Mr. Jignesh Shah has made lot of Headlines in recent past. Thousands of wealthy investors, companies and PSUs like MMTC etc invested in a complex, high-return financial product that many brokers were pushing in the last few years. Now, their money is stuck. Here is an interesting article on NSEL Scam from ET.
What was the deal
like?
An investor would lend money for 25-36 days against commodities like castorseed, wool and sugar stocked in warehouses. Deals happened on the National Spot Exchange (or NSEL) — a platform to match investors and borrowers' orders. The returns were as high as 15%-16%.
An investor would lend money for 25-36 days against commodities like castorseed, wool and sugar stocked in warehouses. Deals happened on the National Spot Exchange (or NSEL) — a platform to match investors and borrowers' orders. The returns were as high as 15%-16%.
What is NSEL?
It's a spot commodity exchange few had heard of before it defaulted on payments on July 31. Unlike other exchanges, there is no specific law to govern it. Those who ran the exchange used this loophole. But why did borrowers raise money through NSEL? The investors could have lent them directly... No investor would directly lend money to a commodity trader in Ludhiana or Kanpur. No bank would touch these borrowers. But investors don't worry about defaults when there is an exchange in between.
It's a spot commodity exchange few had heard of before it defaulted on payments on July 31. Unlike other exchanges, there is no specific law to govern it. Those who ran the exchange used this loophole. But why did borrowers raise money through NSEL? The investors could have lent them directly... No investor would directly lend money to a commodity trader in Ludhiana or Kanpur. No bank would touch these borrowers. But investors don't worry about defaults when there is an exchange in between.
How could it go on
for so long?
It began with two contracts - 'T plus 2' and 'T plus 25' - that were simultaneously signed by borrowers and the investors. Under T plus 2 — which meant money changed hands two days after a trade — investor gave money and collected a letter from their brokers. The letter said certain commodity was stocked in a warehouse. This was based on warehouse receipt that borrowers submitted to NSEL. After 25 days, a borrower was supposed to pay back money and take back the receipt. But the cycle did not end there. Borrowers paid interest to investors after 25 days and the two parties would roll over positions by entering into two new contracts. This went on for months.
It began with two contracts - 'T plus 2' and 'T plus 25' - that were simultaneously signed by borrowers and the investors. Under T plus 2 — which meant money changed hands two days after a trade — investor gave money and collected a letter from their brokers. The letter said certain commodity was stocked in a warehouse. This was based on warehouse receipt that borrowers submitted to NSEL. After 25 days, a borrower was supposed to pay back money and take back the receipt. But the cycle did not end there. Borrowers paid interest to investors after 25 days and the two parties would roll over positions by entering into two new contracts. This went on for months.
Why did the music
stop?
In July, the government directed NSEL not to issue any new contract. As a result, the positions could not be rolled over. A year ago the commodity market regulator had warned the exchange that these contracts were illegal. But NSEL thought it would find a way out. Eventually, the government panicked and shut down the exchange. But why default? Couldn't the commodity stocks be sold to pay back the investors?
In July, the government directed NSEL not to issue any new contract. As a result, the positions could not be rolled over. A year ago the commodity market regulator had warned the exchange that these contracts were illegal. But NSEL thought it would find a way out. Eventually, the government panicked and shut down the exchange. But why default? Couldn't the commodity stocks be sold to pay back the investors?
There were no commodity stocks. This is the crux of the scam. Warehouse
receipts were forged, godowns were empty, and borrowers diverted money to
properties. One of them had even sent funds to his son in Dubai.
Any hope for
investors?
Angry investors, NSEL promoters and the Mumbai police are trying to attach properties of borrowers which they recently succeeded as on December 03, 2013 news piece. But it could take a long time and not all the money may be recovered.
Angry investors, NSEL promoters and the Mumbai police are trying to attach properties of borrowers which they recently succeeded as on December 03, 2013 news piece. But it could take a long time and not all the money may be recovered.
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