Lies , Utter lies and NSEL press articles

After 15 months of  financial rape , excruciating pain and being treated like doormats by UPA, the NSEL investors saw a ray of hope in Modi Sarkar's MCA announcing a draft order for merger of FTIL-NSEL . Just when I expected the media to laud Modi Sarkar's apt decision which may get investors' 5600 crores back (as it would rightly transfer the onus of recovery on FTIL which squandered the funds to its known accomplices) , the news-traders ( a term coined by Modiji) and presstitutes (a term coined for a sleeveless ex-CNN IBN  moron and a specific dhimmi NDTV journo) pitched in with all the vigour to defend chimerical FTIL 'small shareholders' and FTIL.  While these media crooks enjoyed the financial rape of 13000 innocent investors of NSEL with voyeuristic-sadistic pleasure, the first step taken by GOI against the financial rapists jolted them out of their languor. Though I'm the one who had defined the term 'paid-media' at www.urbandictionary.com (All those journotards and media houses who sell their souls and their news for a few pieces of silver) , these FTIL-loving journos take this term to a whole new nadir.

Those  who did not cover the story of an FIR in Delhi being filed on Jignesh Shah and others in bogus NSEL sugar trades (even after being emailed a copy of the FIR by me) became abruptly  interested in  l'affaire NSEL. All of a sudden a lot of bleeding hearts started crawling out of the woodwork in support of minority shareholders of FTIL  (and against NSEL investors) with all sorts of convoluted crap. The amount of blood these FTIL sympathizers' hearts bled form every auricle and ventricle could have given a new life to at least a few thousand patients in need of  blood transfusion. It's even more interesting to see that not a single 'small shareholder' of FTIL is griping about this merger but news-traders are wailing as if they've lost both their parents in one day. Not a single press article even remotely mentions the word 'fraud' anywhere in their coverage. So much for journalism ethics!

An exchange and its promoters should be like proverbial Caesar's wife- 'above any suspicion.' Here however Caesar had turned his wife Pompeia into a Jezebel who slept with anybody  for a few pieces of silver. It is now in public domain  that Jignesh Shah himself used to rig MCX prices using IBMA as a client (no FIR on IBMA still)  where more than Rs 60000 crores (yeah no jokes) worth speculative trades were conducted  and losses of  Rs 66 crores were not even made good. None of these writers had any problems with FTIL running all its exchanges like Jignesh Shah's ancestral family firm including NSEL , MCX ( Rigged trades, bogus donations, bogus purchases, non- existing vendors, non -existent warehouses where orders came from Manjay or Jignesh Shah), MCX-SX (related party trades, breach of corporate governance).

NSEL was nothing but an alter-ego of FTIL and cannot be separated from it. FTIL cannot hide behind the corporate veil to disassociate itself from the affairs of NSEL. NSEL has no independent assets whatsoever, In fact even the premises from where it operates are on rent from FTIL.The key IT infrastructure including data servers were managed by FTIL. What a shame NSEL servers crashed just after the scam!  You believe in coincidences?  I for one don't.

It is a settled position under common law that any fraud or crime is against ‘public interest’. Therefore, by ordering the merger and thereby mitigating / curing the ‘fraud’ would per se be in the public interest. The whole concept of limited liability was to promote trade where businessmen could take risks and conduct business without risking losing  their personal assets. The limited liability concept by no means gives carte blanche to perpetrate frauds and get away with it.All equity shareholders run inherent investment risk and they either prosper or perish with the company depending on the work of their promoters/directors. In all winding up petitions and SEBI delistings minority shareholders get penalized for the acts of their promoters. You think financial journos can't see this plain truth? There is none so blind as one who doesn't want to see! Oops truth and journalism! Ins't Ramnath Goenkaji dead years back ?

Before I disrobe these journos, some hard facts:

• FTIL owns 99.9998% of NSEL and mere 100 shares were given to NAFED to fool people (NAFED a quasi Govt agency was touted as a co-promoter)
• Huge monies of PSUs  (about 450 crores) like MMTC /PEC (public interest) also stuck along with retail investors
• Scam masterminded by FTIL (NSEL was an alter-ego of FTIL) and its CMD Jignesh Shah as evident by various forensic audits and charge-sheet filed by Mumbai police EOW wing
• About 90% of the investors in this ponzi scheme-scam are retail investors sucked in by brokers working in cahoots with Jignesh Shah/FTIL who induced investors by false promises of safety
• Fixed returns were assured to investors by brokers/NSEL with knowledge of FTIL
• T+2 (short duration buy) and T +25 (long duration sell) contracts were to be executed simultaneously by the investor generating arbitrage profits of  about13 % per annum (pre-tax) and 8.8 % post tax.
• On 31st July 2013 when the exchange went bust it had neither money nor the goods to pay investors for which it was a counter-guarantor. Promoter FTIL tried to wash its hands off calling it an employee scam and hiding behind ‘corporate veil’
• No warehouse receipts were ever printed and the warehouse allocation reports and QC certificates issued by NSEL turned out to be bogus
• Out of the total scam,  Rs 2510 Crores is spread over 11,755 small investors which works out to an average of Rs 22 Lakh per investor. This  contradicts the fact that only HNIS are affected
• FTIL ran multiple exchanges  around the world (most exchanges were loss making) including MCX, MCX-SX and NSEL (frauds detected at all exchanges)
• An exchange with ‘national’ in its name started by FTIL group to hoodwink investors and NAFED brand was used to give it ‘quasi government’ look
• By a gazette notification dated 5 June 2007, the Ministry of Consumer Affairs under Sharad Pawar (how can his ubiquitous name not surface, we're talking about a freaking scam here) exempted one day forward contracts at NSEL from FCRA subject to certain conditions. Ironically Mr. Paul Joseph who signed this exemption (even before NSEL started  functioning ) subsequently joined the FTIL group
• In 2008 NSEL  started functioning as a delivery based spot exchange but had no significant business and was making huge losses
• In 2009 fraudulent ‘paired trades’  were launched to generate business and profits  for NSEL/FTIL. These contracts were ab initio illegal as the exemption provided to NSEL was only for contracts up to 11 days where as pair trades extended till 25 or 35 days
• The first borrower in 2009 that was loaned money was NK protein Ltd a company owned by Mr. Nilesh Patel –the son-in-law of then chairman  Mr. Shankarlal Guru (appointed by FTIL) .This shows the complicity of promoters/board with borrowers
• NBFC -Lending Activities started much before Anjani Sinha became the CEO. This is thus a fraud masterminded by FTIL Board
• Emails found by EOW wing of Mumbai police confirm how FTIL finance director, Jignesh Shah(CMD of FTIL) and auditors (Mukesh Shah- Jignesh Shah's uncle) were cooking the books of NSEL
• Along with  Jignesh Shah and his 2 corrupt sidekicks, FMC and SEBI both found FTIL as a company not 'fit and proper' in conduct and unfit to run exchanges.

Here is a chart how about 81% of consolidated income of FTIL came from NSEL operations:-

Ever wondered how Jignesh Shah and FTIL got away will all their fraudulent activities? Oh shut up we all know corrupt UPA government, that's a bloody no-brainer. There was a tad more than that. Check the galaxy of senior bureaucrats who work for FTIL group. No prize for guessing why no action was being taken against FTIL and Jignesh Shah in this scam. I am surprised why under MPID act , FTIL's assets are not being attached in spite of being a clear provision to attach the assets of the promoter.

Now let's start undressing these media crooks. Let me start  with Livemint and their ace joker  Mobis Philipose ( @mobis_philipose ).His brilliant piece in Livemint on merger says    " Order violates fundamental principles of rule of law "

Claim: " The government is forcing a parent company to take on the liability of a subsidiary company, ignoring the fact the subsidiary was formed as a separate entity precisely so that the parent company’s liability is limited  to the extent of its investment in the firm"

Fact: NSEL was promoted by FTIL  with only 100 shares being given to NAFED (to give it quasi-govt. look) to fool gullible investors and commit the fraud.In spite of having MCX (tightly regulated) where this spot business could have taken place, FTIL chose to form a new company. Before even NSEL started business ,an exemption from FCRA was given by magnanimous Maratha politician and his pet bureaucrat 'Paul Joseph' who after giving this NSEL exemption immediately joined FTIL group

Claim: "If the government proceeds with the forced merger, it will appear the country doesn't respect the rule of law"  and  " according to the laws of the land, the risks associated with such acts by the holding company are limited to the extent of capital invested."

Fact: Quite amusing as it does not refer to any specific rule , act or law ;  nor does it cite any case laws but relies on loose statements which are patently false and misleading. Had this pea-brain writer done a little more research before writing this trash he would have easily known that the MCA is headed by Shri Arun Jaitley who himself is an ace lawyer and a legal luminary. Shri Jaitley himself appeared for DDA in Supreme court where the judgement was- "The concept of corporate entity was evolved to encourage and promote trade and commerce : but not to commit illegalities or to defraud people. Where, therefore, the corporate character is employed for the purpose of committing illegality or for defrauding others, the court would ignore the corporate character and will look at the reality behind the corporate veil so as to enable it to pass appropriate orders to do justice between the parties concerned." Clearly Mobis has neither checked facts nor law but who cares we are in news business.

Claim  "It must be noted here that the Rs.5,600 crore or so due to NSEL’s investors isn’t listed as a liability on NSEL’s books. As of now, at least as far as the books of accounts go, they are liabilities owed by the exchange’s defaulting members."

Fact: This is a blatant and shameless lie from low-life Mobis.  NSEL as an exchange took the counter-party risk and is directly liable to make good pending payments/settle contracts. This is as asinine  as saying a bank has no liability to depositors but it's a  liability of defaulting loan-takers. Besides, NSEL acted as an NBFC company to the knowledge of FTIL board and Jignesh Shah/Shreekant Javalagekar (finance director).

So now this Mobis dude has done his bit for FTIL with his piece at Livemint but he ain't happy. He's one hell of a news-trader, he goes online ,takes every article against the merger and retweets all. Way to go man long live journalism!

Now comes the 'old lady from Boribunder' - TIMES OF INDIA. They have this unique distinction of being featured on Wikipedia page for paid news.(http://en.wikipedia.org/wiki/Paid_News). Anybody who is Social media savvy would know that 'the New Yorker'  had found out ages back - there are no walls between sales department and newsroom at TOI ( http://www.newyorker.com/magazine/2012/10/08/citizens-jain)

Their merger story: http://timesofindia.indiatimes.com/Business/India-Business/Government-proposes-FTIL-NSEL-merger/articleshow/44904556.cms

Claim :"Besides investors, the move is also expected to benefit a large number of speculators who once traded recklessly on NSEL just to make a quick buck"

Fact: All investors at NSEL were sucked in to the vortex of NSEL trades by promise of a fixed return arbitrage. An email copy from Amit Mukherjee of NSEL was sent to all marketing blokes at NSEL with a copy to FTIL warning  not to use official IDs to send 'fixed return calculators' but to use private email IDs. How the hell an investor investing for 13% pre-tax and 8.8% post tax locked return become a speculator? Any logic?  No but you can't expect logic from a media-house which has no walls between sales-room and newsroom. So shut up and keep reading our crap, this nonsensical  rag was here before your grandfather's time and will keep peddling bull even during your grandchildren's time.

Claim: Talking to TOI, Berjis Desai, senior partner at J Sagar Associates, legal adviser to FTIL, said the notification has the potential to impact investments into India. "It makes a mockery of the limited liability principle"   and  "If subsidiary companies making losses are forced to merge with their holding companies, that could send a wrong message to foreign investors and cause a huge damage to the reputation of the country"

Fact: For starters  limited liability cloak cannot be used to perpetrate premeditated frauds. Besides, those worried about reputation of the country and impact on foreign investors had ironically no problem with a massive (nearly a billion dollar) NSEL fraud by FTIL and its unsettled position till date which would scare away foreign investors. Irony dies a million deaths everyday at TOI.

Next in line is The Financial Express. Express Group once an august institute owned by Shri Ramnathji Goenka -a fearless crusader and the doyen of Indian journalism who never sold himself nor bowed to coercion of even Indira Gandhi. Every time I read the poem 'Invictus' ("my head is bloody but unbowed" )  by William Henley I think of this honorable man. There would be no bigger degeneration in this world  than the Express group during Ramnath Goenka days and what  the group is now. (Sorry I forgot Shashi Tahroor before Congress and Shashi Tahroor after joining Congress).

Here is  their story:  http://www.financialexpress.com/news/editorial-limited-liability-at-nsel/1301106

Claim: "Given how the individuals who lost money at NSEL were fully aware of the risks involved and that such products violated trading norms—they were essentially financing products offering substantially higher rates of interest than what was available in the market—it is not immediately clear why the government feels they need to be compensated."

Fact: Investors were deceived into false sense of safety by FTIL, NSEL and brokers. There was assurance of SGF (settlement guarantee fund) , more than 100% stocks and secure systems in place. You need to be thick in the head if you would invest in a financial product which you knew was illegal ab-initio. I don't think I would hate my money so much or anybody else would for that matter. By this warped logic anybody who trades in F & O segment of equities can be easily robbed as he's chasing higher returns and should not be compensated.

Claim: More important, since NSEL’s accounts don’t list them as liabilities—the money is owed by defaulting parties on the exchange

Fact: Yawn!  Haven't we gone over this crap already??. Please read above. Ramnathji Goenka please don't turn in your grave this is Zeitgeist live with it. Oops remain dead with it.

Claim: "It is this limited liability principle, the world over, that ensured people invested in firms to set up ventures which, sadly, also went bankrupt on occasion. If investors knew their personal assets could also be attached, many would cavil about investing in any ventures"

Fact: A well-planned fraud cannot be allowed under the guise of limited liability. If the Sugar -castor prices had dropped to 5% of the original value and the commodity exchange had gone bankrupt it was understandable.Here an exchange was started with the sole purpose of defrauding people without any stocks ever. Loans were given to shady defaulters at high interest rates under paperwork of commodity trades. No that wasn't enough, to add insult to injury Jignesh Shah and other common directors of FTIL stood corporate guarantors to defaulting crooks on NSEL like NK protein and Aastha-Juggernaut group.

Claim: "If it is to be assumed NSEL’s 13,000 investors comprise the public, what of the 55,000 FTIL non-promoter shareholders? The sooner the government rescinds the merger order the better"

Fact: There is no bigger fallacy than FTIL minority shareholders. Check figures :

SHAREHOLDING PATTERN OF FTIL FOR THE QUARTER ENDED 30TH JUNE, 2013
No Of shares	No Of Holders	% in terms of number of shareholders	No. Of shares	Shareholding percentage
1-500	46912	97.02%	22,48,845	4.88%
501-1000	709	1.47%	5,24,956	1.13%
1001-2000	309	0.64%	4,51,794	0.98%
2001-3000	113	0.23%	2,81,157	0.61%
3001-4000	56	0.12%	1,97,170	0.43%
4001-5000	38	0.08%	1,79,374	0.39%
5001-10000	80	0.17%	5,79,358	1.26%
10001-and above	132	0.27%	4,16,15,883	90.32%
Total	48,349	100.00%	4,60,78,537	100.00%

It is clear from above chart only 132 people close to management and Jignesh Shah owned 90.32% shares whereas 1-500 shares were held by only 4.88% investors. All  original FTIL shareholders had 15 months to sell their holding  and only speculative investors have remained in FTIL. A lot of small investors even entered at the low price of Rs 100-125 to make a quick buck. Besides, a lot of NSEL investors have also bought some shares in FTIL with a view to move SEBI- CLB later on . 

Even if we were to compare absolute numbers , the market cap of FTIL is about 828 Crores (reserves of about 2400 Crores)  and the value of holding of small shareholders in FTIL (under 500 shares) who constitute 5 % by market cap is only  Rs 41 Crores.

Now Comes the paper Business Standard. I will given them the credit of being reasonable objective and fair in covering this issue so far.  

Here is their story: http://www.business-standard.com/article/opinion/forced-mergers-are-wrong-114102200985_1.html

Claim: "What about the shareholders who own the other 55 per cent? They have just been forced by a government fiat to take a major capital loss, taking on the liabilities of another company. Is this how the government intends to protect minority shareholders?"

Fact: Haven't I gone over this shit  before? It's OK, as it is BS (I have a special predilection for 'em), I'll explain once again. There are only about 10% shareholders not close to management. They too run the equity risk (as in winding up petition or SEBI delisting) of sinking with the promoters. Nobody can I repeat nobody can hide behind anything once a premeditated fraud is proven. 

Claim:  "A basic rule underlying modern markets is being violated here. The ministry for corporate affairs, it appears, is unsure about why subsidiaries exist. "

Fact: Subsidiaries do not exist to encourage frauds and malpractices. Limited liability is only to promote risk-free trade and commerce not to pick pockets of 13000 people who include Army veterans, widows, students, retired pensioners, PSUs etc.

What shocks me more is that these same crybabies and bleeding hearts were shockingly quiet when FTIL paid about 177 crores without consulting any shareholder to small investors in NSEL (Who could throw stones at FT tower). They also had no ivestors' interest at heart when around 40 crores were paid as legal fees by FTIL to defend Jignesh Shah. 'Honest financial journalism' indeed is a bigger oxymoron than 'peaceful Pakistan'.

This merger is indeed a bold decision from incorruptible/ untouchable #Modisarkar which I am sure now will  go after these fraudulent FTIL group like Eliot Ness- the Feds went after Al Capone. The merger will  help India as follows (presstitutes' rants notwithstanding)-

• A clear message to the country and the whole world that this government means business and has zero tolerance for scams and fraudsters . The ministers in Modisarkar are not for sale and their honesty is non-negotiable 
• Restoration of faith of Indian investors and FIIs in Indian exchanges, markets and system
• GOI gets its PSU investments back (about Rs 450 Crores) and saves Rs 1650 Crores in Income tax
• A strict warning to scamsters that they can't hide behind limited liability cloak
• Commodity trade which has almost come to a standstill will get revived and GOI will get more revenue by virtue of this
• All markets including equity markets will get a boost  if this situation is resolved resulting in overall growth and prosperity

Tax-paying NSEL Investor's Frustration

Where in the land of the crooked  it is folly to be wise
In the country of the corrupt honesty has no prize

Where big  money talks  bullshit does walk a mile
Babus Cops and  lawyers all do oblige with a  smile


Where the  honest and upright get punished for no crime
The crooks with their pelf easily  do buy a good time

Where  fairness truth and rectitude are burnt to a cinder
and orders and favours are sold to the highest bidder

Where an honest crusader is often driven to suicide
His money,  rights and justice are badly  denied

Where an Indian tax-payer is taken for a jolly ride
Why doesn't the government just stand by his side?

Where the ace crook is free and cocks a snook at me
I know I'm in the wrong country where I should not be
 
If this is the cesspit we wanted our nation  to be
What is the damn point of calling this country 'free'?

NSEL Investors Hanged Drawn and Quartered

 To be hanged, drawn and quartered was a  penalty in England  where convicts were fastened to a hurdle, or wooden panel, and drawn by a horse to the place of execution, where they were hanged (almost to the point of death), emasculated, disemboweled, beheaded and quartered (chopped into four pieces).

The more I see the plight of NSEL investors, the more I can relate to this English phrase.Though this penalty in England was reserved only for high treason, in India it seems to be the fate of people who invested (on strong recommendation of  national level brokers-wealth managers)  their  tax paid legitimate money at 13% in NSEL -an exchange semi regulated by the Forward markets Commission and promoted by FTIL who also promoted MCX.

NSEL investors  may be ridiculed for being greedy and reckless, called stupid for investing in an 'unregulated exchange' , found deserving of this fate for being 'speculators' and now even be branded 'bogus traders' .  If expectation of a meager 13% pre tax ( 9% post tax in an economy where food prices rise by 20% every year) return on investment is greed what would you call the stock market investors-punters who expect a daily upper circuit in the scrip they've invested? This same very greed-expectation on return on capital (which just about beats inflation) keeps the capital markets of the world and the economy ticking.

Innocent investors of NSEL seem to be a fair game for every Tom Dick and Harry (who love to take potshots at 'em)  in India as they neither have the numbers nor the political vote bank clout  to warrant attention or help. I have never been a big fan of P. Chidambaram but my disgust for him reached a new nadir when he said 'NSEL investors are no babes in the woods and they knowingly invested'.  My respect for Sucheta Dalal also nosedived the day she highlighted NSEL investors coming out of costly cars rather than focusing on her core specialty of exposing scamsters. My respect for judiciary also came down a notch when the Mumbai HC order 2 days back on Jignesh Shah's bail called me 'bogus trader' who knowingly invested in NSEL.  

Nothing can me more shocking, convoluted and  illogical.Which investor in this world would knowingly invest his tax-paid money in a fraudulent exchange sans any stocks. You need to be seriously hating your money or need to be a 'loony bin case' in order to do that. Does my money burn a hole in my pocket?  Hell No!!  Now the 'bogus'  investors in NSEL include 2 large public sector units  MMTC - PEC , an ex PM's family and an ex MP's family not to mention widows, students and middle class investors who have lost their life time savings. The criminal investigation wing of Mumbai Income Tax has already verified the authenticity of investments and account books of most NSEL investors and not found anything amiss at all.

As for we not being 'investors', here is the Oxford English dictionary definition- 'Investor': One who puts money into financial schemes, shares, property, or a commercial venture with the expectation of achieving a profit:' Do you need to be a brain surgeon or a rocket scientist to figure out such a simple term? Is Greed to generate return on your investment bad? Ask Gordon Gekko of the movie Wall Street and this is what he would say-

"Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures, the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge, has marked the upward surge of mankind and greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the U.S.A"

There is another English phrase which comes to my mind thinking of Jignesh Shah's journey so far- 'Money talks and bullshit walks'. Bigger the money , bigger bullshit it can make walk !  Mr. Jignesh Prakash Shah the mastermind and biggest beneficiary of the NSEL scam seems to be cocking a snook and having a big laugh at all of us investors of NSEL.  Mr. Jignesh Prakash Shah listen carefully- the mills of the gods may grind slow but usually they grind exceedingly fine. There is only so much bullshit you can make walk with your ill-gotten pelf and somewhere your luck will run out.The game has now changed a little in last 3 months, Your zealous  protectors and benefactors at Delhi have gone and a new brand of  upright politicians are now in the seat. We investors might have lost a battle but the war will still rage on.

Jigneshbhai ,You can also tell your sidekick Joseph Massey who claims to be a devout Christian that the bread not earned by the sweat of ones' brow is no good and 'better is a poor man who walks in his integrity than a rich man who is crooked in his ways' : Bible Proverbs 28:6

Why did I live in India?- an ode to NSEL

The agony of living in INDIA

I was born in India and chose it as the country of my living
A democracy with robust legal systems I was led into believing

I worked hard ,made money and paid my taxes with a smile
Thought  there was a system backup should things ever turn hostile

There was wily shyster from Mumbai with crazy greed for pelf
Ace crook with knack of greasing  palms and so full of himself

He created exchanges by the ton and flaunted them with pride
Bureaucrats,media and politicians all in his deep pocket did reside

Rules, regulations, controls and caution all went for a big toss
Ministries, SEBI, FMC all conceded  the crook was the real boss

He started novel trading schemes and every statute  he defied
With starting of NSEL , fairness  truth and honesty all died

NSEL  and greedy brokers had designs on investors' wealth
They dangled a carrot and extracted investors' monies with stealth

In July some FMC babu abruptly put a spoke in Jiggy's wheel
He wrote a letter which was not a part of Jignery pokery deal

The financial merry-go-around of NSEL came to a screeching halt
On July 31st the shit hit the fan and gullible investors got a rude jolt

Steel, Paddy, Castor and Sugar  they traded only existed on paper
The hard earned money of investors vanished like a whiff of vapour

Shah, Anjani and brokers pulled a real fast one on investors lame
The brazen con played could've even put  Harshad Mehta to shame

The Shah and his pals are free even after heinous criminal acts
After 3 yrs of scam they are still busy burying evidence and facts 

Hard earned money looted and Government doesn't give a damn
The Shah is surely getting away in spite of  this brazen scam

Why did I live in India with systems so damn corrupt and lax
If there was never any protection why did I pay crores in tax?

The Rs 5,500-crore scam no one wants to deal with

What exactly happened in the NSEL scam? How did Rs 5,500 crore disappear? And why is there still no sign of an investigation?

An innocuous-looking notification from the Forward Markets Commission (FMC) came in on July 12, 2013. And in the offices of the National Spot Exchange Limited (NSEL), a commodities exchange promoted by the Jignesh Shah-led Financial Technologies (FinTech), things began to change. 

The notification restricted NSEL from making fresh contracts available as they were likely in contravention of the Forwards Contracts Regulation Act. NSEL first changed its contract duration to comply, and then when it found customers leaving in droves, threw up its arms and shut down the exchange. 

More than Rs 5,500 crore was due, and over the next few days it became evident that there was neither the money nor the underlying ‘spot’ goods to settle trades by over 15,000 investors. Since then, the story has unravelled, slowly. 

The scale of this default dwarfs the last big exchange crisis, the Rs 600 crore settlement problem at the Calcutta Stock Exchange in 2001.

What is a Spot Exchange?

Commodity spot trading is about buying and selling a commodity, paying cash for and receiving your goods on the ‘spot’. Which signifies that the buyer and seller agree on a price and ‘deliver’ their side of the contract immediately. 

NSEL was a spot exchange designed to help this activity, with the added feature of being electronic (so buyers and sellers can be in different locations) and anonymous (the buyer and seller don’t know who the other side is). 

The important feature of any such exchange is that the exchange has to stand guarantee to either party that it will ensure the contract is settled. If the buyer can’t bring in the money for any reason, the exchange should then sell the goods to someone else and recover the money (and make up the difference). And a similar exercise if the seller defaults.

Now, when the seller and buyer are far away from each other, how does the exchange guarantee delivery? The idea is that the seller must come to an exchange-designated warehouse and give his goods, which are then tested and verified for quality and weight. He then gets a warehouse receipt (WR) that is used for electronic trading. When he sells on the exchange, the warehouse receipt is transferred to the buyer; this receipt entitles the buyer to take the goods out of the warehouse, or if he chooses, to retain the goods there (to sell them later) by paying the warehouse rental charges.

There are rules governing commodity trading, which is regulated firmly by the Forward Market Commission (FMC). Under the Forward Contracts Regulation Act, any contract that is called “spot” must be settled within 11 days – that is, both delivery of goods and transfer of money must happen within 11 days (called “T+11”). The 11 days give the buyer and seller time to complete the contract. Thus, this would then not become a “forward” contract. 

Spot contracts, by their nature, were deemed to be out of FMC regulation by a small notification in 2007 by the Department of Consumer Affairs. This exemption was given specifically for one-day duration contracts – or, technically those contracts that complete both delivery of goods and transfer of money within two days, called “T+2”.

What NSEL Really Did

Instead of just making T+2 contracts, the spot exchange designed multiple contracts. Some of them were T+2 settled, making them ‘spot’ in nature. Others were the same product but settled after 25 to 35 days, called T+25, or T+36 contracts. This was illegal – such contracts are forward contracts and NSEL was not authorized to execute these, but it did. And no one stopped it. 

And the concept got worse. NSEL sold what seemed to be ‘arbitrage’. You could ‘buy’ the T+2 contract and ‘sell’ the T+25 contract and the difference in prices gave you nearly 15 percent per year, annualized. Effectively, you would be the owner of half a ton of sugar or castor seeds or such commodities, for a period of about a month, which would get sold when you ‘exited’.

The exchange practically removed all constraints from investors during this period – the goods would lie in the same warehouse and be sold from there, and the price difference included a 15 percent net return after storage charges, VAT, etc. 

This arbitrage was almost ‘guaranteed’. NSEL as an exchange stood guarantee, or so investors thought. 

Brokers peddled this product to their customers for over two years. The number of customers ballooned to over 15,000, each of whom put in at least Rs 2 lakh to get their ‘superior’ returns. 

What Was the Problem?

Who was on the other side? That’s the question that no one seems to be asking. 

Was the arbitrage genuine? It appears not. The contracts were always sold in pairs. Brokers have reported that no one was allowed by the exchange to just take one side of any contract – you always had to have a ‘buy’ on the near contract and a ‘sell’ on the far side.

A quick look at the Kadi contract for castor seeds, sold in pairs of T+3 and T+36, shows identical volumes and interest for both contracts in January 2013, and that’s the case with every commodity that had a near and far contract. This is hardly possible in a real market, so it points to the fact that these contracts were always executed in pairs.

The Ponzi Scheme

It turns out now that those on the other side were just 24 members of the exchange, called Planters or Processors or Borrowers. These members owned plants that processed commodities – or, at least, they said they did. For instance, NK Proteins owned a plant to process castor seeds in Kadi, Gujarat. The contract – the Kadi Castor Seeds contract – was settled at an NSEL warehouse located inside the Kadi plant of NK Proteins.

Processors like NK Proteins (and there were 23 other such members) were on the other side of the trade. They would sell at T+2 and buy back at T+23, offering huge returns.

The fact that the contracts were executed in pairs indicates a financing program. Something is placed as collateral to borrow money for a short period of time. This used to be commonly known as “badla financing” in the pre-2000 stock exchanges, where shares were collateral. (Badla is banned now; the financing has moved to the futures market.)

Let’s say I am a plant owner, and I can’t get a loan from a bank. I can effectively borrow from you at 15-18 percent – much cheaper than I can borrow from banks. And if I’m smart, I know that the goods I sell you will remain at a warehouse inside my premises, so why not cheat a little and tell you that yes, I’ve added more goods to your warehouse, and you, on the other end of the phone agree.

In this situation I can invent stock that doesn’t exist and borrow against it for 15 days; for the interest, I might pay some out, but immediately get it back in a new contract when I add even more imaginary stock. This was the Ponzi nature of the game.

Indeed, it turned out that some of these companies had poor balance sheets incapable of handling such large loans – loans of the size of Rs 900 crore. And the exchange did nothing.

Most ‘investors’ rolled over their contracts. That is, when the contract was unwound after T+35, they would enter a fresh round of T+2 (buy) and T+35 (Sell). Meaning, the interest received was also ploughed back into further purchases; a ‘borrower’, on the other hand, was pretending to pay interest, but was simply creating warehouse receipts for the interest and trading them on the exchange, while rolling over the contract forever.

The End of the Game

All this had to stop sometime, and the circular from FMC stopped it. 

First, on 16th July the contracts were cut to T+10. But that would involve too many pair trades – from one a month to three a month, each of which had higher transaction costs. 

Next, some investors smelt a rat and didn’t roll over their contracts.

The lack of a rollover shuttered the exchange. When the ‘borrowers’ were told that they had to pay back all the money, they simply could not (or didn’t want to). And it turns out they don’t seem to have the goods to back it up either.

On July 31, NSEL issued a circular saying all future contracts would be stopped. And because there was a settlement problem, they would have to delay payouts for a while.

Remember, some investors had bought goods on a T+2 contract, paying upfront. Now they expected that after their 25-35 days, the other contract would kick in and they would be paid back money at the higher rate on that contract.  

At this point, the exchange should have stood guarantee. That’s the role of an exchange. But because it didn’t get paid from the borrowers, it didn’t have the capacity to pay. 

Lies, Deceit and an Incestuous Web

The exchange started to lie. The CEO, Anjani Sinha said on August 1st that they had a ‘Settlement Guarantee Fund’ of over Rs 800 crore plus they had all the stocks in the NSEL warehouses. In a few days they changed that position, stating they had only Rs 60 crore in cash and the rest of the ‘guarantee fund’ was in stock. All entities were supposed to put a tiny amount – up to 5 percent – as margin until trade completion. This, too, was unavailable for some reason.

And then, after telling everyone that they would get their money back, the NSEL management said they had to auction stock to get the money. Soon, even that avenue was gone as there wasn’t any stock.

Jignesh Shah, the founder of FinTech, which promoted the exchange, said in a press conference that they would have a high-powered committee, including an ex-SEBI chief, a senior police officer and the like, to ensure settlements happen. As it turns out, the committee was useless in actually enforcing the contracts.

NSEL next created a complex settlement program. After a few days, NSEL management offered a ‘settlement calendar’ stretching 30 weeks where people would be paid back Rs 174 crore per week for 20 weeks, Rs 86 crore a week after that, and a big balloon payment at the end.

NSEL couldn’t even make the first week’s payments properly – it paid up just half. In the second week, to fend off investor aggression, FinTech dipped into its resources and paid Rs 177 crore to those with less than Rs 10 lakh outstanding. There have been three payments till now – of Rs 92 crore, Rs 190 crore (including small investor payouts) and then, this week on Tuesday, 3rd September, Rs 15 crore. But in the settlement program, NSEL had promised to pay Rs 174 crore on each of these three Tuesdays.

In the middle of all of this, it turned out that many of NSEL’s 24 Processor members were related to each other. One of the biggest borrowers, NK Proteins, is owned by the son-in-law of NSEL’s chairman Shankarlal Guru. Then there was Indian Bullion Market Association, owned primarily by NSEL, which participated as a member, allowing parties in the bullion space to buy through them.
 
The whole thing began to stink.

N Sundaresha Subramanian of Business Standard visited many of the defaulting members and found strange results. There was a mall in the place where 2 lakh tons of sugar was supposed to have been stored, at the address of a NSEL borrower called Mangla Shree Properties. In Ludhiana, where ARK Imports was supposed to have 12,000 tons of raw wool, there was apparently nothing. One borrower had vacated its premises months back, while another refused to admit they owed anything.

NSEL’s investors involved clients from nearly every major broker in the country. Even the Sahara Group, which is under RBI and SEBI fire, was found to have invested more than Rs 200 crore. Some NSEL board members were close to political bigwigs like Union Agriculture Minister Sharad Pawar. CEO Anjani Sinha had earlier in his career overseen defaults in two exchanges in Magadh and Ahmedabad. 

Belling this cat will not be an easy task.

Where are the Regulators?

The FMC was supposed to control regulation of all forward contracts. Although NSEL had received an exemption, it was only for the T+2 contracts and definitely not the T+35 contracts. The new FMC Chief, Ramesh Abhishek followed this up since 2012, but what about those before him?

The Department of Consumer Affairs was the de facto regulator when no one else was. It had been made aware of the situation over a year ago and should have taken action, and it didn’t. 

Even after the scam was unearthed, and the scale of the borrowing discovered, regulators remain tight-lipped about action. SEBI has barred some of the 24 ‘borrowers’ from trading on the stock exchange, and FMC has ring-fenced MCX (a commodities futures exchange which shares the same promoter, FinTech, with NSEL) from helping the beleaguered NSEL with its cash. However, any other actions have yet to come through.

Where is the RBI? Banks have lent to operations that involve stocks in warehouses. In fact, some photos of NSEL warehouses explicitly state that goods are pledged to certain banks. Are these goods there? Has the RBI asked banks to initiate a probe? Not yet.

If FinTech is the promoter of NSEL, and NSEL has seen a huge default, the obvious next step is to declare that FinTech is not ‘fit and proper’ to run any other exchange, including MCX. This has not yet happened.

Given this is a huge fraud, it remains astounding that agencies like the CBI, the Economic Offenses Wing or others have not been brought in to investigate. The failure of regulation could be because there are too many agencies involved.

Were Brokers to Blame?

Brokers might have known something was wrong. After all, you don’t get an exchange everyday where you have to coordinate between a buy and a sell on the phone. 

Many, though, fell prey to the machinations themselves. 

They promised investors a return of, say, 12 percent, and then took that money to NSEL and decided to make the 3 percent extra that NSEL promised. 

Now, when NSEL has defaulted, brokers want to put the blame on the exchange – but just like the exchange, they promised the money, which they have to pay. SEBI must act and ensure these brokers pay. 

Also, brokers are expected to be fiduciary agents of their customers – should they have exercised more caution before recommending such an investment? 

Where is the Money?

The short answer is: we don’t know. 

The Enforcement Directorate and a Mumbai Police Special Investigations Team (SIT) are trying to find the money. It’s gone abroad through hawala, says the SIT. Others claim it has gone to fund real estate, where there is no swift liquidity. Yet others claim the money was used to prop up FinTech and MCX shares in the stock market – so when those stocks fall, the amount of money that can be recovered reduces. It is also believed the money was siphoned for political interests or for personal gains of the personalities involved.

Jignesh Shah, the ambitious promoter of FinTech, started out as an engineer on the BOLT system for the Bombay Stock Exchange in 1989. After learning the ropes, he set up FinTech in 1995 and established a presence in brokerage back-office and terminal software across India. Then he set up MCX and a slew of other exchanges in India and abroad.

Shah won a battle against SEBI in 2012 about a circumvention of regulation in their new MCX-SX stock exchange. He had aggressively taken away market share from other exchanges. He had sued people who wrote against him and kept media as a friend with a big advertising budget. NSEL’s exemption from the Department of Consumer Affairs was attributed to Shah’s influence. But it is now apparent that everything is not clean in the FinTech empire. 

It would be a surprise if someone with Shah’s business sense let all this happen without knowing where the money has gone. 

What Happens to MCX and FinTech?

FinTech, at Rs 111 per share, is down over 70 percent from its 31st July price of Rs 540. It derived a large portion of its profits from NSEL – the trades resulted in outsized earnings through exchange fees. But the sudden lack of profit is not its only problem. If it is declared unfit to run exchanges – and it has about nine of them – that would destroy the enterprise. Apart from this, there are potential fraud charges if more dirt is discovered.

MCX is a well-regulated commodities futures exchange. The volumes in it haven’t come down quite as much as one would suppose. Its share price fell 60 percent after NSEL’s shutdown announcement on July 31 but has now recovered to a mere 40 percent fall. The expectation is that regardless of what happens to its promoter FinTech, MCX will be sold – and there are willing buyers.

The Future?

The NSEL crisis shows the investment community one thing: we do not have adequate regulation or enforcement. That if there is a crisis, the ‘agreement’ will not be sacrosanct; it will be secondary to the interests of the parties who have better political and business connections.

This default will trigger other issues, and in a country already branded as crony capitalist, the lack of will to enforce laws and put people in jail for fraud will hamper future investment. Decisive action is required, but the window for action is fast shrinking. There is a political fallout to this crisis, but the details on that are sketchy at best.

The problem really is: we have lost trust. The entire financial system is based on trust – for example, if everyone tried to withdraw his or her bank deposits at once, we’d have to shut everything down. Every attempt to undermine this trust must be dealt with heavily. 

NSEL’s ‘getting away’ will leave us all with a deficit worse than a fiscal or current account one: the Deficit of Trust.

Deepak Shenoy is a founder at Capital Mind (http://www.capitalmind.in), a financial data, commentary and analytics site and lives in Bangalore with his family. You can reach him at deepakshenoy@capitalmind.in and follow him at https://twitter.com/deepakshenoy