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Commentary

NSEL Has Settlement Options, But Leaves Much To Answer

In a press release, NSEL has now said that it’s got some options on the table to settle. After meeting with people who are supposed to have given back money in the term they should have returned it, those people have asked for more time because, I suppose, that they can do so.

Also read: Moneylife.

The gist:

They have two options, one of which is a settlement like this:

1) 8 Members are willing to pay their dues, as they come about or “even earlier”, amounting to Rs. 2181 crores.

2) 13 members offer to pay 5% per week for 20 weeks, amounting to 3107 cr.

3) Three companies aren’t yet paying up, adding up to Rs. 311. cr.

They’ve named the companies in 2 and 3. Funny thing: two of the three companies that “aren’t paying up” are profiled in Business Standard, as family-run basmati rice producers run by cousins. They have a turnover of Rs. 40 crore (put together) but obligations to NSEL of around 55-60 cr.

( You might find this strange if you think of it as them trading commodities way above their turnover – but if you think of it as a loan, then it’s just a company paying 15% interest on a 60 cr. loan, where debt>turnover is common. )

The second option is of trying to encash Post-Dated Cheques from the counterparties, adding up to 4,900 cr. (I’ll wait for you to stop laughing)

But my questions run deeper:

How does this settlement work?

Technically all contracts are getting settled over the next month (since the longest contract was T+36 days and no further contracts since about July 29). Does that mean if your counterparty is one of the #1 eight nice guys above who will settle their dues, you will get your money in full?

Or will you get 39% of your money on your due date (where the 2181 cr. out of the 5600 cr. total is 39%), and for the rest about 5% every week for 20 weeks? Or is it that some people get paid in full if they know the exchange or have other influence?

What happens if some borrowers default after paying a few weeks? Will the NSEL renegotiate or is it the end?

Details are awaited.

What happens to the “borrowers” that default? And to the exchange itself?

Consider this: if you borrow from a bank and don’t pay up, even if you pay back 5% of your outstanding for 20 weeks, CIBIL will show you as a defaulter and you will not get further credit anywhere. Companies that restructure loans also face similar problems and have to pay higher interest rates.

What’s the penalty for those borrowers in #2 or #3 above? Why aren’t they being penalized even if they pay 5% a week for 20 weeks?

In my view: RBI should ask for their names and put them in a defaulter list. SEBI should ban them from securities trading for at least 10 years. FMC should charge them a penalty and disallow them from trading in other commodities exchanges until the settlement is complete. Without a stick, this business will never see trust restored.

And what about the exchange? NSEL has made T+25 contracts available when they shouldn’t have. There needs to be an investigation and if found guilty, the exchange should pay a fine of 3 years of profits in my opinion. Again, no stick, no confidence.

What about interest for the 20 weeks?

Sure, many will be happy to just see their money back, but the 3107 crores to be returned over 20 weeks has a problem – what about the interest that is carried over the 20 weeks?

My rough calculations indicate the amount adds up to Rs. 85 cr.

Can some of these “borrowers” actually default on their obligations, and then get to pay no interest or penalty on the repayment?

What about the allegations of incorrect inventory?

Since the opening of this crisis, the biggest fear has been that the stock they say is there is probably not there, at least not all of it. 

Business Standard has checked their raw wool warehouse in Ludhiana and claims that the security guard says there has been no truck going in or out in the last seven months, while online reports claim things are being moved in and out.

Business Standard has another fascinating story from two warehouses (Kadi and Unjha in Gujarat). ET reported in July that there were doubts about castor seed inventory. And finally, the original BS article that talked about Paired Trades.

Why isn’t the FMC and the Dept. of Consumer Affairs ordering an immediate audit – by a CBI or Certified Auditors – of at least a few warehouses, immediately? If there is a discrepancy, then they should investigate. If people are found guilty of manipulation they should be put in jail. If the storage facilities have left the goods in bad condition, there needs to be

You surely wouldn’t find this in a press release from the exchange, but where is the government’s action in a press release?

And finally, why give us options? What are they waiting for?

Have you ever heard of someone sending a press release saying “We have been given a choice between eating a burger or a pizza, and we don’t really like pizza”. You’re going to say – so eat the burger, no? What are you waiting for?

Sure, there is trading tomorrow and they had to have a statement out there. But why not make this the offered settlement? Why not just say this is the deal, now we go forward with it?

Telling people this is still a considered option means just one thing to me – there isn’t commitment from the “borrowers” entirely just yet, so they need the wiggle-room. Otherwise they would have simply offered it and maybe tweaked things around if they got a push back from the “lenders”.

The Stock Impact

To FT: While FT is down nearly 80%, the largest fear was that FT would have to make good on the losses. That could still be the case, and the settlement isn’t really confidence inspiring to me; however, the market could well like it because we are that kind of market.

The second fear was that they will lose the confidence of investors in all their exchanges is a definite risk. Even with the settlement, this is a default. These investors aren’t coming back easy, and might never go to a FT run exchange; other investors will hear of this and demand mega guarantees from FT before they invest. Either ways, the future of their exchange businesses look weak, even with the settlement.

However, this bit might have been factored into the price already – losing 60% of your business but losing 80% of your market price might make it a little more reasonably valued firm. But there are so many “I don’t know” things about the settlement and how they’ll deal with any other defaults, that buying FT on “fundamentals” looks iffy; however there is ample reason to think that if the stock bounces, it might do well.

A third fear was that FT management would be indicted. There are no adverse news items to that effect, yet.

In all, the market might actually give the stock a thumbs up. On the other hand, market players might be really pissed off, and use this time to dump FT shares. So technically I am not saying anything; I would wait for the first hour of trade to determine direction.

To MCX: The fear was that FT will get hosed and be unable to operate MCX. That fear seems to be gone; MCX hasn’t been hurt or indicted in any way either.

The other fear was that people will yank off their collateral and margins from MCX. I don’t see that happening on Aug 1 and 2. And if volumes don’t drop tomorrow, MCX might still come out okay.

The impact should be positive for MCX more than FT. But the market, it doesn’t really like predictions and there is too much information assymetry. (That’s a nice way to say “I have no idea what will happen tomorrow.” )

  • prabee says:

    When was the last time you say regulators giving stick!. Even if they do it will be kind of mosquito bite which they will rub it off and go on.
    Again nothing is going to happen to those defaulters and if presented a chance they will do this all over again

  • alokt says:

    At the outset let me state that I am an investor so I may have some positive and hopeful bias in my comment:
    1. The Business Standard article on Market value of Paddy as between Rs. 980/quintal to Rs.1700/quintal is completely inaccurate as it appears to have taken a simple average of all varieties of Paddies when calculating the market price. The current price of Paddy 1121 which is a special basmati paddy is Rs. 4300/quintal which falls to R.2600/quintal during time of arrival of new crop in November.
    Therefore, loss on account of sale of paddy has completely been overstated.
    2. This after, Mr.Jignesh Shah has made the categorical statement that the difference of Rs. 760 crores reflected in the Settlement Guarantee Fund was on account of an accounting entry i.e. margin of 10-15% paid by the borrowers was adjusted against their outstandings.
    In other words, this margin was not used to fund payouts.
    If this is true and if stocks are indeed present, it means that this 10-15% cushion is available to offset losses on account of forced liquidation of stocks of defaulting parties.
    I think this aspect is critical to verify and I do hope we get clarity

  • B.Joseph says:

    Everything has been stage managed with the complicity of all the people involved including the brokers, who inspite of illegal trading roped in new investors till the last day. The amount siphoned off is so huge that a fraction of it can silence everybody that raise their voice and the matter will die its natural death couple of years from now. All thetorve allowed the events to happens. That is the speciality of loot in India, which is no better than a banana republic. Only an authority with genuine concern for the investors can solve the present problem.