NSEL Scam , Spot Exchange Scam

National Spot Exchange Scam:-

When Indian was falling deep in Scams everyday new Scam arises that shocks everyone. Now every Indian is not surprised to new Scams as this becomes a routine for them. But few scams must be known deeply so that you may not lose your hard earned money. NSEL Scam is one of them

Everybody must aware about NSEL Scam which rocks stock market last year. You must have knowledge about such type of scams so there everybody must think twice before investing.

NSEL is a company which is promoted by Financial Technologies Limited and NAFED (National Agricultural Cooperative Marketing Federation of India Limited). NSEL Scam is estimated around about Rs. 5500 crore. Fraud comes into limelight when NSEL failed to investors in commodity pair contracts after 31^st  July 2013.

 Spot Exchange functioning

As clear from the name it implies that buying and selling of commodity at Spot price, buyers and sellers get agreed upon a particular spot price of commodity and buyer get contract immediately and seller will get money back. NSEL was designed to help in this through electronic media by which buyers and sellers don’t even know each other that is same process of Stock Market.  As In stock market that exchange acts takes guarantee for the contract settlement.

Forward Market Commission (FMC) controls commodity market.

As per rules of 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 T+11. The 11 days give the buyer and seller time to complete the contract. Thus, this would then not become a “forward” contract as in case of Stock market where settlement done of futures up to contract expiry. In Spot Market Settlement must be done in T+2 days as per FMC. 
 But what NSEL does is they created their own contracts such as T+25 and T+36. These type of contracts are illegal as such contracts are known as forward contracts and NSEL wasn’t authorized to do that and no one stops them to that type of activity. 

But NSEL felled into own trap in NSEL contracts one could ‘buy’ the T+2 contract and ‘sell’ the T+25 contracts and the difference in prices gave you nearly 15 percent per year, annualized. In NSEL terms 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 is good value of money for investors and investor’s starts pouring money into that ultimately lose their money. 

NK Protein Involvement:-
There were 15000 investors in one side and  just 24 members of the exchange called Processors or Borrowers. These members owned plants or process commodities or atleast on papers they did it.

NK Proteins is one of main behind that activity. NK protein owned a plant to process castor seeds in Kadi, Gujarat. The Kadi Castor Seeds contract – was settled at an NSEL warehouse located inside the Kadi plant of NK Proteins. They 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. By doing they borrow money from investors and give them 15% interest on their investment as they are unable to get loan from banks in this way got loans at 15% interest rate for 15 days and again and again they repeat the process after 15 days each. This way they get loan of 900 crore and due to poor balance sheet they unable to handle such loans and results into default and exchange did nothing.

But that game has to ended someday and circular from FMC stopped the same.
Contracts were cut to T+10 instead of T+23 and T+36 on 16th July. But that would involve too many pair trades – from one a month to three a month, each of which had higher transaction costs. 
also at the same time some investors fell there is something wrong going on so they didn’t roll over their contracts. The lack of a rollovers results into stopping of NSEL. When Borrowers like NK Protein are asked to pay back the amount to investors but borrowers don’t have at all.

On July 31 NSEL stopped all future contracts and issued a circular that there was a settlement problem so they would have to delay payouts for a while. As NSEL acts a Guarantee so as borrowers doesn’t have money to pay so NSEL have to pay all amount so they don’t have any amount at all.

Cases Started Filing against NSEL Management:-
The NSEL CEO Anjani Sinha said on August 1st that they had a all the stocks of commodities in their warehouses and ‘Settlement Guarantee Fund’ of over Rs 800 crore plus. In Very few days they changed their statement by saying that they had only Rs 60 crore in cash and the rest of the ‘guarantee fund’ was in stock. Then again they said that they put commodities on auction and there after amount will be paid.

Then again Jignesh Shah founder of Financial technologies announced a claim settlement calendar of 30 weeks where people get for first 20 weeks an amount of Rs 174 crore per week and Rs 86 crore a week after that and all remaining payments at the end. But that could not even happen for 1^st week only. Payments they made are for 1^st week 92 crore,2^nd week 190 Crore and in 3^rd week 15 crore only.

Big question which yet to be solved is Where is the Money?

This question is still not solved and remaining still under investigation by Enforcement directorate and Mumbai Police SIT ( Special Investigation Team). SIT earlier announced that Money has gone abroad thorugh Hawala. They also claimed money used to increase Financial Technologies and MCX shares abruptly and during stock fall money that can be recovered get reduced.

These arbitrary trades offer 12-15% return per annum. The investors who claimed their T+2 payment found that the NSEL neither had the money nor the commodities to honor their T+25 dues.

NSEL instead gives that money of investors to 24 borrowers. NK Protein which is owned by son-in-law of the former Chairman Shankarlal Guru of NSEL  borrowed Rs. 1000 crores from NSEL.

There are around about 14000- 16000 Investors get loss due to that Scam along with public sector units like MMTC and PEC. Warehouses mentioned on NSEL website were arbitrary Settlement Guarantee Fund of around Rs 839 crores on 29 July 2013 vanished into thin air.

Main Culprits behind Scam

Charge-sheet has filed against

1.      CFO  Anjani Sinha

2.      Vice presidents – Mr. Amit Mukherjee and Mr. Jay Bahukhundi

3.      Two borrowers of  NSEL- Mr. Nilesh Patel, Managing Director, NK Proteins and Mr.Arun Sharma, film financer and chairman of Lotus Refineries.

However, the charge-sheet did not mention the names of Jignesh Shah (promoter and director of NSEL), Joseph Massey and others who played key roles in scam.

In Charge-sheet Mr. Sinha was held to be Mastermind in Multi crore scam

 Mr. Bahukhundi , Assistant VP , Warehouses, created a website of false stocks of commodities and generated wrong bills .

 Mr. Mukherjee , Assistant VP, Business Development ,got defaulter borrowers and generated fake warehouse receipts .

 The police have so far recovered Rs. 4,449 crores which amounts to 80 percent of the scam money through attachment of properties of the accused.  Jignesh Shah formed Multi commodity exchange (MCX) in November 2003 and then went on to set up a stock exchange last year in competition to National Stock Exchange (NSE). Jignesh Shah which was chairman of FTIL, Shah on October 9 quit as Vice-Chairman and Shareholder Director of MCX-SX.

Few weeks later, he also resigned as Vice Chairman of MCX. Forward market commission ordered that Jignesh Shah is not a 'fit and proper' person to hold any position in the management and the Board of any Exchange recognized. Same order had been given for Joseph Massey and Shreekant Javalgekar.