Investors file complaint against brokers of NSEL with Mumbai police, Sebi

Mumbai: A group of investors has filed a complaint against brokers of National Spot Exchange Ltd (NSEL) with Mumbai police’s economic offences wing (EOW), the enforcement directorate and the Securities and Exchange Board of India (Sebi) in connection with the ₹ 5,574.35 crore payment crisis at the commodities exchange.

The complaint filed by NSEL Investors’ Action Group on 24 December has alleged that some brokers “may have used their connections and taken money out of the settlement guarantee fund at the last moment” before the exchange defaulted on payments to investors.

The investor group has asked for a “forensic audit of all major brokers involved” in the payment crisis. It has also alleged that a few brokers had “induced” their clients to invest in NSEL’s pair trade products by “financing them to the extent of 60% to 90% at lower rate of interest”.

Besides, the complaint said most brokers assured their clients that they had verified the stocks lying in the warehouses of NSEL.

“The brokers acting on behalf of the investors did not collect delivery orders or warehouse receipts (as per bye-laws) which were the title of the goods. In a criminal breach of trust the brokers gave away investors’ money without securing the investor in return by collecting negotiable document like warehouse receipt/delivery order,” said the complaint filed by NSEL Investors’ Action Group.

The complaint has also alleged that the brokers had collected transaction charges for stocks that did not exist in the warehouses. “They (brokers) have cheated the clients by collecting false charges/fees and pocketing the same…, ” said the complaint.

Currently, the EOW is examining the books of accounts of at least 148 brokers in connection with the NSEL crisis. The agency has also summoned a few top brokers in connection with the investigation.

The settlement crisis at NSEL came to light on 31 July, when the exchange abruptly suspended trading in all but its e-series contracts. These, too, were suspended a week later. The closure of trading may have been prompted by an instruction from the ministry of consumer affairs to the exchange asking it not to offer futures contracts. A spot exchange isn’t supposed to do so, but NSEL was doing that.

NSEL tried to implement the change, but because its appeal was to investors and members who were not interested in spot trades, it eventually had to suspend all trading. It later emerged that all the trading on NSEL happened in paired contracts, with investors, through brokers, buying a spot contract and selling a futures one for the same commodity.

The entities selling on spot and buying futures were planters or processors and members of the exchange. It turned out there were only 24 of them, and they used the paired contracts as a way to raise easy money. When the trading was suspended, the investors were left holding contracts that the members couldn’t buy because they didn’t have the money to do so.

On 14 August, NSEL proposed a payout plan, but it has been unable to stick to the schedule and has not made a single complete payout.