On 1st of August 2013, a financial fiasco was reported which largely went unnoticed in the national news media. The surprising fact is that the current fiasco reported in the National Spot Exchange Limited (NSEL) is much more than the Harshad Mehta scam of 1992 in terms of the valuations and the Ketan Parekh case in 2001 in terms of the magnitude. The trouble arose when there was a default in payment by NSEL to a pool of some 13,000 institutional investors. Earlier, individuals like Mehta and Parekh had disguised and illegally drawn funds from the markets. In this case the NSEL, the entire institution this time around has been accused of siphoning. The duty of settling transactions by taking deliveries from sellers and protecting the stock in its custody was bestowed upon the NSEL which had taken upon this task, has failed completely in carrying out its duties.
For spot market trading in agriculture and other commodities, NSEL was set up to provide an electronic platform to farmers and other rural investors. The default in payment at the NSEL is considered to be a collective failure of a very high magnitude. The payment defaults in the two previous scams combined were far less than the amount of Rs 5,500 crore involved in the present scam which is much higher. There has been no response from the Government or any regulatory agency this time whereas there were arrests of high profile individuals in the two earlier instances with the Finance Minister even making a statement on the floor of the House in connection with them. At this point of time, all that can be known is that the Forward Markets Commission (FMC), a regulatory authority under the Ministry of Corporate Affairs, has been empowered with the responsibility to supervise the settlement process for the 13,000 odd investors. Since they keep saying that they have no powers, interactions with the FMC officials in Mumbai have yielded little result. The FMC has been seen to write a series of letters to NSEL and this is the maximum effort that the body is putting. The letters were asking the NSEL to appoint surveyors to check on stocks, give pay-out schedules and so on. The orders stating implementation of FMC directives has been left to the exchange and any form of non-compliance has not been punished as of now.
On 22nd August 2013, nine companies were reported as the defaulters and the consequently the stock exchanges have directed not to list any of these nine entities in the bourse. These nine entities include Loil Overseas Foods, ARK Imports, N K Proteins, Lotus Refineries, Spin Cot Textiles, NCS Sugars, Tavishi Enterprises, Yathuri Associates and Vimladevi Agrotech. These defaulters owe the NSEL dues totaling Rs 5,500 crore to which is to be paid to 148 members/brokers, representing 13,000 investor clients. In order to prevent another scam in the offing and hurt the already derailed India growth story, the spot exchange (NSEL) came up with a redressal strategy and announced a seven-month plan to settle the dues. However, by 20th August, which happened to be the first pay out day as per the settlement calendar, it was able to pay only Rs 92 crore, as against a scheduled payment of Rs 174.72 crore. In a time when foreign institutional investors have been withdrawing money as is evident from the falling rupee, a scam of such magnitude in a trading bourse can trigger panic and bring the entire growth story to a halt.
This time around the entire institution and its founder, Jignesh Shah has been under the scrutiny. The sudden disappearance of stocks is a matter involving mystery as it could be easily observed that three harvesting cycles had taken place. During this period, the stocks would have easily moved in and out of godowns. The sudden disappearance of stocks is difficult and unacceptable to digest. A security agency had been appointed to safeguard the goods, the exchange as well as the FMC has said. Also, another agency was appointed to check the quality and quantity of goods. While the highest priority should have been to secure the goods, yet, at the end of three weeks, the FMC is asking for the appointment letters of these agencies. It would be interesting to note that Shah is also one of the promoters of the MCX trading exchange.
Undoubtedly, the times of Harshad Mehta are back as people have been putting their hard earned money on entities which have no physical existence. What is even more disturbing and is likely to give a serious jolt to the confidence of both the retail and institutional investors is that the institution which had taken the responsibility of carrying out a smooth transaction is to be held responsible as the prime culprit. Moreover, the founder, Jignesh Shah, who enjoys a reputation of good management and network skills have gone silent on the whole issue. Hence, it is totally up the finance ministry to facilitate the speed payment of the defaults so that the confidence of the investors is not shattered.