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NSEL SCAM

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by

Riddhi Goel

on 24 September 2013

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Transcript of NSEL SCAM

NSEL SCAM
BACKGROUND
National level, electronic and transparent spot market, started live trading in October 2008. It is promoted by
Financial Technologies India Ltd (FTIL) and National Agricultural Cooperative Marketing Federation of India (NAFED).
The NSEL provides a platform for auction and trading of various commodities including agricultural products, grain, bullion, metal and energy. the NSEL is a
“spot”
exchange, meaning it can offer trading for delivery of physical stock of commodities within a short period allowed for settlement.
LENDER
Buys a commodity on T=2 settlement basis and then simultaneously sells the same commodity for a T+25 settlement at a higher price

• A lender cud earn upto 11-15% annualised returns

• Lenders were mostly high net worth individuals looking for a 12 to 18 per cent returns

• The lender sells the contracts and simultaneously buys a 30 day forward contract while pocketing the difference,
How NSEL messed up?
• Such contracts, according to the government, amount to short-selling, where an individual sold the contract without actually owning the underlying commodity.

• Second, spot exchanges cannot offer contracts whose tenure exceeded 11 days. However, NSEL was offering contracts over T+10 settlement cycle. It allowed buyers who could not pay for commodities they bought more time and sellers who could not deliver commodities sold on time. This amounted to forward trading, which is in violation of NSEL’s mandate.
Third, FMC, the commodity market regulator, pointed out that it was not compulsory on the part of sellers to deposit the commodity in warehouses before taking a short position

• Under the guise of spot trading, NSEL was offering forward trading facility to investors without proper margin and settlement systems. NSEL was taking advantage of a regulatory gap. Being a spot exchange NSEL was regulated by the Agricultural Produce Market Committee (APMC), a board set up by state governments.

o The forward trading in commodities come under the domain of Forward Market Commission (FMC), a more stringent regulator.
way forward for NSEL
The Government is said to be readying new regulations to govern spot exchanges to plug these loopholes. Until then NSEL will not be allowed to launch any new contract. The structure of the now suspended contracts could change based on the new regulation. Meanwhile, SEBI has sought details from various brokers on their exposure to contracts on NSEL
What is a Spot Exchange?
A spot exchange is an electronic version of the age-old mandi, where buyers and sellers meet to exchange goods and money. National Spot Exchange floated by Financial technologies,
The deals happened through the National Spot Exchange. The underlying stock was commodities:
the transaction may comprise buying a crop from the farmer and selling it to the miller. For instance,
the investor will enter into a 3- or 4-day buy contract and a 20- or 25-day sell contract. The exchange
claimed it reduced the cost of processors
BUYER
• Sold his commodity on a T+2 basis , received funds upfront and then paid back the funding
on a T+25 basis

• The borrower- the current lending rates in certain sectors are amlost equivalent to this arrangement

• These players benefitted from credit which they got with practically no questions asked. If these
companies would go to banks for such huge sums of money, they would be asked to produce balance sheet and other documents. But through NSEL they got easy money.

• Typically, these are companies which own and operate the warehouses or in premises the stock lies. For example, ARK Imports, which the warehouse operator for raw wool was named as one of the 13 members/ processors, who have offered to pay 5% of their total dues every week.

• This product proved popular with borrowers who would not get credit otherwise because they were not creditworthy
Events leading to unfolding
• December 2012: It is noticed that NSEL’s Web site cites FMC as one of the regulators of the spot exchange (the others being State Agriculture Marketing Board and Warehouse Development Regulatory Authority).

• February 14, 2013: NSEL confirms modification of content after FMC objects to the incorrect use of its name as regulator of spot exchange.

• July 31: NSEL announces that trading in all contracts, except e-series contracts, stands suspended until further notice; that delivery and settlement of all pending contracts will be merged with immediate effect; and to defer it for a period of 15 days. The crisis comes to a head.

On July 23, NSEL issued a directive to its members that all contracts have to be settled within 11days or a (T+10) basis and that too on payment against delivery basis. Settlement of a contract happens when the buyer gets delivery of the commodity and the seller gets the money. It also restricted traders from putting buy or sell trades at the same time to square off the exposure to the market.
impact
This caused panic where most traders were interested only in longer term contracts.There were contracts that could be settled even 30 days after the trades were done. Soon after the new rule was announced trading volumes dried up on the exchange as traders
failed to roll-over positions and demanded settlement of trades. This forced NSEL to suspend trading in most contracts and put a 15-day moratorium on settlement of existing contracts
Over Rs 5600 crore trades remain unsettled. About 15,000 investors have to receive funds from the exchanges. Half of these investors are small investors. Several leading brokering house like Motilal Oswal, Indian Infoline, Geojit also suffered as their clients had exposure to the tune of Rs 700 crore
current scenario
These 24 borrowers are spread across India and have various types of businesses such as sugar mills, textiles, agricultural products, etc. Out of these 24 borrowers, 19 have recently been
declared as defaulters

Many small investors in India think and believe that the word “exchange” means government and they presume fi nancial strength and credibility. That is not the case in reality. Though the Government of India gave an approval to the NSEL for trading, the same government suspended trading of all contracts inclu ding the e-series at the NSEL in the fi rst week of August.

Jignesh Shah, one of the promoters of NSEL, announced in a media conference in the second week of August a fi vemonth payout plan starting with Rs 174 crore. However, the fi rst payout made was only Rs 92 crore. This clearly shows the failure of the NSEL board to have a grip over the situation

similar case .....
Another emerging south Asian economy, Hong Kong, recently faced a similar issue. The Hong Kong
Mercantile Exchange (HKMex), which was started in June 2008, was closed in May 2013 on account of fi nancial irregularities and issue of false instruments
Full transcript