters.

But that doesn’t mean there weren’t #2 and #3 guilty parties. Brokers, if they had done the above, were definitely guilty of, at the very least, not acting in the fidiciary benefit of their clients. This is even worse than ULIP misselling, though some insurance agents come very close.

There are more – the auditors, the defaulters, the FMC (when it ignored this), the government ministries, and yes, even the investors. (The reader above understood that it was possibly a scam. How many others didn’t care?)

We have to enforce action against the #1 guilty party.

But we also must address #2 and #3, even though some will say it is poetic justice that many of these very brokers have lost substantial sums of money. It is imperative though, that we do not allow them to pass their losses to their customers.

  • Jaya says:

    Thanks for giving us continuous updates on this NSEL fiasco, am one of the avid readers who read your daily updates. One request, would you be able to cover e-series which was banned later. NSEL has mentioned on their website that e-series investors could take physical delivery. Did any investor actually get delivery? Yesterday the newly nominated Mr Ramesh has mentioned that there is no one available at NSEL to do the day-to-day activities and i wonder how they would actually give deliveries in physical for silver and gold if this is the real status?
    Appreciate if you could dive into the e-series side of NSEL fiasco.
    thanks and regards

  • Kanwal says:

    I had started investing in E Gold & E silver couple of months ago and had purchased 2 KGs Silver and 10 Gms Gold before trading in E Series was stopped.However my units were still in the ool account of the broker and had not been transferred to my dmat account.Now I told the broker to transfer my units to my dmat acct so that I could take delivery of physical gold & silver.However I have been told by broker that transfer from pool account to my dmat is not possible.I am clueless abt the fate of my investment.Can you please guide me on this and how can I salvage my money.

  • Jaya says:

    to the best of my knowledge, the units MUST be transferred from pool acct to your demat within a day after pay-in. How come you traded months ago and still it has not been transferred to your demat acct? Please check again with broker in writing and also with NSDL/ CSDL.

  • 1. Parliament is in session/No word about it in parliament/No explanation from govt functionaries in parliament.
    2. No CBI enquiry/No SIT enquiry.
    3. FMC acting in fits and bursts/Highly suspicious why it is doing so?
    4. FMC to be brought under finance ministry now/Why? To manage it? Is the finance ministry trying to hides something? Have MCX/FT/NSEL/Promoters paid off govt functionaries?? Without the knowledge of govt functionaries/regulators a fraud of such a dimension simply cannot happen.
    5. No FIR registered against wrongdoers? No arrests? And remember this is a legal exchange and not a flybynight ponzi investment company….or network mktg company like ….
    6. Surely some ppl in high places have a lot of explaining to do!!!

  • harish says:

    Do chk about the Powar-ful Politician angle !
    I wondered why there was no regulation of spot exchanges and thought that it had something to do with APMC s where food prices quadrupled effortlessly ….
    FP is running a story about two NSEL directors who are closely associated with Union Agriculture Minister Sharad Pawar as directors on an agri-business forum that was launched by Pawar in 2001.
    CITA’s governing council at the time of its establishment reflected the strong presence of businesspersons closely identified with Sharad Pawar such as Vijay Mallya, Chairman, United Breweries, KM Goenka, then the CMD of the Baramati-based Dynamix Dairy, who was later an accused in the 2G scam, and Anuradha Desai, Chairperson of Venkateshwara Hatcheries, one of the earliest investors in the Lavasa Lake City project, which which also Sharad Pawar’s name is associated.
    NSEL’s Chairman Shankarlal Guru and one of its Pune-based directors, BD Pawar, are serving as directors on the board of the Centre for International Trade in Agriculture and Agro-based Industries (CITA) that was launched by Pawar to lobby for the domestic agri-business industry.
    Well informed sources from the agricultural sector in Maharashtra told this correspondent that BD Pawar was identified as a trusted lieutenant of Sharad Pawar. While he shares the surname, he is not related in any way to the union minister.

  • Ritesh Shah says:

    its government responsibility to payback all investors ruined by this nsel-government scam.
    because its fault of government, why government gives permit to run EXCHANGE!!!! without proper backup & checking?
    if any one wants to open they have to submit lots of identification & bla bla bla.. but government freely allows to run scam to this crooks.
    all the foreign investor should back off from india to save their investment, here government is leech, & master in scandals.
    no surprise, why this issue still not raised in parliament till date, neither from UPA nor from any others.
    remember crook allways helps crooks.. so did our shitty government,

  • Ritesh Shah says:

    this powerful pawar’s are really sucking blood & money of innocents, now i think only way for us is to, give notice to brokers => they will give notice to NSEL => it will say i m defaulter, so pass liability (i m not sure, it can happen or not)=> FMC => to government => we will do something & will pass next 20 -30 years….
    very strange how government gives power to individual company to run exchange.!!!! ( unless this crook politicians has its vested interest in it)… cuz without proper id you can’t even open savings bank account.. & they are giving permit to run exchange without any checking.. so absolutely those who have given permit is only at default
    because its their responsibility to look after disbursed power & authority.
    so in short we have to fight where we r not going to get any result.