A Tale Of Two Sleeping Watchdogs

The least you can expect from a watchdog is to bark and alert its owners of an intruder’s presence. But when watchdogs turn into lapdogs, there is nothing to deter the looters. The recent transgressions by the National Spot Exchange (NSEL) are turning out to be the most classic case exemplifying this. Right under the nose of not one but two regulators, a few entities have managed to plunder a humongous Rs 5500 crore belonging to thousands of investors.

Let’s allow for the assumption that Rs 5500 crore is a rather small amount as compared to the quantums of money that get swindled away in scams nowadays. This possibly becomes the first excuse for the regulators letting the looters do what they wanted to, for looking the other way even if irregularities were noticed.

Having said that, let’s move to the next bizarre but quite plausible possibility – those who were looted have more than enough wealth at their disposal. So, it hardly matters to them whether investigations and recovery proceedings begin today, tomorrow, a month after, six months down the line or even if they don’t begin at all. Given the pace at which investigations are in progress, this seems to be the most likely reason for the regulators to give urgency a pass in this case. In fact, our questions sent to the FMC Chairman Ramesh Abhishek’s office through an email sent way back on August 27, 2013 still remain unanswered.

The first serious rap from the FMC office to the NSEL and its promoters came in only after the first official default on payment happened. What can explain such an inordinate delay in the whole process? Is there any doubt as to the seriousness and scale of the fraud that has happened right under the nose of the regulator? Does the FMC not wield power enough to bring the culprits to book? We, at DSIJ, have sought answers to some very pertinent questions through an RTI application filed at the FMC office. There is hope that truth will prevail.

In fact, the inaction of the FMC seems to be putting even the reactive actions of the NSEL in a favourable light. Of its own accord, the exchange appointed an auditor to audit the warehouses. It even appointed a committee to look into the problems after they came to light. And what was the FMC doing while all this was happening? Well, another committee would probably be needed to look into that aspect.

By the way, a word of advice to the committee which will hopefully be appointed some day to look into the FMC’s functioning. According to sources, if one digs into some of the joint initiatives that the FMC has been undertaking with various intermediaries in order to propagate stakeholder education in commodities trading, one would probably find a whole lot of studies and projects launched by it in alliance with an interesting list of companies – some of them group companies of the promoters of the NSEL as well.

Now we come to the much revered SEBI, which on occasion, has risen to keep a strict vigil on the market actions of players – or so it says. Is it keeping the same kind of watch on the developments surrounding the NSEL as well? Look at the price movement of the two listed entities coming from the troubled group, and the answer is more than obvious. Between July 30, 2013 and yesterday (September 2, 2013), Financial Technologies’ stock is down from Rs 550 to around Rs 115. The movement seen in the counter has been so wild that it has lost as much as 65 per cent on one day (August 1, 2013) and gained as much as 31 per cent on another (August 5, 2013).

Here’s something even more interesting. On August 27, 2013 (the day of the second payout of NSEL), Financial Technologies announced that it was loaning Rs 174 crore to the beleaguered exchange to meet its payout obligation due for the week. The announcement came in post market hours and the stock was already down eight per cent that day. But on the very next day, it gained almost all that it had lost the previous day, moving up by as much as seven per cent.

The stock is down in the dumps. There is no way that sane investors would want to touch this stock in its present circumstances. But a look at the way it has been trading even at its present levels calls for caution.

Is the SEBI listening in this case? Is there a need to change the categorisation of the stock and put it in a constricted zone (trade-to-trade) so as to safeguard gullible investors who could fall prey to the greed of bottom fishing and eventually end up burning their fingers? We have already raised questions about how shareholders of Financial Technologies stand to be shortchanged by the management’s decision to loan an amount of Rs 174 crore to NSEL.

The story of the MCX stock is even more intriguing. The stock is down 50 per cent since the NSEL crisis broke out. But, most of this fall happened during the early days of the crisis. Between August 19 and September 2, 10 out of the 11 trading sessions have seen the stock end the day in green. In fact, it has moved up by as much as 49 per cent over this period. The stock has consistently risen over the past seven trading sessions, moving from Rs 292 to Rs 392.

The SEBI is one among the many institutions that is currently probing the NSEL. The least that we can expect it to do is to keep a strict watch over both these listed entities and their stock price movements so as to ensure that speculative tendencies do not disrupt the markets in the wake of the developments that come to light as the days pass by.

Today (September 3) is another day when the drama will take a new turn. The third payout is looking like it will be yet another sham, with the exchange having nothing at its disposal to pay investors. Is another loan to NSEL in the offing? Where will the money come from? While the questions are mounting, the answers are elusive or at best yet to be found. Appended at the end of this piece is a reported list of agencies that are probing the NSEL fiasco. We hope at least one of them comes up with something that could end the drama and take it to a logical conclusion. By that we mean – taking the wrongdoers to task.

It is not with the intent of criticising our regulators that these thoughts have been put forward. In the present circumstances, there is an urgent need to nip this problem in the bud. If not done, it could disrupt an already fragile market sentiment beyond repair. Lessons learnt from the early 90s and mid-2000s have already shown us in full extent the pain that markets go through once a systemic ailment strikes.

List Of Agencies Probing The NSEL Fiasco*

SIT of the Economic Offenses Wing
Task Force set up by the Prime Minister’s Office
Team of Secretaries set up by the Finance Ministry
Two working groups under the team of secretaries
Forward Markets Commission
Enforcement Directorate
Securities and Exchange Board of India

(*Source: Business Standard)