THE INSIGHT STORY : NSEL (National Spot Exchange Ltd)
What went wrong? Explained in simple language!
So, we all heard about the latest scam which has come to light. The infamous NSEL 5600 crore commodity scam. Here, we will find out what exactly went wrong with National Spot Exchange Ltd.(NSEL) which is a joint venture of Financial Technologies of India ltd(FTIL) and National Agricultural Cooperative Marketing Federation of India(NAFED). NSEL is a private organisation run by Shri Shankar Lal guru ( Chairman), Jignesh Shah (Vice Chairman) and Anjani Sinha ( MD & CEO).
NSEL was founded in 2005 and went live for online trading on the 15th October, 2008.
NSEL is a commodity exchange, which means it acts as a platform for commodity spot trading where in you buy goods by paying cash on the ‘spot’. The key factor of this exchange was its facility of online trading where in the buyer and the seller had the ease to transact being anonymous and it also solved the problem of being at distant places. The work of a commodity exchange doesn’t end here. The exchange needs to assure both the parties that the transaction will be settled and in case of a default from either parties the responsibility lies with the exchange to sell the goods lying in its warehouse and make up for the loss and vice versa if the seller is at default.
Now, the question arises as to where was the loop hole?
A spot trading takes place on t+2 contract basis which means the delivery should be made within two days time only then it will be considered as a spot contract. But NSEL turned them into longer contracts, these were the contracts NSEL wasn’t authorised to perform. Also known as Forward contracts. The investors were in the dark about the arbitrage. NSEL had promised to payout 15% profit, or may be the investors assumed it to be a promise. We clearly don’t know.
To understand the gist of the scam lets go with an example. What if I you parked your vehicle in your friend’s parking. Are you sure he won’t use it? Or may be if you are out of town he may even run it as a taxi? Who knows, if he is smart he might do any of these things. You can never find a ‘’free parking’’ zone. The same was the case here, the transactions were said to be executed fairly and the the commodities were said to be ‘’in the warehouse’’. Which was not the case, the exchange was carrying on contracts without underlying assets. The deliveries were taking place on t+35 basis. NSEL was carrying out a lot of activities it wasn’t authorised to, like for instance NSEL was also transacting on e-contract basis without permission.
Who blew the whistle ?
On 31st July 2013, NSEL was stopped from carrying out any new contracts by the Government. The news spread like a fire and the 13000 investors where left shocked and since then they didn’t get their payouts and NSEL’s MD Anjani Sinha kept insuring the investors with statements as shallow as their warehouse receipts. Leading to a protest on 28th August 2013 at the Financial Technologies Ltd office by hundreds of investors. All the regulatory authorities were wondering as to why the investors are not filing a written complaint against NSEL. Whereas, the investors were confused, as to which door to be knocked for help. Pankaj Ramnaresh Saraf one of the investor, is the new character in the story who took the brave stand of filing an FIR against NSEL. Now, the ball was in EOW’s (Economic Offence Wing) court. Immediate action was taken against the matter and EOW and searched 184 locations across the country.
In no time, we saw two arrests of key people of NSEL Amit Mukerjee (Assistant vice president; business development) and Jay Bahukhandi (Assistant vice president; warehouses) they are under arrest and will be interrogated till 18th of October, 2013. Jignesh Shah and his team of NSEL had been charged under the IPC sections 409, 465, 467, 468, 471, 474, 467, 120(B) and 34. All these sections focus on forgery and criminal conspiracy. Shankar Lal Guru and Joseph Massey too are under interrogations. EOW is not leaving a stone unturned. Now that they know what exactly they were doing, but the management continues to play the blame game. And hence, amidst all the blaming, question remains the same; where is the money?
What have the regulators of the country got to say about the scam ?
CBI, High Court, EOW, Government, RBI, SEBI all the big bosses are coming up with statements. Except for RBI, the evidences found during the raids clearly show that certain banks were also involved in fake pledging of the commodities. The Bombay High court had been closely observing the recent improvements in the probe and has asked Ministry of consumer affairs, Finance Ministry and Forward Market Commission to register their affidavits in correspondence to the PIL to ask CBI to look in the matter. If the sources are to be believed, CBI thinks it would be better if EOW and Mumbai Police continue to investigate the scam owing to their expertise and the progress they have already made. On 14th October, Mr P. Chidambaram when questioned about NSEL said, he had been keeping an eye on the whole incident and his primary concern are the effects on MCX and MCX-SX, the people involved in the scam will have to pay the price but there seems to be no point in undertaking NSEL by the Govt.
Happy Endings? Not so soon!
Although NSEL had been assuring everyone that they will pay back the outstanding amount of 5600 Crore to the investors. Their statements are not backed by sufficient commodities and deposits. The exchange is not having the goods in their warehouses. And you can’t sell a commodity which exists only on paper. FTIL shares have come down by a whopping 70%. 5600 Crore worth of the investors money is apparently ‘’missing’’ from the market. If Shah fails to pay the investors Police will have to confiscate his properties. And the new twist in the story is that the buyers of the commodities and NSEL owners share a close family relation. So, it was a well planned ‘family’ business to fool the investors and the Government to fill their own pockets.
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