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

NSEL Losing Support, Directors Resign, A Disappointing EndGame

National Spot Exchange (NSEL) Chairman Shankarlal Guru, whose son-in-law owns NK Proteins, a defaulter of Rs. 930 cr. to NSEL, has resigned saying “some bad people have entered the exchange" who should be punished. (For what it’s worth, I agree)

Deena Mehta, who earlier presented a case for why we shouldn’t be worried about NSEL, is now flummoxed that there are no goods! She quotes how other commodity settlements are working fine with warehouse receipts, but this one is gone.

And thirdly, the crisis has reached a political doorstep. Sharad Pawar’s aide (but not relative) B.D. Pawar has also resigned.

Let’s see what’s happened:

  • NSEL has defaulted in paying back investors.
  • They palm off the blame to the counterparty defaults. There are only 24 people on one side, and more than 13,000 people on the other, with the former owing a collective 5,500 cr. to the latter.
  • An exchange is supposed to guarantee settlement. That’s why they exist.
  • They have not done the settlement. They have not even tried to auction the goods that supposedly exist in warehouses – even if all goods don’t exists, some should.
  • They have lied repeatedly about how much was owed, by whom, and how much the settlement guarantee fund has.
  • They run other exchanges, a total of nine all over the world.

Stop right here, and tell me why these people are allowed to run exchanges? Financial Technologies, the promoter of the NSEL exchange, is responsible for the settlement, and if does have money at its disposal. Why hasn’t it used its own money to pay up? If the counterparties default, that should be their problem, not the investors’.

But it gets worse.

  • The 24 people on the other side? They are the “processors”, and own the plants where the warehouses are located. Essentially, your counterparty has both your goods and your money.
  • None of these 24 companies have balance sheets to support the kind of debt that has been taken.
  • Only two or three of them have actually returned money on a delayed and agreed schedule.
  • One of them, NK Proteins, is owned by the son-in-law of the (now ex-) chairman of the exchange.

Why aren’t these parties being investigated? Why isn’t the exchange – or the FMC or CBI or whatever – running default proceedings and taking away everything they own? It turns out the Income Tax department has swung into action now,  and found that these companies have over-reported stocks, which are short or non-existent.

Where could the money have gone? Let me give you one theory.

Assume that the money was taken to shore up share prices of two companies, and let us give them fictitious names like TinancialFechnologies and XCM. If the money was used to buy shares (that’s how you take prices up) and those shares were purchased at Rs. 1000+, then what exists today is just those shares, not the money. Today, these shares are worth, say Rs. 150 and Rs. 300 each. Even if you sold these shares, you would get only a fraction of what it cost to buy them. So most of the money could simply be a “loss”.

And then, the brokers:

  • Brokers now say they thought the exchange was safe. They got investors to invest’.
  • But they couldn’t just place an order on a terminal. They had to call the exchange and do two legs – a buy and a sell leg – together. They couldn’t just execute one leg and leave it on – supposedly.
  • If that’s the case, wouldn’t they try to get more information? Was the exchange, backed by a strong promoter, beyond reach of authorities? How could a commodity scheme disguise itself as a financing scheme?

And the last question which flummoxes me:

  • Why isn’t parliament discussing this when it’s in session?

I am utterly disappointed with what’s happening. Some people are imploring media entities to intervene, who decide that they’re not worth rescuing; it is wrong to blame them, it is to blame yourself for depending on them. There is an investor forum that Kirit Somaiya is running, and he’s written scathing letters and collected evidence. (See latest)

But the failure is of our justice system. Why hasn’t even one case of fraud been filed? What are investors waiting for? Sure, SEBI has banned the defaulting entities from the stock markets, but honestly, these are just shell entities. Where are the courts, the investigative agencies, the police and the political fury? What am I missing?

Like our content? Join Capitalmind Premium.

  • Equity, fixed income, macro and personal finance research
  • Model equity and fixed-income portfolios
  • Exclusive apps, tutorials, and member community
Subscribe Now Or start with a free-trial