NSEL or the National Spot Exchange Limited is an unregulated exchange. SEBI or FMC have no jurisdiction over it and as a result of the same investors funds to the extent of Rs 5,600 crs are stuck and to a large extent gone.

FMC or the forward markets commission regulates commodities markets while SEBI regulates stock exchanges, equities and currencies. NSEL has been granted permission to operate by the Ministry of Consumer Affairs, Food and Public distribution. APMC’s or Agricultural Produce marketing committee of various states have allowed trading on this exchange.

Spot as defined by FMC is a period which does not exceed 10 days and the contracts on NSEL are of duration longer than that which makes the products traded illegal and bad in law. Looking at things in retrospect it appears that what has happened takes us back 2 decades to the days of Harshad Mehta. In 1992 you had a scam regarding bank receipts and in 2013 you have a scam regarding warehouse receipts. The magnitude of this scam is Rs 5,600 crs and NSEL is 99.99% owned by Financial Technologies. This company reported a net profit on a consolidated basis of Rs 227.4 crs for the year ended March 2013 on revenues of Rs 751.93 crs resulting into an EPS of Rs 49.36.

With no regulator, and plenty of political backing it seemed all was fair in love and war. The company had two types of contracts with one being the arbitrage product where you bought commodities on a T+2 basis and simultaneously as the second leg sold the product on a T+25 day basis. The difference was the interest one earned and there were no hassles of taking delivery or inspecting the goods etc. All this was taken care of by the exchange and through its various associated companies. The second contract was E-Contract in which products like gold, silver platinum etc were traded in electronic form and one had holding in demat form which could be converted into physical form as and when required.

Everything seemed to be going well with the broking community marketing this product quite aggressively as a better product than fixed income ones. It had yields which ranged from 13-16% and the same was further increased with some brokerage houses allowing the product to be leveraged 15-20 times and the incremental difference between the borrowed amounts adding to the net yield. This helped the investor on a ticket size of 50 lacs and leveraging 20 times having an exposure of 10 crs and earning a net yield of 24%, something which seemed simply too great.

With investors tied up, borrowers were always available as bank finance is difficult and involves collaterals and guarantees. People it appears have borrowed from this exchange against so called stock and diverted the money to all possible end uses other than the one for which they had been borrowed. The exchange is in a crisis and the same would be debated in parliament on Tuesday the 20th of August 2013.

NSEL management team has cobbled together a settlement programme where they have said that the pay-out would be done over the next 30 weeks and delayed interest at 8% per annum on reducing balance would be made post the completion of the total pay-out. It seems a tall order and one can only sympathize with the affected people.

There are a few questions which remain unanswered.

First where did the money go?

Second with so many associations and groups of people talking about the issue why till date there are no complaints with the NSEL exchange for non-payment of dues in time?

Thirdly with such large amounts outstanding why no broker member has as yet been declared a defaulter?

Fifthly will the government explain how such an exchange could function without a regulator for so long?

And finally will there be a case against brokerages who have mis-sold the product?

One is not sure whether answers would ever come but the whole issue is a DISASTER and downgrades the entire effort of showcasing India to the world as an efficient trading place.