Home / Companies / NSEL retracts note claiming brokers were involved in fraud

Mumbai: Brokers, many of whom were hitherto claiming to be affected parties in the irregularities at the National Spot Exchange Ltd (NSEL), were actually involved in the fraud, the exchange claimed in a note.

The statement came shortly after NSEL’s joint managing director Prakash Chaturvedi told news channel CNBC TV18 the same thing. Later in the evening, though, the exchange withdrew the statement without assigning a reason.

An email and calls to the exchange’s spokesperson seeking a reason for the withdrawal were not immediately answered.

On 31 July 2013, what was then considered a settlement crisis at NSEL came to light when the exchange suspended trading in all but its e-series contracts. E-series contracts were meant to allow retail investors to buy and sell commodities in dematerialized form. These, too, were suspended a week later.

The suspension 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 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 2013, NSEL proposed a payout plan, but it has been unable to stick to the schedule.

The brokers and investors have consistently claimed around 13,000 of them were affected by the fraud. NSEL said in its now withdrawn note that only 45 of the around 13,000 had verified their claims and that these add up to 12 crore.

The exchange, under the guidance of a Bombay high court panel, issued a note on 9 February asking all affected parties to provide details by 25 February.

“In the open hearing conducted by the high court committee on Monday, investors opposed such data collection by the exchange. The committee has ordered status quo and there is no immediate onus on the investors to file their claims immediately," said an investor who was present at the hearing. He declined to be identified.

NSEL added in its statement on Monday that brokers engaged in large-scale code modification in the four months to July 2013. The underlying trades accounted for over 2,000 crore, the exchange claimed in its withdrawn statement.

Client code modification allows brokers to move trades from the account of one client to another. While regulations allow such modifications, regulators insist such changes should be an exception rather than the norm.

According to the statement, the operations team of the exchange found rampant client code modification in the case of over 300,000 contracts. It has also highlighted the fact that Ketan Shah, one of the trading clients and president of NSEL Investor Action Group (NIAG), has alleged ledger manipulation in his complaint to the Economic Offences Wing of the Mumbai Police.

Based on the paltry response, Chaturvedi, joint managing director of NSEL, has questioned the genuineness of the claims saying it seems brokers “acted as front or proxy" of trading clients.

“We will be happy if all the claims made by the trading clients turn out to be true and their own. But it seems like, based on data we have received so far, brokers have acted as front or proxy where PAN (permanent account number) lending, name lending and KYC (know your customer) lending seems to have happened…and the 13,000 number is being used to generate sympathy from the system," the note quoted Chaturvedi as saying.

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