Justice delayed

It is more than five years since the scam at the country’s first spot exchange for commodities, the National Spot Exchange Limited, broke out, but there is still no sign of closure. As the stakeholders involved continue to trade charges and point fingers at each other, it is becoming apparent that many of the numbers being mentioned are questionable. For instance it is widely believed that 13,000 investors trading on NSEL lost a total of around ₹5,600 crore. But a committee appointed by the Bombay High Court headed by Justice VC Daga to investigate the NSEL scam found claims worth only ₹650 crore from 4,697 entities. It also appears that not all the investors who are purported to have lost money really exist going by the report of the Economic Offences Wing of the Mumbai Police, which reports that many fictitious accounts, for trading on NSEL, were created by brokers, by enrolling low income people as clients.

There is no doubt that lapses have occurred at multiple levels. The then regulator, the Forward Market Commission, delayed taking action against NSEL stating that spot exchanges were outside its purview. The exchange was guilty of various mis-deeds including facilitating trading in forwards when it was allowed to trade spot transactions only, allowing shorting on the exchange and coming up with paired contracts that allowed investors to make fixed returns while providing financing to commodity users. The investors are guilty of not doing due diligence and investing in a suspect fixed-return commodity-based instrument. But there is no disputing that brokers have had a large role to play in bringing investors to trade on the NSEL platform. It is right that the spotlight has now turned on the malpractices of intermediaries, as brought out by the EOW report. The report states that the intermediaries, besides selling the paired contracts of the exchange, also financed these trades, often through their associate companies, had nexus with defaulters and re-routed funds through multiple accounts. This report is very disturbing as the same set of brokers facilitate trades in stocks, currencies and fixed income instruments as well. If they are found to resort to illegal practices in any one segment, investors in other segment are also at risk. The market regulator therefore needs to take this report seriously and impose penal actions, wherever required.

As far as recovering investors’ money goes, NSEL claims that it has already repaid the amounts due to investors with less than ₹2 lakh outstanding and that it has repaid 50 per cent of the investors who had outstanding amounts between ₹2 lakh and ₹10 lakh. It’s therefore possible that investors who are still awaiting their money are mainly larger traders. Such traders can not claim ignorance about the risk associated with investing in commodities. SEBI can use the learnings from this episode to heighten the scrutiny on intermediaries to protect investors in the future.

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