Did NSEL brokers take the system for a ride?

Data suggest they modified clients' code 300,000 times

As cases related to the crisis-ridden National Spot Exchange (NSEL) progress, a fresh set of information suggest NSEL brokers might have been taking the system for a ride. According to the NSEL data, brokers modified client codes as many as 300,000 times, which is very unusual. Client codes are changed after the deal on the exchange is done in one name and then transferred in another name and allowed only for bona fide mistakes.

“Brokers of the exchange had in the beginning of the day transacted deals in their own names or in names of one or two clients and later internally transferred to various other names by modifying client codes,” said a source, adding NSEL trading was not like other exchanges where through the day hundreds of thousands of deals take place. At NSEL, most of the trading happens in the early hours.

MODUS OPERANDI

• A borrower sells commodity and through brokers investors pay for it and the deal is reversed after 25-30 days according to contract specification.
• Brokers buy commodities in one name and later re-allocates that to investors
• So, on the exchange, first deal done by the broker is given one client code which is by end of the modified to transfer the commodities to various investors
• If investor has used borrowed fund then he is not an investor but a trader by definition.

On modification of clients’ code, a leading NSEL broker said: “They (brokers) have done so because the time available on the exchange used to be so short that a broker hadto strike a deal in a single name and later on transfer positions. Investors used to get exchange contract notes.” In equities and commodities, changes in client codes are allowed only in a genuine case. In commodities, change in client code was done to transfer profit and loss to launder money, which was stopped.

In another development, which is giving a curious turn to the NSEL fiasco, investors who have lost money are not coming out to claim when the high court-appointed committee asked the spot exchange to collect claims and other information regarding the so-called investors. Based on that, NSEL asked brokers to submit claims including source of funds of investors’ money (borrowed or own). According to NSEL Investors’ Forum, there are 13,000 such investors but only around 20 of them have given claims. Investors will not come forward if their money is unaccounted for. According to sources, with the National Spot Exchange  case progressing, it is looking like a bogus demat-investors scam that struck the capital markets in 2005.

An official involved in the process said actual investors might not be even 13,000 or many of them might just only lent their bank accounts including Know Your Customer documents.

Various NSEL investors’ associations have filed a class action suit in the high court  here, seeking compensation. Modern India Limited, which has invested in NSEL, has also filed a similar suit against the spot exchange. The number of these associations claiming to represent these investors has also grown. Those that have objected to the NSEL seeking their source of funds include the NSEL Investors Forum, the NSEL Investors’ Action Group and a lesser-known body, NSEL Aggrieved And Recovery Association, besides Modern India. According to the office bearer of one of the associations, they need not disclose the source of funds to the exchange.

On Monday, the HC-appointed committee, headed by Judge V C Daga,  will hear plaints of these investors on whether they are supposed to provide the source of their funds or not. The deadline for their claims to the Daga committee is Wednesday.