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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?

  • mangoman says:

    It is very clear.
    All parties are at fault here. Obviously the promotors are cheats here. The greedy so called ‘investors’ does not have any moral rights since they knew very well that there is no such thing called ‘stocks’ , ‘ware houses’ etc on which they punt. Government on the other hand allowed this thing existed and operated in ‘vacuum’.
    That is why they asked Jignesh shah to settle this matter like a kangaroo court. Obviously government knew about this ponzai scheme and it fears that if it touches ( NOW THIS IS IMPORTANT), it is like opening a pandora box which will expose India in very poor light as these exchanges are nothing but a great ponzai schemes.
    What do you say?

  • Praveen says:

    What am I missing?
    The fact we live in India and everything is “Chaltha Hai” here…btw, parliament is busy discussing FSB.

  • mangoman says:

    I support Food Security Bill.
    We should appreciate congress for giving back atleast a fraction of money they have taken from the general public. General public is looted by government by the artificial inflation engineered by RBI and government to support a handful of corporates and real estate mafia.
    I hate the corporates who oppose the food bill. When this parasites got stimulus package of 6 Lakh crore of Lehmann collapse they did not complain. When common man asks his due these idiots are shouting from roof top.
    Feel like vomiting when Kiran Mazumdar Shaw speaks ethics on behalf of Corporates
    Deepak,
    Disappointed to see that you oppose FSB.

    • I am deeply disappointed in anyone supporting the FSB. Mostly people haven’t read the bill. There is no food security in it. There is only a subsidy that our children will pay. The hungry will still go hungry. The corrupt will get mroe to be corrupt about. Everyone will pay more for food, because the government will hoard most of what is produced and let it rot.
      This is a horrible bill that our politicians should never have passed. It will need to be reversed, and I hope the next government dilutes it and converts all food subsidies to direct cash transfers.
      This is a disgusting way to run politics. But our government has repeatedly demonstrated a complete lack of any economic knowledge and practical know-how. People who don’t get food today will not get any food anyhow.

      • Shashi says:

        Completely agree with Deepak. Saying 67% will get food sounds like a farce when again the “leaking” PDS system is being used to distribute the grains. There will be corruption of proportions unknown in Indian history due to this.

    • Hemant says:

      Yo mangoman,
      Like since 70’s congress is HATAOING GARIBS,it will now grab votes under the pretext of Food Security Bill.And since we are having public who loves Chennai Express will run to vote for CONgress & Mr.Deepak don’t you think we are like fools to complain as i feel idiots in our country(who are in large no)deserve to be under congress till whole country gets sold?

  • shinu says:

    Why the parliament not debating it…? 5500cr fraud
    parliament and media are occupied with the money robert vadra made…50cr fraud
    Even a state of kerala was paralyzed for weeks when a secretary of the CM was involved in an 8cr fraud. BOTH POLITICAL STUNTS BUT not for the benefit of general public.
    India is country for the politicians, by the politicians… Common man is always the loser…. Raja, Kalmadi, or even the 24 mentioned above will walk scot free in few days max after visiting the high profile “cells” but poor Indians remains poor and get looted and raped.

  • d k dhingra says:

    There is always a limit for the duration of happy hours or sorrow period on any matter- be it marriage of the son or be it the death of dearest one. The process is same. similarly, when some one turns out be an anti social element, the society starts ignoring him over a period of time even if there are strong condemn at the initial stage.
    So is now the case of the politician. it is now a way of life. There is no use of crying time and again. it now needs to be accepted till there is a strong change in society.