Home / Market / Stock-market-news /  NSEL investors fear default; brace for legal battle

Mumbai: High-profile investors in the embattled National Spot Exchange Ltd (NSEL) are exploring legal options, apprehending default by the commodity exchange, even as NSEL is likely to release the plan to meet its payout obligations on Wednesday.

NSEL is a unit of the Jignesh Shah-run Financial Technologies (India) Ltd (FTIL). Multi Commodity Exchange of India Ltd (MCX) is also part of the same group.

In a hurriedly called press conference on Tuesday, a group of investors and brokers led by Nirmal Jain, chairman of India Infoline Ltd, Motilal Oswal, chairman and managing director of Motilal Oswal Financial Services Ltd, and Anand Rathi, founder and chairman of Anand Rathi Financial Services Ltd, said that a few of them had visited some of the warehouses and discovered that these did not have the quantity of the stock mentioned by NSEL. In some cases, there was no stock at all and the warehouse receipts were fake, they alleged.

Though there are reports that NSEL has engaged Switzerland-based SGS to audit stocks across 89 godowns of the exchange, an investor from Delhi alleged that SGS has merely drafted an offer letter to audit the stock held at warehouses and nothing has been finalized as yet.

The reports said that SGS India, a part of Switzerland-based SGS Group Management SA, has been given the mandate to audit 21 commodities that are stocked across 87 warehouses of NSEL. The group is one of the world’s biggest inspection, verification, testing and certification companies.

“We want the government to take over NSEL, just as it had taken over Satyam (Computer Services Ltd) together with its assets and liabilities and everything. The government should also take over FTIL and MCX ) till such time all payments of the investors are done," Sharad Kumar Saraf, managing director of Technocraft Industries (India) Ltd, said.

His company has 60 crore exposure to NSEL.

Saraf said his company is in talks with lawyers to freeze the assets of Shah of FTIL.

“From where will the money come? If FMC (Forward Market Commission, the commodity futures regulator) guarantees 5% of payout every week (from NSEL), we will accept," Saraf told reporters.

NSEL said it was wrong to hold the promoter responsible.

“We would like to clarify that 23 buyers are required to meet their pay-in obligations and any default would be dealt as per legal default proceedings," said Anjani Sinha, managing director and CEO, NSEL.

“The management of NSEL under the supervision of the board is making all attempts to ensure settlement is achieved. This institution has been used by industry satisfactorily for three years and now exclusively holding the promoter responsible is inappropriate."

Anand Ladsariya, another investor in the exchange, said, “This is a question of trust. Today it has happened with this exchange, tomorrow there could be another commodity exchange... The entire financial system will go bust this way."

Oswal said his firm had an exposure of around 250 crore on NSEL, most of which was on behalf of its clients. Other brokers declined to comment on their exposure, citing client confidentiality.

“We are concerned about the cascading effect of this… Turnover in all exchanges have come down in last 15 days," said Rathi.

Directed by the government, NSEL has opened an escrow account with a bank to ensure payouts on priority to about 8,000 small investors stuck after the exchange halted trading 1 August. The government has asked Shah to take complete responsibility for ensuring the settlement of about 5,600 crore due to investors.

NSEL has set up a four-member panel to monitor the process, and the government has empowered the FMC to oversee the settlement. Brokers and investors are not in favour of this committee and said the government should form a new committee, with people of high repute and experience such as Deepak Parekh, chairman of Housing Development Finance Corp. Ltd.

Meanwhile, there does seem to be some discrepancy in the data on stock positions of the buyers provided by NSEL, as alleged by the brokers.

In the case of NK Protein, which has a 929.29 crore exposure, NSEL has said that the company has 84,766 tonnes of cotton seed oil and 96,581 tonnes of castor seed valued at close to 530 crore and about 352 crore, respectively. Besides, NK Protein also has stock of 7,553 tonnes of castor oil worth about 50 crore. In all, NK Protein has a stock of about 1.89 lakh tonnes, according to the latest data uploaded on NSEL’s website. All this is stored at the company’s two plants at the Kadi-Thor area near Ahmedabad, according to NSEL.

However, NK Protein’s website contradicts this. The company has an overall storage capacity of 14,000 tonnes per annum, including various types of edible oils.

Promoted by Nimish Patel and Nilesh Patel, NK Protein is engaged in the business of refining edible oils. The company is also engaged in the trading of edible oils.

An official present at the company’s Kadi-Thor factory where castor oil and seeds are stored said that work has been going slow at the site since the last one month. He claimed that the storage tanks’ capacities were under-utilized.

Mint could not verify the claims as the managing director Nilesh Patel didn’t take calls. His daughter Priyanshi Patel, a director in the company, declined to speak on the matter.

Shriram Subramanian, managing director of Ingovern, a corporate governance research firm, said, “They (NSEL) were playing regulatory gaps… The exchange performed without oversight of independent board of directors… The brokers are party to this… They could have stopped this... Basic tenets of risk management and corporate governance were thrown out of door."

On Tuesday, FTIL shares dropped 0.4% to close at 169.50, while MCX fell nearly 5% to 266.60.

Since the beginning of the month, FTIL shares have lost 68.7% and MCX’s 58.34%, while the benchmark Sensex has lost 0.6%.

Maulik Pathak in Ahmedabad contributed to this story.

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