Tuesday, December 17, 2013

Internal IT documents expose NSEL’s Rs 5500-crore scam

Internal documents of the Income Tax department have revealed that National Spot Exchange Limited (NSEL) is involved in Rs 1000-crore scam through selling of things that do not even exist. Trading fake stocks, fake warehouse receipts and exchange of money rather than commodities and misleading investors by giving them false information, NSEL and a few other companies have brought more than 17,000 investors on the brink of losing savings to the tune of Rs 5500 crore.

NSEL is a national level organisation serving as an electronic platform in the field of commodities trading. However, in this case, NSEL has rather worked as a financial institution where brokers promised investors, personal as well as some PSUs, a return of 15 to 20 percent.

Pacts were signed between the loaner and loanees for each deal. The first was a three-day pact. As per the agreement, within two days of signing it, the investors would give the loan amount and the loanee would give them a warehouse receipt in return. Similarly, a 26-day pact also was signed, in which it was agreed that 25 days after the negotiation, the loanee will pay back the pre-decided amount and take the warehouse receipt back.

However, the loan amount was hardly returned after 26 days. After the pact was over, the loanees gave the loaners only the interest. This was similar to futures trading in stock market – an activity now banned.

As per the rules for trading of commodities through NSEL, the sellers and buyers have to complete the business transactions within a stipulated time. The buyer gives the entire amount to the seller on the last day. Only then does he get the commodity quantity.

This never happened. Commodity quantity was never delivered. Just the money was returned to the buyers. This implies that commodity exchange never really took place, only money exchanged hands. All financial transactions took place through NSEL.

NSEL guarantees the quality and quantity of commodities. In truth, NSEL never had the amount of commodities it claimed to possess.

NSEL traded the commodities it never had. For example, Deputy Director, Income Tax (Investigation), Ludhiana searched two warehouses storing raw wool on 23 April 2012. The godown in Sirah village had 2205 metric tonnes of raw wool, while NSEL had showed it to be 6058 metric tonnes.

Similarly, the godown located in Purba Village had 947.61 metric tonnes of raw wool stored. But this was shown in NSEL records to be 5706 metric tonnes.

Interestingly, NSEL had shown the quantity of raw wool on its website (May 23, 2013) as 12,154 metric tonnes. Despite this, NSEL’s Assistant Vice President, Warehousing department, Jai Bahukhandi, in his statement submitted to the office of Deputy Director (Income Tax), Ludhiana on May 28, 2013, had put this quantity at 11,764 metric tonnes.

The survey that had been conducted for the insurance of the stock by the National Insurance Company had also revealed that these two godowns did not have the capacity to store as much wool as NSEL was claiming. Apart from this, it also came to light during the investigations that the wool stored in these warehouses was of poor quality. NSEL had claimed that the wool is of 21 micros, when actually it was of 34 micros i.e. of an inferior quality.

NSEL mislead its investors by providing them false information about the quantity and quality of its commodities. A handful of companies kept the entire stock to them and minted money by cheating people, claiming they possessed large quantity of superior-quality commodities. Clearly, this could not have been possible without the complicity of NSEL officials.

All in all, it was a business where investors were buying the same quantity of commodities again and again without even knowing that NSEL never had any such stock.

For example, party number 1 (seller) wants to sell 100 metric tonnes of raw wool for Rs 700 per kg through NSEL. Two parties (party number 2 and 3) are ready to buy this stock. On the third day of the signing of the agreement, party number 2 and 3 will give party 1 the entire amount, which would be approximately Rs 7 crore. On the 26th day, party number 1 (buyer) is supposed to give the commodity (100 metric tonnes of wool) to party number 2 and 3. However, it does not do so. Rather, party 1 (seller) buys the commodity from party number 2 and 3 at the current market price (Rs 710 per kg). However, in these 26 days, party number 1 sells the same commodity to several buyers and accumulates a large sum of money. Amidst all this, party number 1 never maintains the quantity and quality of its stock being displayed on NSEL’s website. Investors are shown a rosy picture.
 It is worth pondering that NSEL charges Rs 100 for every business transaction worth Rs 1 lakh that it facilitates. This means, increased trade leads to increase in income for NSEL and that too, from commodities which never existed. In this business, one or two parties control a particular commodity. They show bogus purchase bills in their accounts so that they can cheat investors into believing they have large stocks available. This way, through NSEL’s electronic platform, they trade in commodities which do not even exist.

In July end, the government had directed NSEL not to issue any further contracts. This had halted the entire trade. FMC (Forward Market Company) had also issued warnings to NSEL but it had no impact.

Unanswered questions
1. NSEL’s above activities are illegal. Why did FMC, the regulatory body, not launch a probe?
2. NSEL had to deliver the stock, but it had no stock. Why was this not investigated?
3. Some sellers, who had claimed they had stock worth crores of rupees, were actually firms that had no source of funding for investment. Why was no action taken against them?
4. Was the money accumulated in this fraudulent way being misused for some other activity?
5. The exchange sponsored by Jignesh Shah had caused heavy losses. How was this loss financed?

What is NSEL?
NSEL i.e. National Spot Exchange Limited works as an electronic platform facilitating trade in the areas of agriculture, bullion (??) and metal commodities. NSEL was formed in 2005. It is a joint undertaking of the Financial Technology (India) Ltd. and NAFED. Ideally, its main purpose is to serve as a facilitator between buys and sellers. Farmers and other sellers come to NSEL with their produce (such as sugar, rice, cloth yarn, steel, copper etc) and store them in its warehouses, where the commodities undergo quality-check mechanisms and the buyers are given warehouse receipts. The sellers can use this receipt for the purpose of online exchange where the buyers bid for these receipts. This increases the possibility of the seller getting the best buyer.

Rs 5572 crore of outstanding dues with 24 Companies
Under NSEL’s management are 24 companies that have outstanding dues of over Rs 5572 crores, due to which nearly 17,000 investors are unable to get their money back. On 14 August NSEL refused to make the payment on the grounds that it was unsuccessful in gathering margin money, guarantee etc. This shows the complicity between this company’s management, FTIL and the 24 defaulter companies in cheating the investors. Gulail has a list of those 24 firms along with details of how many crores each form owes.

The buying-selling game
Party number 1 (seller) wants to sell 100 metric tonnes of raw wool for Rs 700 per kg through NSEL. Party number 2 and 3 are ready to buy. On the third day, Party number 2 and 3 will give party 1 the entire amount, which would be approximately Rs 7 crore. On the 26th day, Party number 1 has to give the commodity but it does not do so. Rather, Party 1 (seller) buys the commodity from Party number 2 and 3 at the current market price of Rs 710 per kg.

There was 2205 metric tonnes of raw wool in the godown in Sirah village, wheras NSEL had shown it to be 6058 metric tonnes. Similarly, the warehouse in Purba village had 947.61 metric tonnes but NSEL showed it in its record to be 5706 metric tonnes.
by Shashi Shekhar ( shashishekhar@gulail.com)  

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