Has NSEL forgotten that it's an exchange?

Brokers say the exchange's duty is to settle dues first, going after defaulters comes later

ARK Imports was started in June 2011. Anubhav Aggarwal, the 34-year old promoter, invested Rs 98 lakh for a 98% stake in the company. Parents Kailash and Rajni Aggarwal stepped in to pick 1%. All of them live in the same address in Gurdev Nagar, Ludhiana.

Two years on, the company which has an authorised capital of Rs 1 crore, is said to be sitting on a stock of Rs 816 crore. Or in other words, it owes that much to the brokerages and investors who had taken positions in National Spot Exchange’s (NSEL) Raw Wool contracts.

For the period ended March 31, 2012, it had a balance sheet size of Rs 124 crore. It had inventories worth Rs 7.35 crore. Other current assets stood at Rs 112 crore matched by other current liabilities of Rs 113 crore. It had Cash and cash equivalents of Rs 70 lakh.  On a turnover of Rs 165.2 crore, it made a net profit of Rs 7 lakh during this period.

 
On Sunday, NSEL listed ARK as one of the thirteen entities which wanted to pay the dues in 20 weekly installments of 5% each.

Even at this rate, it was not going to be easy for the Aggarwal family to pay up Rs 40 crore per week obligation, especially when considering Business Standard in a recent visit found that the raw wool stock in the Seerah godown was nowhere near the 11,190 tonne reported by the exchange.

But wait. Why are we even worried about the counterparty and his financial condition. Is the exchange not supposed to be the central counterparty? Should it not be settling all contracts on both sides irrespective of the bankruptcy or otherwise of one side?

So, what is Jignesh Shah talking about when he says he will take action against defaulters? Was this an exchange or some money lending shop that he says defaulters will attract penal interest of 16%?

In December 2012, consumer affairs minister KV Thomas was quoted in media reports as saying, 'A complaint has been received by FMC that an investment scheme promising assured returns to retail investors is being marketed by a member of NSEL.' The minister had added, “Regarding the scheme resulting into an illegal NBFC transaction, the issue is being examined in consultation with Finance Ministry,' the minister said.

Brokers say let him take any action he wants against the defaulter at his own leisure. But, he should first settle the dues, which is the fundamental promise of any exchange.The exchange should have collected enough margins, put in place adequate systems to address these issues.

Shah’s announcement of the committee has also not inspired any confidence among brokers. Top brokers with exposure to the exchange are said to have met the consumer affairs ministry to press their case.

The other difficult question that this raises is what did small, nuclear family companies like ARK do with such huge sums of money. Were they using this money and playing stock positions in other markets such as the commodity derivatives and stocks? After all if you have to allow make HNIs to make 18%, then you have to make this money and a little more elsewhere. If this is true, then the crisis has only begun.