NSEL borrowers got 50:50 profit share

Agreement with Chandigarh-based LEAF shows sharing of profits, alternative financing options, secrecy clauses and more

The relationship between National Spot Exchange (NSEL) and its borrowing members was a little more intricate and indulgent than between a typical exchange and its members.

In a typical set-up, a member is enrolled for a fee and permitted to execute trades on the platform. The exchange does not take any interest in the business of the member itself.  

NSEL was different. The troubled bourse, now facing a Rs 5,600-crore payment crisis, had agreements with some of its 24 borrowing members, containing elaborate commercial terms that included sharing of profits, deals to organise finance, etc. These deals entrusted business obligations on both parties. While the borrower was responsible for procurement, storage and the like, NSEL was responsible for organising finance, warehousing and even sales.

MORE THAN MEMBERS

• Agreements not typical of those between a member and an exchange
• Agreements talk about alternative financing options
• NSEL offered other options such as bank financing, offline deals
• Third parties blocked from entry in case of dispute
• Agreements had secrecy clause

“After deducting all direct costs incurred in the operation from the net sale proceeds, profit will be ascertained, which will be shared equally between LEAF and NSEL,” stated an agreement between Chandigarh Lakshmi Energy and Foods (LEAF) and NSEL, reviewed by Business Standard.

This agreement was signed by NSEL’s erstwhile chief, Anjani Sinha, and LEAF’s managing director, Balbir Singh Uppal, in October 2012.  Business Standard also reviewed similar agreements signed with Mumbai-based Lotus Pharma Chemicals. Lotus has sued NSEL in the high court at Mumbai for settlement of dues. Further, the agreements indicated NSEL would organise finance for procurement of goods through various methods such as banks and offline bulk deals, apart from an online trading mechanism.

“NSEL and LEAF will jointly organise finance for the entire procurement of basmati paddy under the following: A) From banks based on the storage receipts issued by NSEL. B) under the online trading mechanism against stocks kept under NSEL custody and C) others (offline bulk deals),” another clause in the agreement said.

There were clauses to prevent interference of third parties in case of any disputes. The agreements further reinforce the allegations that the exchange and its borrowers had a clear understanding of a financing arrangement, whereas it was projected as a platform between farmers, traders and millers.

An NSEL spokesperson said: “As regards Lotus, we would like to clarify that we are not aware of any such agreements entered into on behalf of NSEL by the erstwhile management. Moreover, with respect to your other observations on NSEL’s business, as the matter is sub judice and under investigation, we cannot comment.” “The exchange jointly organised finance from banks based on storage receipts issued by NSEL or under the online trading mechanism against stocks kept with NSEL. This shows that such agreements are against the byelaws and procedures of an exchange,” said an NSEL Investors Forum official who reviewed these agreements.

More, borrowers such as LEAF were to act as only facilitators for procurement directly from farmers and NSEL was supposed to maintain the farmer database. In fact, no commodity was purchased from farmers directly and NSEL did not have any records of farmers, the investor added.

The agreement allowed the borrower to process the commodity after the launch of contract. In line with exchange specifications, the stock has to be in the custody of the exchange and the borrower would not have any access to it until the close of the contract.

Further, the agreement also had a secrecy clause, wherein on the event of termination of the agreement, “all data and other materials” have to be returned without retaining any copies.