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Commentary

NSEL Told To Auction Stocks, Take Punitive Action.

The Forward Markets Commission has rapped NSEL hard once again, in a scathing letter to management.

  • Why was only Rs. 92 cr. paid out? This is way lesser than the settlement plan announcement of Rs. 174 cr.
  • Why has NSEL not closed positions in an auction? And why weren’t defaulters pursued?
  • Since the default has happened the first step directed to NSEL is to sell the goods in auctions, immediately. This is likely to result in extreme pain if those good are, er, not there at all. 
  • The second step is to seize the defaulters’ book and recover money from all their realizable assets.
  • The third step is to report all deficiencies, auction results and take punitive action.

This is a very straightforward accusation that the exchange isn’t doing what it’s supposed to. I wonder what happens if NSEL disobeys – will they get more strongly worded letters, or will FMC take over?

Some say the auditor is going to be taken to court for stating the stocks exist. But an audit is a snapshot. I could bring in stocks the day before the snapshot and take them out the day after. Then you can’t blame the auditor – even if he knew, and it’s impossible to prove that he knew.

I’m very perturbed to see why this is not a “Serious Fraud” or a CBI investigation even now. There is obviously something wrong in this picture; NSEL has defaulted twice, told us more than a few lies, there are doubts about collateral quality/quantity, management has been fired…apart from a forensic audit (which is only about the books of accounts) we need a forensic investigation into the various parties involved.

Meanwhile NSEL gets a mere Rs. 40 lakh on Wednesday.

Parag Parikh has an interesting post on NSEL today, speaking of the behavioral biases that hamper us. While I would agree with many things, I believe that it was very difficult to debug that NSEL arbitrage as it was quite believable.

Look at Yes Bank today. The stock trades at Rs. 246 and the September future trades at Rs. 250. Even if you assume an outlay of Rs. 175,000 (buying cash and selling the future) the return is about 1.1% for about a month, which is around 13% annualized. This is not just theory, it exists in the market today. So is it wrong? There is a tiny risk that this arb will fail (if the entire NSE fails). But that is a risk investors will take today. I’m not sure it’s just behavioural bias here at play – people were given wrong information and hardly anyone seemed to know that just 24 companies were on the other side of these massive trades.

It will get worse before it gets better.

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