NSEL’s journey from spot exchange to para-banker

Paired contracts accounted for 99% of turnover on exchange in April-July 2013,finds audit report.

Written by Fe Bureau | Mumbai | Published: October 16, 2013 5:48:29 am

The board of the National Spot Exchange (NSEL),which is blaming the senior management of the spot exchange for the ongoing settlement crisis,approved the introduction of long-term “paired contracts” nearly four years ago that led to the bourse essentially becoming a platform for raising short-term finance,finds a forensic audit report prepared by Grant Thornton. The report was commissioned by NSEL after it sacked its CEO Anjani Sinha for his role in the R5,600-crore payments crisis at the exchange.

The volume and value of such financing trades grew substantially over the years and became the main contributor to turnover on the exchange,excluding the e-series contracts. The share of such trades rose from 25% in 2009-10 to as high as 97% in 2012-13. In the four-month period between April and July 2013,the share of paired contracts was 99% of the total turnover.

Indian rupee on Sept 5

“The introduction of these long-term contracts resulted in members,acting in collusion,to enable a financing mechanism by simultaneously engaging in back-to-back trades… The exchange platform facilitated,and provided a faster medium of financing,by being a counterparty guaranteeing both sides of the trade,” says the forensic report.

The board of NSEL ratified contracts with a long-term settlement period in 2009 and subsequently contracts with a tenure of more than 11 days were introduced. The board minutes dated November 16,2009,ratified trading of T+18 and T+36 contracts,while the minutes dated December 19,2009,ratified T+25 contracts,notes the forensic audit report.

This is in sharp contrast to the claims made by the board that the crisis was the result of mismanagement by the senior management with the board completely unaware of the developments.

The report further finds that via this mechanism,short selling was enabled on the exchange,which is a violation of regulations governing spot exchanges.

In fact,review of internal emails by the forensic audit panel showed that returns on such investments were being circulated internally.

In addition,investor presentations prepared by NSEL clearly provided a yield for investment in various products as part of the contract specifications.

“This is in contravention to the representations made by NSEL to FMC refuting any form of investment-type schemes being offered on the NSEL exchange,” says the forensic audit report.

Interestingly,while such contracts were introduced during 2009-10,only one member – NK Proteins – traded in these contracts in the first year. Subsequently,there was a surge in the number of members who traded these long-term contracts. NK Proteins is one of the biggest defaulters to NSEL with outstanding dues estimated at Rs 969 crore. Nilesh Patel,managing director of NK Proteins,also happens to be the son-in-law of Shankarlal Guru,who was chairman of NSEL till August 2013.

Sinha to appear before EOW today

The former managing director & chief executive of the National Spot Exchange (NSEL) Anjani Sinha will appear before the Economic Offences Wing (EOW) on Wednesday,reports fe Bureau in Mumbai. Soon after the settlement crisis became public,Sinha absolved the NSEL board of any wrongdoing by stating in an affidavit that he was responsible for the crisis. The Mumbai Police wing has arrested two former employees of the spot exchange — Amit Mukherjee and Jai Bahukhandi — who have alleged that Sinha was responsible for mismanagement at the exchange. Meanwhile,former MCX-SX MD Joseph Massey and Shankarlal Guru,who was the chairman of NSEL till August,appeared before the EOW for questioning on Tuesday. The police have also questioned the CFOs of some of the borrowers to get insight into some of the entries made in the books of accounts of NSEL and the defaulting entities.

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