)
The $1-billion National Spot Exchange Ltd (NSEL) scandal can be approached in two ways. First, it was an exchange and was allowing clients to sell commodities they did not own or short-sell, which is illegal. Second, it was a financing scheme, which allowed a small group of people to pool money from a large number of investors, assuring them returns.
These two views need not be mutually exclusive and in this case, they certainly are not. The NSEL paired trades investment scheme was both. In fact, last December, Consumer Affairs Minister K V Thomas went on record that a complaint had been received saying NSEL was an illegal financing operation, clothed in exchange-wear. He said they were investigating this.
Let’s look at the facts. There were 24 people who made use of Rs 5,600 crore (close to $1 billion) collected from 13,000 investors. At a point, this sum was as high as Rs 21,000 crore, the minister was quoted as saying recently. The people who collected money assured a return of 15-18 per cent. These people, who are companies with little or no actual business, can’t even dream of such sums in the regular channel, say banks or other financiers. Two intermediaries helped this: the exchange and the brokers. They both earned huge fees and commissions, in crores of rupees.
Now, when the government stuck down this operation abruptly, the borrowers don’t have the money to pay liabilities. What does this mean? This means that the 24 people and their facilitators were probably using the new money that came into the system to pay off the returns that are due to older investors and the redemption of actual capital, whenever sought for. When the new money supply has been plugged, there is a payment crisis.
This is the age-old method. It works spectacularly well when the scheme builds up. Historically and across geographies, such schemes have succeeded spectacularly before turning into quick-sand, that sucks in dreams, wealth and even lives. Remember Harshad Mehta or Bernie Madoff and you surely would not have forgotten the Saradha group’s Sudipta Sen.
Saradha and Sen bring to us all those big noises made on regulatory reforms. After hectic lobbying riding on the Saradha issue, the government recently empowered the Securities and Exchange Board of India (Sebi), to deal with all such money-raising schemes. Any person, who pools money in excess of Rs 100 crore, can be treated by Sebi as a collective investment scheme (CIS), the new ordinance has stated. Sebi also has powers to go into schemes even if they are less than Rs 100 crore on a discretionary basis.
However, Sebi doesn’t seem to be looking at the NSEL fiasco from a CIS angle. The reports so far have indicated that Sebi is probing brokers’ margins, that it has ringfenced the stock market from risks and so on.
But should Sebi not be looking at it as a scheme where a few people benefited from money collected from thousands? Business Standard has, through the course of the past couple of weeks, been able to establish the following: that a raw wool importer, the second largest debtor among the 24, who has dues of around Rs 800 crore, has a capital of Rs 1 crore. The stocks in several godowns for castor, wool and jeera are doubtful, insufficient or both. Other news reports have raised similar questions on sugar stocks and the companies which hold these such as Mohan India.
All these and claims of brokers and investor forum on Tuesday clearly point to the existence of a financing scheme. If it existed, then by definition it would be illegal.
Are these not reasons enough for Sebi to explore the collective investment scheme angle and begin probe and action?
Sebi cannot afford to cite jurisdictional issues and sit quiet. Sebi is better placed with its larger manpower, nationwide network and experience in handling such situations, than the fledgling, single office Forward Markets Commission (FMC). FMC, clearly ill-equipped to execute this kind of an operation, will only be too happy if help comes by in cleaning up this humungous mess, that has set back the commodities markets by a decade.In recent cases, the concepts of “concurrent jurisdiction” and “regulators working in tandem” have been held good.
To crown these, Sebi has also got these substantial new powers to search and seize in the premises of entities.
With great powers come great responsibility.
If you cannot apply the new powers on a live case in front of your eyes, what was the tearing hurry to usher these powers through an ordinance? Can the regulator wait endlessly for rules and regulations to be made when the statute is already in place? Will the scandal that is snowballing wait patiently for you to frame the rules and then take action? Sebi has to find a way to say “me, too”, before it is too late.
