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Commentary

NSEL Might Not Have Those Stocks, Say Brokers

The day before NSEL was supposed to make the first payment after it defaulted, the worst fears are now looking like reality. NSEL doesn’t have the stock in the warehouses that it is supposed to have as security (LiveMint HT Dheeraj Singh):

In a hurriedly called press conference on Tuesday, a group of investors and brokers led by Nirmal Jain, chairman of India Infoline Ltd, Motilal Oswal, chairman and managing director of Motilal Oswal Financial Services Ltd, and Anand Rathi, founder and chairman of Anand Rathi Financial Services Ltd, said that a few of them had visited some of the warehouses and discovered that these did not have the quantity of the stock mentioned by NSEL. In some cases, there was no stock at all and the warehouse receipts were fake, they alleged.

No stock at all? What a surprise.

And worse, the exchange might only be able to pay 10% of its dues of Rs. 5,600 cr., they say.

NK Proteins, one of the borrowers (and owned by the son-in-law of the exchange), owes over 900 crores, and supposedly has about 1.89 lakh tonnes of commodities – in just two plants. But their web site states that the capacity the whole company has is just 14,000 tonnes.

Most of the stock is in warehouses that are inside factories or on land controlled by the parties that were effectively the “borrowers”. They effectively had the money and control over the security, it seems. Little wonder, then, that everything has vanished, even if I would question that it ever existed.

(I wrote that NSEL might have dummy stocks in one of the first posts in this saga)

Oh, now there are calls for government backup:

“We want the government to take over NSEL, just as it had taken over Satyam (Computer Services Ltd) together with its assets and liabilities and everything. The government should also take over FTIL and MCX ) till such time all payments of the investors are done,” Sharad Kumar Saraf, managing director of Technocraft Industries (India) Ltd, said.

His company has Rs.60 crore exposure to NSEL.

I really don’t think my taxes should be paying for any of this; when they made money it was their money, when they lost it is supposed to be someone else’s problem?

Brokers are now asking relevant questions, says Business Standard. Like how come FMC said NSEL wasn’t a problem. Like where’s the money that is being returned by those that said they’ll pay on time. Like why isn’t the promoter’s assets frozen, and why are they allowed to run or control other exchanges. These are good questions.

At this point, management of the exchange needs to be removed, and a team put in place that can build evidence of any fraud that might have taken place. Already, we know that the forward contracts were illegal. But fraud of the variety that involves misreporting of stock, especially if they were aware the stock didn’t exist – that might have happened, and if so, the responsible people should go to jail.

Maybe this time, when it’s the rich people whose money is stuck, there will be some enforcement.

Impact: If your money is stuck, expect it to stay stuck for a while at least, and prepare for a “haircut”. If this makes large brokers like Motilal and IIFL and Rathi stuck for cash, we might see good stocks getting hit on the stock markets while they exit to nurse their wounds.We don’t know what foreign players are thinking, but an exchange default and potential fraud with no real investigation is not a recipe for attracting foreign capital.

However more news will be available tomorrow, and perhaps the other side of the story, if there is one. 

  • Akash says:

    During the lower circuit, unless yours is the first order at the exchange or there are buyers at the lower circuit price that keeps buying till your order is executed, you cannot just sell the scrip. I’m worried about the retail investors who are still stuck in the MCX scrip as I was one of those who held on to the MCX scrip even after it was on a losing streak from the IPO price. I assumed that an exchange (NSEL) would never default and would always have risk management and high corporate governance standards in place.
    I took the haircut of 75% on 8th Aug 2013 after investing at the IPO price. Seemed that it was better late than never. The promoter effect has affected MCX and FTIL scrips which in my view was irrational, but the market has a mind of its own and keeps punishing the listed promoter supported companies, even though the companies have individual balance sheets. Maybe the market is not sure of how MCX operates when it comes to guaranteeing commodities that are being traded.