NSEL SCAM-Story of greed, forgery and cheating!

SEBI declares commodity business arms of Motillal Oswal, IIFL not fit and proper, more may follow....

NSEL was operating unregulated as it didn't come under the scrutiny of the Forward Market Commission(FMC), as FMC were not regulating spot market business and it was a regulator of future contract of commodities. As per law spot exchanges are not allowed to offer future contracts and all transactions need to be settled on T+2 basis. NSEL was actually not supposed to offer future contracts, but they were providing future contracts of up to T+35, that is Trading day plus 35 days, which they were not authorised to do. In addition to that there should be proper underlying assets for every contracts and in the case of NSEL without stocks of commodities at warehouse they are not supposed to offer contract for spot sale. NSEL defaulted there, they allowed to trade contracts without proper commodities in stock, means warehouse. what it means? No stock in the warehouse and the contract is purchased somebody from the market, he have a definite option to take delivery. But when the contract is not backed by stock in warehouse, the company will issued fake warehouse receipts and the buyer will believe that his commodity is in warehouse, which is actually not there. The business was on  and on and nobody suspected the illegal business, allowing future contracts to be dealt, which NSEL not authorised to do and issuing fake warehouse receipts for commodities which is not in stock. It was money raining, and nobody noticed the drama behind curtain.

The real problem NSEL made this business as a money laundering opportunity. They started selling an opportunity called 'arbitrage' where some one buy shorter contracts and sell longer contracts. Usually shorter contracts usually will be priced less when compared to longer contracts. So in simple terms a person who sell a shorter contract which in turn made null by purchasing longer contract make a profit. This was nearly 15% after all legal charges. They never assured this, but it was presumed by the market by their action. The number of customers grown from less than hundred to more than 13000 and business to thousands of crores.

The real puzzle The arbitrage opportunity offered by NSEL was not genuine. They does not had any stock in warehouse which they were selling and customers buying.  The brokers and exchange smartly started a practice of motivating or insisting on dealing on both sided transactions from each customer by making them believe that they are going to get 15% annualised return. Only pair contracts were traded, no one traded in one-sided contracts, this in turn helped the exchange on product delivery.  It continued like a money laundering system, where a product is sold where it is not actually there and products is bought, where it is actually not. So the smart players played well and made money, without any collateral they have taken crores from the market and kept on rolling over the contract, so they never paid back. On 2013 , July 16 Forward Market commission sounded the dead bell for this fraudulent programme. All contracts were cut down to T+10 . Investors started feeling doubtful and roll over percentages dipped. Lack of rollover created big issues for participant who have sold without product back up, as they now have to repay, they could not. The exchange who supposed to guarantee the satisfaction of contract, who also was a party of the fraud, could not perform its role. 5600 crore fraud got birth.

Concerted fraudulent  action All participants were related each other, all brokers used this as an opportunity to make money. All of them made money and the customers got cheated.  Some of the brokers may not be knowing but most of them knowing what is happening, but they failed to fulfil their fiduciary duty, while running for money. No law enforcement agencies were policing these action while it was done, but once the balloon blasted, all ran for their pieces, loss only for the customers. Each started blaming each other and the payments got delayed and delayed.  NSEL stopped the business, Jignesh shah and his management team went to jail and came out on bail.

What this SEBI action means? SEBI which is the stock market regulator, caught more than 300 stock brokers who were one way or other related to this entire scam. some of them penalised and many are pending.  The big names referred were commodities broking arms of Motilal Oswal, India Infoline, GeoFin, Anand Rathi etc. The order issued by SEBI on 22nd of February says that the commodity broking arms of Motilal Oswal and India Infoline as 'not fit and proper' for commodity broking and asked clients to either to withdraw of transfer their securities with other brokers within 45 days free of charge. The tragedy here is these broking companies whose names are in the order and also being investigated already stopped their commodities trading as a separate company and they have moved their commodities business under the unified broking business . Now what we need to see is whether this order applies to businesses under this licence also. If yes, then it is a punishment in real nature, other wise it will remain an eye wash. Not taking proper action while the fraud was getting committed and punishment when nothing can be compensated.

Cheating and Fraud remains a big threat in the securities and commodities market, let it be a big player or small, the investor need to be cautious. inputs from various newspapers, Wikipedia, SEBI website and related websites.

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