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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.

  • Sunil Arora says:

    Just a minor point on the arbitrage of Yes Bank. Once I count the transaction cost, the trade does not remain attractive anymore

  • Pramod Kalyanshetti says:

    My question is not about arbitrage. The fact that it remained for almost 3 years without getting closed. Also people are talking about it as borrowing and lending activity when in fact it was a spot exchange facilitating exchange of goods for money. Also people lent money without taking delivery of goods and those who borrowed kept on borrowing without settling the interest payment. Shocking
    My post on the subject http://www.tumblr.com/blog/pramoduvach

  • Niftytrader says:

    This is a alarming development….read below
    1. Cockroaches will start coming out of MCX soon as stocks may not match EWR
    2. Naked short selling will become tough as no cash settlement
    3. Volume may dry and volatility may increase.
    All in all, a very bad develpment for Indian exchanges.
    **************
    Dear Participant,
    Exchange is in receipt of the communiqué from CDSL (Central Depository Services (I) Ltd) and NSDL (National Securities Depository Ltd), regarding discontinuation ofElectronic Warehouse Receipts (EWR) activity citing regulatory requirement .
    Hence, based on the directive received from the Depositories, Exchange hereby directs your DP (which is empanelled with Exchange) to comply with the regulatory requirements and which are as under:
    1.No new account should be opened for holding EWR/s.
    2.The Depositories henceforth shall not generate any new ICIN for credit of EWRs.
    3.We advise you to contact your respective account holders / participants to initiate the process of converting EWR/s into physical delivery by setting up remat request in respect of commodities held by them in electronic form.
    4.Rematerialization request set up should be completed latest by 31st August 2013 and the cost of Rematerialization shall be borne by the Exchange.
    5.All zero balance clients account, if any, are to be closed under intimation to the clients.
    Post set up of remat request, underlying warehouse receipts and quality certificates can be obtained from the respective warehouses in which the commodity is presently stored.
    All participants are also advised to refer the attached circular no. MCX/C&S/271/2013 issued by the Exchange. Please advice your clients that the delivery obligations in all commodities henceforth will be through physical delivery mechanism.
    For further details or clarifications, participants are requested to contact the undersigned and/ or Mr. Bharat Bhushan Thakur on 022-30930500 ext 1779.
    Regards,
    Saket Sinha
    Asst. Manager – Market Operations.
    Phone: + 91 – 22 – 66494000 Extn: 4111
    Fax: + 91 – 22 – 67269561.
    Email ID: saket.sinha@mcxindia.com

  • Sanjay Singhaniya says:

    Why you are leaving out auditor? Do you really believe that 10 tonnes of commodity can be stored in 1 square foot of ware house?

  • Dhananjay Redkar says:

    The entire NSEL fiasco brings to mind part from Godfather where Michale Corleone when he starts taking interest in Don’s business finds that some of the businesses suddenly dropping and Hagen explains that it is because Don stopped patronizing them for some reason or other.
    NSEL seems more a case of the firm losing some of its political patronage and the can of worms being conveniently opened, which everyone was very much aware of.

  • They’ve amply shown that they’re happy to wash their hands off NSEL and have no interest in resolving the problem and revising the “exchange (?)” If FMC/Govt really wants J. Shah and co. to get going, they should use only ‘chabi’ available-MCX chabi i.e. threaten take-over of MCX and dissolving its board, then only there’ll be seriousness.

  • alok says:

    Awaiting debacle at mcx as EWR get wound down and stocks are settled as physical delivery…..who will ensure stocks r complete there…..