Sunday, 1 September 2013

5700 Crore default by commodities exchange NSEL -The genesis of a scam

National Spot Exchange Limited (NSEL) is defaulting on payments to 15000 odd  investors. It owes the market 5700 crores. It is a huge scam that is being carefully downplayed because when the cookie crumbles, big names will tumble.

False Warehouse Receipts
NSEL is a commodity exchange, one assumes that all trading is backed up by stocks of equivalent value. So they should be no cause for panic. But the shocking truth is that the stocks don’t exist! Warehouse Receipts are all that exists. The status of most warehouses is:
a. The warehouse doesn’t exist
b. In some cases the supposed Warehouses companies are totally fake with peons as directors!
c. If they exist they do not have any goods
d. Some warehouses exist but they take no cognizance of the receipts claiming they are fake

Illegal Forward Trading thrived at NSEL

No Regulatory Control –

How did this happen? The common man sleeps sound assuming that there are checks and balances for the markets and there would be even more stringent checks and balances of commodity exchanges – especially those dealing in agricultural produce. But the shocking truth is the from the time NSEL began trading in 2008 end till around 2012 there was absolutely no check on its operations, not even any monitoring.

NSEL was India’s foremost agricultural trading exchange, promoted by Jignesh Shah whose impeccable credentials seem hollow now, and supported by the government (through NAFED), whose complicity in the whole fraud is laid bare.

The crux of the matter is that in agricultural commodities “forward trading” is improbable because you are actually buying/selling goods which are meant for timely consumption. When NSEL, began a buyer was supposed to sell within two days “T+1” formula. But between 2009 and 2011 NSEL traded in T+25 and T+36 periods without any questions! It is interesting that the Ministry of Consumer Affairs (MCA) which is the only body to which NSEL reported, was led by Sharad Pawar during that period. It is only in 2012 that the Department of Consumer Affairs (DCA) began questioning NSEL. NSEL kept skirting DCA for almost a year until the scam came to light in July 2013

Illegal Hoarding of essential commodities – Exchange fuelled Inflation?

There is no sanction for such forward trading in agricultural commodities – in fact it amounts to illegal hoarding of essential commodities! World over queries are being raised whether commodities exchanges are fueling inflation. Experts and activists have strongly advocated against speculation on agricultural commodities:

“The FAO has already reported that enhanced speculation in futures of agricultural produce has led to at least 30 per cent rise in food prices globally. How the spot market could be prevented from the overwhelming sway of the capital in futures trading could be judged from the following facts: India produces mentha oil worth $250 million odd but futures trade in this commodity generally goes up to $2,500 million. The case of guar is most interesting; its production in India was around 1.6 million tone last year while its quantity traded on the futures market reached 169 million tone- around 1700 times more.” Jaspal Siddhu, senior agriculture journalist.

The Economic Survey (2007-08) of Indian Government clearly underlined that “Direct participation of farmers in the commodity futures market is somewhat difficult at this stage as the large lot size, daily margins, high membership fees etc work as deterrent to farmers participation in these markets. Farmers can directly benefit from the futures market if institutions are allowed to act as aggregators on behalf of the farmers”.
If we look at following graph the rise of prices of commodities like Rice, Sugar and Wheat we see a obvious spike in 2008 – the same time NSEL began operations.

Background and chronology

Jignesh Shah of Financial Technologies (India) Limited began MCX, India’s first commodities exchange that traded in metal, bullion and energy.
Sharad Pawar became Agricultural Minister
November 2004
MCX signed MOU with FTIL and NAFED to start an agricultural commodities spot exchange
May 2005
FTIL & NAFED launches NSEL
MCA gives sanctions to NSEL to do one day trading in agricultural commodities. Interestingly NSEL is exempted from regulation from The Forward Contract (Regulation) Act (1954), FCRA*.
October 2008
NSEL began trading. Interestingly its initial work was conducting E-auctions for NAFED, FCI, MMTC, PEC, and Hindustan Copper, all public sector organizations.
NSEL starts trading in T+25 and T+36 formats without any approval. Here we need to understand the nature of trading
NSEL did not give warehouse receipts of T+1 transactions to the investors but kept with the warehouse receipts on behalf of the customers. It was treated as early pay-ins for T+25 transactions and thus encouraged traders for futures trading. So traders never got warehouse receipts, the only tangible proof of their commodities. NSEL seems to have benefitted in two ways from this – they did not have to furnish the actual proof of the commodity and they blatantly forced double transactions on the traders.
The unsuspecting traders went with NSEL’s assurance that goods are under the custody & control of the exchange so there is no risk. And that NSEL will release the receipts to the final buyer on getting full payment. Since NSEL is counter party for all settlements of trade, people did not mind. NSEL gave assurance in writing guaranteeing the quality, quantity and weight of the goods. Most important, all goods were allegedly covered by insurance.

The Woes
February 2012
The Consumer Affairs Ministry issued an notification appointing Forward Markets Commission (FMC) as the designated agency to which all information or returns relating to the trade shall be provided by NSEL.

April 2012 to April 2013
NSEL received letters from DCA but did not disclose the content. When brokers questioned the contents of the letter NSEL claimed they were some queries which had been adequately responded too.

July – August 2013
However, in July 2013 when the brokers became jittery of the going ons, there was a meeting between Secretary of Company Affairs Pankaj Agarwal and NSEL where it became clear DCA was not allowing forward trading in the T+25 and T+36. NSEL reduced the forward trading to T+10.
But by now the investor confidence was shaken and trading volumes fell, causing what seemed like a liquidity crunch at NSEL. The situation reached a peak when NSEL failed to meet 31st July pay outs.
NSEL assured brokers that all payouts will be made. They said they would merge the payouts and share a revised calendar. The brokers demanded to know if there were any serious defaults. But there was no disclosure made. Instead NSEL assured them saying they had 6200 crores worth of goods and a settlement guarantee fund of 840 crores.

On 4th August there was a meeting of FMC, NSEL, Brokers, and Borrowers. NSEL assured they will pay 5% of outstanding on a every week over 30 weeks. They also assured that they would pay 16% interest if there were delays.
By now the brokers had begun independent searches into the wareshouse and were alarmed to discover that there were goods!
As per the settlement calendar the first payment was due on 20th August of 174.72 crores. NSEL has only been able to pay 92.12 crores.

1. Investors cheated: The promoters, directors, and shareholders of NSEL have deliberately tricked investors 15000 investors await payment of 5700 crores.
2. Inflation: The forward trading has led to serious price hikes in the price of commodities. The hoarding in warehouses would have led to shortages and now, the disappearance of the stock itself will lead to further shortages.
3. Insider information: NSEL has been running an exchange without any regulatory controls simply because those close to the Minsiter for Agriculture are on its Board.

a. Chairman Shankarlal Guru is a leading expert on who the Government of India relies to make policy decision regarding trading of agricultural commodities. He has served as Chairman of a high powered committees on agricultural marketing set up by GoI. In fact the Guru Committee Report recommended scrapping of Essential Commodities Act (1955) and review of other 27 legislations to make them facilitative towards free trade. (Exhibit Guru Committee Recommendations). Undoubtedly there is a conflict of interest wherein a GoI Advisor is a Chairman of an exchange – his recommendations will be skewed to protect the exchange.
b. Chairman Shankarlal Guru and Director B D Pawar are also directors in Center For International Trade In Agriculture & Agro – Based Industries (CITA) wherein Supriya Sule, daughter of Sharad Pawar is a director. “CITA is a non – profit organization founded by Great Visionary Shri. Sharad Pawar committed for services to farmers and rural population. Our mission is to guide the farmers, stakeholders, policy makers and other related organizations….. in particular to encourage farmers to sell their products profitably in domestic and export markets.” There is a direct conflict of interest here – the Chairman and Director of NSEL are directors of CITA which influences policy and farmers. CITA has always been led by Sharad Pawar’s close coterie – Anuradha Desai, Vijay Mallya, KD Goenka.

4. Loot: NSEL intially tried to protect the names of the defaulters. Out of the defaulters NK Proteins Ltd which has defaulted payment of 952 crore belongs to the ChaiRman’s son in law!
Name of borrower Outstanding amount
Mohan India Pvt Ltd/ Tavishi Enterprise Rs 952 cr
N K Proteins Pvt Ltd Rs 930 cr
Ark Imports Pvt Ltd Rs 730 cr
Loil Health Foods Ltd / Loil Overseas Foods Rs 690 cr
P D Agroprocessors Pvt Ltd Rs 618 cr
Yathuri Associates Rs 460 cr
Lotus Refineries Rs 247 cr
Aastha Minmet India Pvt Ltd Rs 236 cr
Other defaulters are NCS Sugars Ltd, Spin Cot Textiles Pvt Ltd, and Vimladevi Agrotech Ltd.
AAP Demands
1. All forward trading in agricultural commodities should be stopped.
2. In order to pay the investors the following must be done:
a. Sell all goods and realize their value
b. Utilize the alleged settlement guarantee fund
c. Freeze all assets of defaulters and realize the dues
d. All goods have allegedly been insured – the goods are missing so make the insurance companies liable to pay.
e. GoI have been claiming VAT on each transaction at NSEL. (Surprising in the first place since same goods are being traded without any value add) Since all these transactions were null and void, GoI should refund the VAT and use it to pay the investors.
f. Freeze assets of all directors, promoters, shareholders of NSEL as well as FTIL and MCX should be frozen till the investors are paid off.
3. There is a need to investigate those in GoI who allowed the creation of NSEL and allowed it to run without any regulation and make them accountable for it. FMC has been asking for some years to have spot exchanges and warehouses under its jurisdiction, in addition to its existing responsibility. This hadn’t been conceded. The Warehousing Development and Regulatory Authority (WDRA) had put a set of proposals on its website on regulations for spot exchanges. This, too, wasn’t taken forward by the DCA.

Now the FMC (forward market commission ) and NSEl are exchanging letter games while 15000 investors are begging for the return of their capital.1 montth post busting the scam and no arrest, the crooks still run multiple exchanges in India including premier commodity exchange MCX.

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