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Business News/ Companies / News/  Blame spreads over NSEL’s failures
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Blame spreads over NSEL’s failures

Internal investigation blames unscrupulous clients for its troubles; former CEO points a finger at wrongdoing by executives

NSEL, the spot exchange arm of Financial Technologies (India) Ltd, reports say, effectively served as a platform where mill owners or planters could raise short-term money and financiers make quick returns. Photo: Ramesh Pathania/Mint (Ramesh Pathania/Mint)Premium
NSEL, the spot exchange arm of Financial Technologies (India) Ltd, reports say, effectively served as a platform where mill owners or planters could raise short-term money and financiers make quick returns. Photo: Ramesh Pathania/Mint
(Ramesh Pathania/Mint)

Mumbai: The strange case of National Spot Exchange Ltd (NSEL) gets curiouser and curiouser with an internal investigation by the exchange blaming unscrupulous clients for its troubles; and its former chief executive officer (CEO), in an affidavit, pointing a finger at wrongdoing by executives, including some with a weakness for the high life.

Both seem to be attempts to clear the promoters and the board of the exchange of any blame for the crisis.

According to the internal investigation, details of which were shared with Mint by a person familiar with the findings of this probe who did not want to be identified, the clients of some defaulting members sold commodities held in warehouses to repay their bank loans.

NSEL, reports say, effectively served as a platform where mill owners or planters could raise short-term money and financiers make quick returns.

This is how it worked: members (mill owners or planters) and their clients (smaller planters or mill owners) stored their produce (or produce they have bought) in warehouses, sold the produce to financiers (brokers and their clients) and simultaneously entered into a forward contract to buy the produce from the same financiers at the end of a longer period (usually around a month).

The exchange, which wasn’t regulated, was under the scanner of the consumer affairs ministry (under which the commodities market regulator Forward Markets Commission, or FMC, operated until it was recently moved under the finance ministry) for some time and, under pressure from the ministry, abruptly suspended trading on 31 July.

That left financiers high and dry (to the tune of around 5,572.75 crore). Although NSEL submitted a payout plan and schedule, it hasn’t stuck to it, mainly because members haven’t paid up, and the value of stocks held in its warehouses does not add up to the amount owed.

The board and the promoters have thus far managed to escape the blame—although the financiers and the media, including Mint, have highlighted the lack of risk management and governance systems at the exchange— and attributed the crisis to members and possible mismanagement by some executives.

Indeed, the internal investigation, the person cited in the first instance said, disclosed that clients could sell stock from the warehouses because they had “colluded" with some exchange officials.

That’s the same message in an affidavit by NSEL’s former CEO Anjani Sinha and bank account statements of some of the exchange’s executives that have been seen by Mint. Together, these documents show that some officials were bribed by members and, in return, allowed them to trade and raise funds without adequate backing of stocks in warehouses. The Economic Times newspaper reported about parts of Sinha’s affidavit on Monday.

The exchange didn’t comment on its internal investigation and on the affidavit of Sinha, but said that “commodities which are lying in warehouses under the control of NSEL are being auctioned after calling for sealed bids. However, the stocks of those warehouses which are not under NSEL’s custody are with respective warehouse owners and the borrowers".

Last month, NSEL hired Swiss firm SGS to verify the quantity of commodities lying in warehouses. The summary of SGS’s report, put up on the company’s website, suggests that a number of warehouses were in the custody of defaulting members.

SGS has so far inspected nine warehouses related to seven defaulters and found significant shortage in stock. An FMC report last week said the shortage was to the tune of 85%.

SGS wasn’t allowed to inspect 29 warehouses of 11 other defaulters.

The exchange’s version is that the collusion between its own executives and members is the main reason for the insufficient stock in warehouses.

For instance, according to the Axis Bank Ltd account statement of Mohan India Pvt. Ltd, one of the borrower members, NSEL’s former assistant vice-president of business development, Amit Mukherjee, and his wife Bonhi Mukherjee were allegedly given 3 lakh and 15 lakh by the company on 11 February and 22 March, respectively.

Additionally, Sinha, in his affidavit disclosed that Jai Shrivastava, a director of Mohan India, stated to him in a meeting in Delhi on 7 September that he had given 35 crore to Amit Mukherjee, partly in cash and part in cheque.

Mohan India owes about 575.08 crore as payout obligations to NSEL investors, the fourth highest among 24 buying members of the exchange.

In the case of PD Agroprocessors Pvt. Ltd (which owes 639.55 crore), Namdhari (which owes about 61.5 crore through two associates) and White Water Foods Ltd (which owes 86.12 crore), the affidavit disclosed that the common feature was that all of them used NSEL for raising funds against physical stock. “But it is possible that in some cases, those stocks were already pledged with the banks," said Sinha.

“...I suspect that they might have entered into dealings with the buying members for their personal benefit. For this, they should have subjected to any judicial enquiry...I also came to know that in course of visits to Delhi, Amit Mukherjee was using high-end cars like Bentley, Porsche, etc. and stay at Hotel Radisson Blue (owned by Mohan India/Mera Baba group), which were sponsored by Jai Shrivastava," Sinha said in his affidavit.

“...As told by T. Ravishankar (a Delhi employee of NSEL) yesterday, Jai Bahukhandi, another officer of NSEL, bought a high-end SUV costing around 17-18 lakh around 4-5 months back...," Sinha said in his affidavit dated 11 September, a copy of which has been handed over to FMC, the Economic Offences Wing and other investigating agencies.

Mint couldn’t immediately verify this independently.

Bahukhandi was serving as the assistant vice-president (warehousing) for NSEL before the entire management under Sinha was overhauled. While explaining the intention of Mohan India’s Shrivastava behind such secret dealings with NSEL management, Sinha said that NSEL team was told that they were “big sugar traders". Apart from real estate, hotel and school business, they also have interest in some sugar mills in Uttar Pradesh.

Sinha added that the exchange later discovered that the entire Mohan India story was farce. “Initially Bahukhandi confirmed that stock lying in Delhi is around 1.35 lac MT (metric tonnes), but later on it was discovered that at no point stock was more than 5-10 thousand MT."

The affidavit exposed the underbelly of NSEL’s dealings over the past few years, how its business model changed from a delivery-based trading platform to more of a financing model and how the platform was extensively misused by its members in collusion with NSEL management to raise funds without trades being backed by adequate stocks at the spot bourse’s warehouses.

Sinha disclosed that most of the buying members were using the NSEL platform for running their businesses.

“Besides, some of these buyers have used such funds for some other activities such as extension of their plants, investment into real estate and may be for other activities too," he said.

While holding himself and his management responsible for subverting the bye-laws of the exchange, Sinha made effects to establish that NSEL’s directors and promoters were in no way responsible for the crisis.

In his affidavit, Sinha claimed that while the design of the contracts introduced by NSEL was good, the weakness was that it allowed plant location as the delivery centre, shifting the control on stocks and warehouses from the exchange to the buyers. This gave the buyers a free hand to manipulate warehouse and stock records

Sinha blamed the inefficiency of the warehousing team for breaking the vital chain between physical stock and exposure, and said they were incompetent to handle high volumes of operation.

According to him, the buyers defrauded sales proceeds without actually delivering goods, diverted funds availed through fictitious sale transactions to buy real estate and other properties, and made false statements about stock positions in the presence of FMC officials.

“The weakest link in the entire episode is the warehouse management," Sinha said, adding that he himself had faltered by not informing the board about increasing exposure and risks of widespread defaults, and submitting a wrong stock statement to them on 30 July, which was later also submitted to FMC.

Still, as a client pointed out, there are holes in both versions.

“It was NSEL’s responsibility to ensure that stocks were secure in warehouses to safeguard the interests of investors," one client said on condition of anonymity. “NSEL even charged for maintenance of warehouses." And if some clients had sold stocks as alleged, why hadn’t NSEL filed police complaints against them, this person asked.

Ami Shah contributed to this story.

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ABOUT THE AUTHOR
Anirudh Laskar
Anirudh Laskar is a senior editor at Mint, with 17 years of experience. He has reported on significant corporate matters including large mergers and acquisitions, India's emerging e-commerce sector and regulatory issues in the financial services industry. Based out of Mint’s Mumbai bureau, Anirudh has worked with Business Standard and The Telegraph before joining Mint in 2009.
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Published: 17 Sep 2013, 12:02 AM IST
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