NSEL fiasco and Regulatory framework

Here comes another financial fraud with the traces of criminal conspiracy all around. 24 borrowers dupes 15000 investors of 5400 Crores of rupees and regulatory agencies are still guessing what has happened. National Spot Exchange Limited (NSEL) , a subsidiary  of Financial Technologies Ltd. (FT) ,who is promoter of MCX also, flouts all the norms of spot trading due to fragile regulations . NSEL was setup with permission of Ministry of Consumer Affairs , practically without any regulatory agency or framework. It got license from Ministry of Consumer Affairs in 2007 for spot  trading in commodities. In absence of any strict regulatory oversight it expanded its operations in latter part of 2010 and included other 'novel products'. Punters joined in steadily to take advantage of the new 'services' NSEL offered, which included paired contracts of T+2/T+25. Despite whispers of unauthorised deals, including those struck for the above paired contracts, punters felt safe to do business because of the lack of regulation.
It was only after February 6, 2012, when the Government notified the Forward Markets Commission(FMC) as the designated agency on behalf of the ministry that things started to move. The FMC found glaring anomalies in NSEL operations. Even the said regulatory agency , FMC, has now come with the statement that NSEL was not regulated entity of FMC and FMC have limited role to play.

It means that an exchange has been operating in India with a very fragile and unclear regulatory set up to oversee it. National Spot Exchange had several contracts where settlement was done beyond eleven days. In fact, some worked to a T+25 and T+35 day settlement cycle. The Forward Market Commission also found that there was short selling in some of these contracts where an individual sold the contract without actually owning the underlying commodity. Settlement beyond 11 days and short trades were both not permitted by regulators on spot market transactions.

Taking advantage of practically zero regulatory restrictions, money was  got invested from people all around the country and was accumulated by 24 entities on pretext of having the stock of that much worth. Some of these entities , having borrowing of hundreds of crores from NSEL, have been setup as late as in 2011.

Most of these entities,who have borrowed Rs.5400 crores  from NSEL, does not have even 10/20% of the stock declared by them. None of the entity is credit worthy and their statement of accounts speak loudly of their conduct. It means that fake warehouse receipts have been issued, fake stock statements have been prepared,fake VAT documents and insurance documents have been prepared , godowns are vacant and even addresses of godowns given are not correct. In one reported case there is a Mall at the godown address and in other case there is not even 70 lakh of stock in the godown whereas stock of more than 700 crores has been shown in the documents.
Everyone knows that there is no stock and one wonders as to why FMC is still saying that it apprehends that there might not be stock of 6200 crores as claimed by NSEL and it is getting the stocks physically verified from independent auditors.

It is not understandable , when fraud is clearly visible ,as to why so much time is being wasted to catch hold of just 24 borrowers and other related parties. The fraudsters are still moving around in swanky cars and in the mean time money might have travelled out of India and also did most of the family members of defaulters.

Till the time whole thing got busted , money was being collected from innocent investors ,luring them with 15-18% of return. They were issued warehouse receipts with no stock in the warehouses. There is no need of debate on this that people do not understand such markets but are lured by high returns.

It seems that in this election year government is too busy in other things. It is unfortunate that now our authorities are messing it up and trying to make the matter look complicated which otherwise is a clear case of criminal fraud being conducted in absence of any regulations. The inaction and denial on part of government is really astonishing. The matter is being tossed from one ministry to another and in our country running away from taking responsibility is a very common situation.

How come 24 borrowers commit fraud with same modus operandi is anybody's guess. It means that everything was controlled from a centralized platform. If government wants it can immediately tighten the noose around 24 borrowers and officials of NSEL engaged in this fiasco and trace the money trail and recover the money. But it is surprising that authorities are still thinking of conducting investigations instead of taking quick action to recover the money. There are only 24 borrowers and recovering money ,with such powerful government agencies in place, should not be impossible if will power is there. The government showed quick action in case of Satyam and any more delay in this case would help the defaulters swindle away the money and investors lingering on in courts for decades to recover their money.

In case of one of the defaulters there has been an Income Tax raid  few months back ,before this fiasco broke out. The Income tax department could not recover any stock from the assessee where as the books were showing stock of more than 700 crores .The stock details released by NSEL is also showing stock of more than 700 crores in so called warehouses. In another case, chairman's son-in-law has been the biggest defaulter and address of one of his godown is showing Mall built up there. Inspite of clear instances of fraud , the authorities are waiting for stock audit reports by independent auditors.

In this country with lax laws and delayed justice , the things are being allowed to be messed up and poorly informed investors are made to run here and there and make futile efforts to  recover their savings  .Those who can afford the loss, try to  forget it as another loss in the financial markets and those who have lost their life long savings are left with only tears in their eyes. In US ,Rajat Gupta , is made to repent for whole of his life for his involvement in a case of insider trading and in our country , handful of high profile persons having top contacts , rob  people of their money and government always have other priorities to deal with. Every fiasco is first tried to be buried under the carpet and if that does not happen then it is allowed to become complicated and dragged on in enquires, investigations and courts for decades together. After few decades neither the culprit is alive nor the victim and the mess that could not be buried under the carpet gets buried beneath the ground.

NSEL is a clear case of fraud by a handful of persons and the fact that the same company runs MCX is really alarming . If our government really shows the will and takes quick action , tracing the money trail from defaulters and NSEL officials is not a big deal. Like Satyam scam, it is easy to go after 24 borrowers and recover the money but government is taking too long to interrogate the borrowers and exchange members to find out where the money has gone.

The government can really set an example in this case by seizing the ill gotten money from the defaulters and assets acquired with it and giving them back to the investors. But if authorities delay it more, then it would mess up the things to detriment of innocent investors and shake the confidence of citizens in the regulatory set up of this country.

CA.Arun Gupta
Ex-Chairman Ludhiana Branch of NIRC of ICAI
Ex-Secretary District Taxation Bar Association

 (The author is a Chartered Accountant based in Ludhiana.He himself doesnot have any exposure in NSEL or MCX)