Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Commentary

Jignesh Shah Has A Press Conference, Creates a Committee, Spends Seven Hours.

Jignesh Shah, promoter of FT which in turn manages NSEL, the exchange that has defaulted on settlement (*), has had a press conference. The important point was: they had a seven hour marathon meeting on Sunday with the “planters”/“plant owners” and the “members” and all that, and something awesome came out of it, except we don’t really know what.

* Of course it has defaulted. A delay in settlement is a default other than a 1-2 day move – this one is five months!

First, Shah’s contention is that any disruptive move, even if correct, can be hugely limiting for settlement. People who’ve expected rollovers can’t suddenly find money, and you can’t liquidate the goods without serious impact. So they need some time.

The payment plan will be disclosed on August 14.

This makes sense – unwinding will take time, but it should not be done by the exchange – it should be done by the FMC, and they should take over the exchange completely during that time. It should also come with serious consequences such as a huge penalty to the exchange so it doesn’t become routine. Already, it’s established that the exchange was doing something illegal – providing forward contracts when it was not allowed to.

Also please note that they had a SEVEN hour meeting on Sunday.

Next, they’ve appointed a four member committee made of people some of whom have worked with MCX earlier, including GN Bajpai (ex-chairman SEBI), D. Sivanandan (IPS, retd), Sharad Upasani (IAS, Retd), Former Judge R.J. Kochar to oversee the settlement process.

Okay but what will these people do if plant owners default. Remember, many NSEL warehouses are on the same land as these plants, which are located in distant places. Just having this committee, but having no broker or FMC member on board is useless. FMC or SEBI should just take this over and be the committee instead.

If you’ve not been listening, they had a seven hour meeting on Sunday. Seven continuous hours.

One thing Shah said was, when he castigated another newspaper for saying that NSEL owed Rs. 5600 cr, mentioning that it was the plant owners who owned it. Get this Mr. Shah: An exchange is supposed to be responsible, not the plant owner. That’s why we come to an exchange, so you’ll guarantee the trade. NSEL certainly owes all the money to its brokers, it is not just a middleman, it is the counterparty for all parties involved. Let’s not get misled.

None of the plant owners want to deliver stock – all want to return the money. This is a clue: they don’t want to have that stock examined by anyone, in all probability.

My view: This is an exchange default of gargantuan proportions and massive shady financing. Think about it. Just 24 companies have got financing of Rs. 5,600 crores! And apart from this, they might even have bank loans. Some of them are BIFR entities (effectively, prior defaulters). The exchange did illegal things like forward contracts when it was not allowed to,

In that regard, why are we even listening to Shah? The FMC or SEBI should get their act in and take over the board and manage the unwinding operation. The management of NSEL should be taken to task separately for all the wrong doing already known. All defaulters should see an RBI note of no-further-loans (including all promoters).

The default is regrettable, but what matters now is our reaction. We need to show our investors that our exchanges are safe, but I think it will take action from the Finance ministry to actually investigate and prevent further abuse.

  • Niftytrader says:

    now NSEL has been barred from E series contracts also. So essentially the exchange has been shut down for a minimum of 6 months..

  • lohit says:

    ‘When the tide goes out, we will see who was swimming naked’ – Buffet.
    BTW, what happens if an exchange defaults? Can they declare bankruptcy and still continue to function ?

  • mangoman says:

    Deepak,
    You are expecting too much from India.
    Now we all know there is no stock and there is no guanrantee money (800 crores become 60 crores). This 5 months time period is nothing but a hoax. They want to buy time so that people get used to it and forget like all the other scams.
    The real issue is liquidity is getting drained up for scamsters. One scamster will not take action against another scamster. so Govt wont do anything.

  • Vishal Bhatia says:

    You Mr. Shenoy have won a fan, a famous fan (famous -10 years ago (talk about biases)). Not on basis of one post but on the coverage of NSEL Fiasco.
    If there was a vehicle on which I could sit and drive on the history highway I would see explosions after explosions on either side of the road. There would be cadaver of a wind turbine maker, zombie power plants by a trading company, a giant steel plant bought to its knees part a departing patriarch (he would say that his success rate is at least 50%.. master’s car company worked, steel was costly. next time we will toss coins before putting unnecessary cash thrown by the largest body shopper in the country), gas drilling scary looking ships owned by an Omnusinessman (as I type its comes up underlined in red.. obviously, freshly minted by yours truly – think omniscient and businessman – you would say ‘I already did.. what’s the message’).. no no.. we will keep going.. mini-me-usinessman’s natural resources company (this would be burnt paper and not debris), some large full bodied planes jutting out of ground like the white french beard on the chin of its owner, weed infested prime cities of a mustachioed grosvenored Worker of Indian’s largest desert-ed.. and on and on.. as we drive we reach a large petroleum refinery (this one is not exploded.. and supposedly visible from moon.. who went to the moon.. maybe Aztecs after Cortez plundered them..) by a guy who came back from Turkey (at least that what I understood from the movie made to massage the ego of his remainlings).
    That single man is the problem we face with guys like Shah today and there are many like him. Their business mantra like the guy who returned BACK (why did you sir?) from Turkey is jump in the water and you will learn to swim. But as soon as they jump they realize that they need others to jump. So they tell stories about how pleasant the waters are, how they will find pearls and treasure chest in the waters. For that man who returned from turkey all the shenanigans may have worked or who knows what-which should not matter to a guy who is trying to do the business the right way. But that jumping in the water culture with a bit of fancy word called Jugaad and a few trips to the land of opportunities we have a heady mix of guys who don’t understand business. Their single largest belief in navigating the waters by negotiating with the guards is turning to a false truth. After all the guards are impotent at a sight of whale or a tsunami. That single false belief makes all the guzzlers drive Hummers financed by banks guarded by the guards. They operate without any heed to laws of probabilities, sciences of industries and economics of the businesses. Mother nature owes to no one. These complexities (exchange is a very complex beast) requires skilled professionals. Where are the engineers? The learned and mathematically skilled are helping rockstar like professors(in the land of opportunities) in running their MOOCs. We can buy the best software product to run an exchange (in case of FT they supposedly develop their own.. run lola run..) but what will you do when self imposed and objective discipline is required to run an operation which has a human interface (warehouse receipts). My every third book order at the fancy e-tailing website in India results in an error or cancellation due to unavailability. contrast this with ZERO failures in USA. Its not amazon website per se… its the UPS or FEDEX or USPS and the roads and the cars and the ethics and the punctuality… the ecosystem so to say. BSE was struggling in face of challenge from NSE (technically sound) so who where was a need for the new one. And then you have it.. and then… oh boy when the volumes are scarce then the go-getter manufactures some. Here Jim have some gin and tonic.
    Like Arnab Goswami would ask.. “the question is this.. Mr. Shah, do you understand the meaning of an Exchange”
    “errrrrr…nub I was COM..pet”
    “Mr. Shah I will not let you make this as Congress and BJP debate”
    “errrrrrrrrrrrr..nub please allow me to speak”
    “No. Mr. shah the country wants to know if you know how to run a spot exchange”
    “errrrrrrrrrrrr..nub we have a committee to look into that matter”
    “you have not answered my question Mr. Shah, do you know how what is the purpose of an exchange”
    “errrrrrrrrrrrrrrrrrrrrrrr..nub please allow me to complete.. YES I KNOW”
    “If you did then why did you allow FORWARDS on a SPOT EXCHANGE”

  • Guruprasad V says:

    NSEL is going to default. I heard this from a reliable sources. I don’t know how far its going to be true but the source of my news is reliable. Let’s see.

  • Such an insightful coverage Deepak. The more I read your posts, the more I hear my own voice echoing.. to the extent that if someone asks my views I can send a link to your blog!!
    Best wishes.
    -Siddharth