It was a hot summer day three years ago, May 2011 to be precise. A group of top financial regulators in the country met at the ivory-coloured tower on Mint Road that housed the headquarters of India's central bank. D Subbarao, then governor of the Reserve Bank of India (RBI), chaired the meeting at which top regulators of stock markets, insurance and pension were present. The group, known as the Sub-Committee of the Financial Stability and Development Council (FSDC), reviewed macro economic and financial sector developments, focusing on issues related to systemic risk.
One of Rao's deputies was a woman named Shyamala Gopinath, in her late 50s. Gopinath raised an important issue. She was worried about a new entity called National Spot Exchange Ltd (NSEL), calling itself an exchange was trading in agricultural, industrial and precious commodities, and seeing increasing interest among small investors and speculators.
She feared the exchange could be a risk to the financial system as it grew unregulated. She warned if the issue was not sorted, RBI would have to direct banks it regulated to stop providing clearing services to such exchanges. According to the agenda papers and minutes of the meeting, it was clearly pointed out in the meeting that though FMC had been functioning as a monitoring agency, it did not have any "legal or statutory backing" to perform that role.
Sebi chairman U K Sinha also recorded his concerns about growing retail participation during the discussion, pointing out NSEL's positioning in a regulatory grey area. It was decided the matter would be handled by the finance ministry.
R Gopalan, secretary in the finance ministry's economic affairs department, agreed to take up the issue. He wrote a series of letters and engaged in correspondence with another ministry that handled consumer affairs.
Despite such early warnings, NSEL continued to grow bigger, with more and more investors participating in its trades but without a proper regulatory structure. Two years and two months after that summer meeting, NSEL went belly-up. It was unable to immediately meet its commitments. The case was one of the more spectacular ones of the failure of the government to protect the interests of investors, despite having advance knowledge. While long letters containing legalese were exchanged, the eventuality, foreseen at that meeting, could not be averted.
Nearly a year later, several investigative agencies have jumped in, assets have been frozen, the promoter is in jail and it is not clear when and how investors will get back their funds. Averting avoidable disasters is one of the key lessons India's regulators are still learning.
For the people associated with the Financial Technologies group, life has come a full circle in a few years. They bought a ticket for the fast train to glory with a man with a vision, drive and the necessary connections. It was a great ride when it went from a small-time technology provider to become the mother ship of a global exchange network that spanned asset classes and continents. Today, with the captain gone and the mothership being stripped off its offspring one by one, they are learning to swim in the high seas, waiting to be rescued.
For some time, the borrowers did not know what hit them, when NSEL called a press conference and listed them as defaulters. As media and investigators went hounding, many of them went incommunicado. According to them, they had taken a loan on certain terms and long before it was due, the lender was pulling the rug from under their feet. They did not want the money to buy basmati rice and sugar but to finance their own businesses. Some made films, some built malls and others were into stock markets. Some are learning to get out of jail, some are learning to protect whatever assets they have left and some are learning to begin again.
A Delhi-based investor, who works for a listed firm, said, "By the time the assets get sold, it might be four to five years. We thought good days would come but they have not come for us." He added one way to go about the issue was to have a special court that could bundle all the cases around the country and settle these in a time-bound manner. Liquidating assets across the country and realising the money is a lesson investors are still learning.
As Warren Buffett said in his 2000 chairman's letter to Berkshire Hathaway shareholders, "A pin lies in wait for every bubble. And, when the two eventually meet, a new wave of investors learns some very old lessons: First, many in Wall Street - a community in which quality control is not prized - will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest."
