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NSEL Update: Lots of Attachments, Very Little Real Money Coming Back

After a long time, an update on NSEL. The commodity exchange that was basically a large ponzi scheme has unravelled into what seems to be something where everything is wrong and regulators are tying themselves in knots about where to begin.

If you lived in a cave through August-September, here’s the gist: A spot exchange named NSEL, promoted by Financial Technologies, provided a fantastic “arbitrage” opportunity in 2011 and 2012. You invested anything more than Rs. 5 lakh (500K) and got to buy a spot contract of some agricultural good (like castor seeds) and instantly, sell them in a 24-day forward contract at a higher price. Net of delivery costs, storage charges and brokerage, you made between 12% and 18% per annum.

The problem? There was no castor seed or anything else backing the contract in these warehouses. On your side were about 17,000 investors thinking that the return was great. On the other side were 24 “borrowers” who owned the plants in which the goods were supposedly stored; but there were really no goods. So they simply took the money, and when it was time to return it, they found another “investor” to borrow from to return it. Eventually, the Forward Markets Commission (FMC) brought this ploy to an end  by getting the government to ban such a ponzi scheme, and when there is no liquidity, the insolvency of the borrowers resulted in a Rs. 5600 exchange default.

There are many aspects to the NSEL drama. Forward contracts on NSEL were illegal. The exchange management was complicit- they knew these borrowers didn’t have the goods, but let the game continue. The borrowers knew the arrangement. Even after the fraud became apparent, the exchange lied through its teeth, saying it had Rs. 800 cr. as a settlement guarantee fund, which it did not. The exchange also owned a large stake in one of it’s biggest traders, the Indian Bullion Market Association. A settlement was brokered in which the entire money was supposed to be paid over 9 months, but there were defaults from the first month itself. It’s a web of deceit, lies, incompetence, and quite apparently, fraud.

Read through all Capital Mind posts on NSEL.

As an update, after all of that: NSEL has only managed to receive only Rs. 267 cr. out of the total 2970 cr. it was supposed to get in the settlement to date. It’s only paid out Rs. 432 cr., and out of that the NSEL management had decided to pay out small investors some Rs. 177 cr with their funds. Even then, less than 10% of the money has been recovered, and it’s been over four months since the problem was discovered.

The FMC has appointed Price Waterhouse Cooper (PWC) to conduct a special audit of MCX, a promoter entity of NSEL. This is hilarious because PWC was found to be complicit in the Satyam scam, where they audited accounts that they hadn’t even properly verified. While audit is about the integrity of the partner involved and thus the firm shouldn’t have to bear the brunt, the only real punishment for allowing a partner’s misdemeanour is to not give them any future business. But this is India, where you don’t get punished if you say sorry. (Sorry is optional)

The economic offenses wing (EOW) has attached some 2,000 crore rupees worth property of various NSEL borrowers including Mohan India, NK Proteins (owned by the ex-chairman’s son-in-law) and PD Agro.  The EOW plans to file its first chargesheet by December 31. This is exemplary as nothing in the recent past has been done in the same calendar year!

See an interview with Rajvardhan Sinha, Additional Commissioner, EOW.

The Bombay High Court has, apart from attaching Jignesh Shah’s (founder of FT) assets, attached FT Tower (the big office of Financial Technologies). And Shah can’t sell his stake in FT unless he gives MMTC a three-week heads-up.

All this attachment amounts to nothing; unless these assets are sold, investors aren’t recovering any money. And if they really are to be sold, it could take years to go through the courts, and appeals and all that. If investors get 80% of their money after three years, that’s equivalent to taking a 50% haircut now, and investing the money at 9% returns for three years.

The story does not have a happy ending. And the main lesson learnt for anyone is:

If a 15% risk-free return sounds too good to be true, it will be.

  • Anon says:

    & what about IndiaREIT the REIT fund by renowned Ajay Priamal’s company which is TARGETING IRR 24%+ returns?

    • Get their prospectus. See what returns their fund of 2006 has given in 7 years – even now, it seems they haven’t returned all of their investors’ money! (Much of it is stuck in projects that are yet to be sold – but you don’t know when that’ll come and how much)

  • Rajeev says:

    Hi Deepak,
    You have pointed it out correctly. The money that people made couple of years back was easy money. Equation is entirely different now. Great article.

  • Guruprasad V says:

    NSEL is a biggest fraud. It might be more than what has been stated publicly. Jiggu’s wife have traded for more than 40k without posting any margin. Just imagine the short squeeze in the Gold and Silver of 2011 that went even above the prices in dollar terms. Those are contributions of them. They might be knowing the number of contracts in long and short from their own exchange and they make trade according to the contracts. India is a third world country.

  • Ravi says:

    It would be interesting to know if the quoted ‘value’ of properties being attached is Govt. rate or the market rate. If its Govt. rates (which will be substantially low) then investors can hope to recover most of their monies when it actually gets liquidated due to the much upside in the market?

  • sygcom says:

    The lenders too are to blame. Many of these were ‘HNI’ and Private Wealth customers being told by their professional wealth managers that the return was ‘guaranteed’. I don’t think they were unaware of how a commodity exchange works. They would have had enough information to be able to question the ‘guarantee’. There was no guaranteed return promised on paper.
    Correct me if I’m wrong, but it looks like they have knowingly taken the risk of lending money with no collateral.