Was warehousing system the Achilles heel of NSEL?

Did National Spot Exchange Ltd (NSEL) get into trouble because it had a basic weakness in warehousing system, allowing plant locations as delivery centres?

According to an affidavit filed by Anjani Sinha, who has been ousted as the Chief Executive Officer of NSEL after it fell foul of the authorities, the exchange opted for plants as delivery centres to save costs since having a professional warehousing system outside the plant was financially unviable.

“On the other hand, allowing the plant of the buyer as the delivery location provides better control to the buyer compared to the exchange,” Sinha said in the affidavit filed on September 11.

Stating that the design of the spot contracts of NSEL was good, he saidthe warehousing team of the exchange was not competent to handle such volume of operation.

“The inefficiency of (the) warehousing team led to breaking the chain between physical stock and exposure,” Sinha said.

About 25 buyers had entered into transactions on the NSEL platform to get working capital against physical stock of goods, selling and buying in the process. While some actually used the platform for running their business smoothly, some others diverted the funds for activities such as expanding their plants and investing in real estate.

The business model of the spot exchange was initially developed as a delivery-based trading platform but gradually, it became more of a financing model, rather than for delivery of physical commodities. This attracted a large number of clients and investors towards NSEL as they got good returns on the investment ranging from 14 to 18 per cent.

Admitting that he was at fault for not having a proper system and control to monitor physical stocks and exposure, Sinha said that he had relied too much on his business development head Amit Mukherjee and warehousing department in-charge Jai Bahukahndi.

Mukherjee , in particular, has been charged with introducing clients with bad credentials and not informing about diversion of funds and non-availability of stock that was pledged with lenders.

The “most severe” violation was committed by Bahukhandi’s team and the weakest link in the entire episode was the warehouse management, Sinha said. He did not have adequate control of physical stock and made false statements.

Sinha said since 2011-12, buyers were allowed to roll over the positions. Had it not been done, buyers would have defaulted a huge amount.

According to Sinha, the NSEL settlement system was first hit by the failure of Lotus Refineries to make payment.

Lotus committed a fraud by manipulating stock records and issuing false bills. It led to NSEL being trapped in the roll-over mechanism.

If Lotus been declared a defaulter, the entire system on NSEL would have been paralysed because the exchange did not have any stock of Lotus with it.

As a result, the exchange staff had to plead with Lotus to continue trading, leading to its liability increasing by the day.

Sinha said that ever since Mohan India, one of the biggest defaulters, became a member, his warehousing and business development teams had confirmed that the firm had sugar stocks close to 1.3 lakh tonnes and he had relied on them. However, he allowed Tavishi Enterprise and Brinda Commodities to trade without having the actual stock.

Sinha said stocks of raw wool were manipulated when the exchange decided to shift the warehouse outside the factory premises of ARK Imports. NSEL’s staff were hand-in-glove with ARK Imports, a Ludhiana-based firm that traded in raw wool and claimed to be a large importer.

The ousted CEO of NSEL has also admitted adjustments in NSEL books by receiving money from Indian Bullion Market Association to show profits.

Sinha said that the entire amount was with the 24 buyers who used it for their business or other ventures. It could be tracked by investigating the money trail better through their settlement account, client account and subsequent movement of funds.

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