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Commentary

NSEL: Show Cause Notices, Empty Warehouses and We-Want-That-Gold

The Forward Markets Commission (FMC) has issued a show-cause notice to Jignesh Shah and FT (Finantech), asking them to defend their “fit-and-proper” status as directors in MCX. They get two whole weeks to reply.

The charges are of lack of proper oversight (allowing defaulters to continue to operate), of insider trading (IBMA as an NSEL subsidiary was trading on the exchange) and others.

Additionally the Economic Offenses Wing (EOW) has issued a lookout notice for Shah and top management and board members of NSEL, including defaulters. This ensures they don’t leave the country – all airports/seaports will have to detain these people if they try to exit.

And then, the EOW finds that the warehouses are empty:

In a startling development, the Economic Offences Wing (EOW) of Mumbai police, probing the Rs 5,600-crore payment crisis at the NSEL, has found half of the warehouses it raided empty, while four storage building of commodities existed only on paper, a police official said.

Big surprise. The fraud came to light on August 1. They had two months to empty the warehouses, and obviously, they have.

Meanwhile, investors are now eyeing the e-series contracts. These were not speculative trades, paid for in full and gold or silver allocated against them. Such investors thought their money was safe, since they were not really part of this paid dual trade gimmick.

However, the “pair trade” investors think otherwise. They have argued in court that they should be paid pro-rata on any payouts made in the e-series settlement now, for which redemptions have been halted till Oct 7.

This sucks at multiple levels. The “pair trade” investors have no right over this money, as it is held in gold which belongs to those e-series investors. Courts should dismiss any other argument outright.

We are already seeing serious damage in the financial system, where an exchange fails to settle, evidence of fraud pours in, the owners of the exchange are allowed to continue without any arrests and now, courts are being told to sequester assets that were never even part of the same settlement. Imagine if you were told that your savings bank account would be charged Rs. 20,000 because the bank lost money in Kingfisher so they’ll take it from you. This is stupid and horrifying. We’ll all convert our money into cash or gold, if such things happen.

The NSEL drama is withering away from the front pages, but it is going to hurt us in the long run. Like everything else in this country nowadays, the wrong-doers are getting away scot-free. I can only hope the next government will be different.

  • Anand George says:

    “Imagine if you were told that your savings bank account would be charged Rs. 20,000 because the bank lost money in Kingfisher so they’ll take it from you” … isn’t that happening some time soon… don’t recall the exact statement that you made about an investment being 100% safe till that one thing happens and it’s no longer safe… banks today are probably where NSEL was a few months back…

  • Bunch of thieves really with thieves in the government to help and support them as well as NOT TAKE ANY ACTION for so many days.
    Had it been anybody else in any other place…..things would have been different.
    Shocking really.

  • Raj Mehta says:

    “This sucks at multiple levels. The “pair trade” investors have no right over this money, as it is held in gold which belongs to those e-series investors. Courts should dismiss any other argument outright.”
    Paired trade investors are of the view that exchange has used up SGF (settlement guarantee fund) to replenish the e-gold and e-silver stocks after the scam broke out. This action was done to negate the hue and cry from large many small investors which also include people connected with the exchange.
    Investors demand a thorough probe before any action by this dubious exchange… to bail out only certain class of investors.

    • Sorry but I disagree, this is a random allegation without any proof, and the exchange is more likely to bail out some paired-trade investors rather than fix the stock of e-series. The e-series is gold held in escrow, and the exchange has ZERO right over any of it.

  • lohit says:

    ‘Bail-ins’ are now enshrined in the law in some EU countries and Canada. So if the bank fails, depositors will be on the hook, which seems rather fair. Why should tax payers pay for it?
    Deposit insurance in India is Rs 1Lakh. So that much at least in theory in untouchable.

  • rajesh says:

    Thanks for this post. It is amazing that such a frivolous petition (clubbing of eseries) has been taken seriously by the court. The petitioner has done a good job of distorting language. They have presented e-series redemption as settlement and then claim that this settlement is not very different from pair trade settlement.

  • kiran says:

    Nice article Deepak.
    The recent comments from Chidambaram made it clear about the bail-ins india. He mentioned our saving rate is above 30% even in the times of crisis and these savings are very useful if they convert to investment channel. And here is my question, do we have the law enacted the depositors in the banks are the “unsecured investors” like some countries in europe and america.