Spot fixing- clueless or shameless?

Before the jaws drop at the idea of ‘how can a spot fixing be clueless’, let me put a disclaimer that this is not about the (in)famous cricket spot fixing scandal in which some idiot cricketers earned money and lost careers. This is about the whole confounding and entangling scam around the recent NSEL (National Spot Exchange Ltd) debacle which brought down not only FT (Financial Technologies- NSEL’s parent company) shares but also sensex and whole market. It’s been more than a week to the event and still market hasn’t recovered. I am since then trying to be inquisitive about what could be the exact relation between the scams and sensex and believe me, the deeper one digs, the clumsier it becomes!

For those who are unaware of what exactly went wrong in NSEL, it can simply be put like this- Being a spot exchange, NSEL is allowed to sell short term forward contracts of underlying commodities. When MCX (Multi-Commodity Exchange) was founded by FT promoter Mr. Jignesh Shah, his entrepreneurship was lauded and it really made sense at that time, since commodities remained really undervalued till MCX was launched. Then, to increase liquidity and volatility in commodity market, FT established NSEL to sell spot futures with the max. contract period of 11 days. But NSEL unduly  exploited the leverage and went on selling dual forward contracts, one short term and one long term, on the same commodity- say one with T+2 maturity and the other with T+28. Now, an investor could take a long position on T+2 contract and simultaneously enter into T+28 contract with short position, pledging the underlying commodity which never came into his custody. The difference between these two contracts stood around 15-18%. This means the investor would have typically 18% RoI in a month’s time, that too in a highly liquid market. The basic purpose of a spot commodity exchange was to promote commodity pricing to bring the markets to a supply-demand-speculation equilibrium. But with above trading, this basic purpose itself got defeated as these instruments were rather used as short term money making instruments. The fact that you could enter into long term forward contract without actually possessing the underlying commodity enabled the money laundering sharks to circulate oodles of money again and again through the process by rolling over. Typically, the borrowers (purchasers of forward contracts) would be the businessmen (mostly real estate) who were in need of money for short term, who got it in above way for a scanty 15-18% cost of capital, whereas the investors (buying T+28 contracts) were happy too since no other product in the market would give guaranteed 18% returns in a month’s time.

Does this ring any bell? Seems like heard somewhere earlier too? If you feel so, I am thankful that there are others too who got the same doubt. Only 5 years ago, when Lehman Bro. went bankrupt over sub-prime lending crisis and it had a domino effect of pushing the world into a deep financial crisis, something similar happened, didn’t it? Prices soared even when the underlying asset (house price in 2008 crisis) had no material appreciation only due to unethical speculators and shameless rating agencies vindicating these sensibly illogical products as “highly recommended”. My grandfather used to say- “promise something to someone only if you have it”. It seemed like an average-intelligence common sense at that time, as any sane person would know it. But I guess limits of sanity vanish in thin air as you grow bigger in financial market.

Why to go to USA actually looking for a reference? Take our own country and our own Bombay Stock Exchange for example. In 1992, before Sucheta Dalal exposed the scam, Harshad Mehta and Ketan Parekh also did kind of similar things. Harshad Mehta brokered for the “ready forward” deals between two banks or two parties, wherein instead of earning commissions of thousands of rupees, Mehta embezzled crores of rupees into the market and artificially blew the stock prices out of proportions. All it took for him to get hands on counterfeit BRs (Bank Receipts) which he could exchange with lending banks while purporting to be brokering for an invisible borrower pledging the BRs and voila! He could get truckloads of cash in return. Well, ‘how’, ‘why’, ‘when’ are the questions only for innocent investors like you and me who invest in market believing in its potential to reflect the true economy. For the financial institutes out there who are the trustees of our money, it’s all about getting maximum leverage and pouring in the excess leverage again into the market so as to burgeon their balance sheets and turnover figures. None cared to carefully verify the authenticity of the BRs being traded. Result? Yes, Mehta and Parekh did go to Jail and then chairman of Vijaya Bank did commit suicide fearing the ignominy, but who actually burnt their fingers? It was us, the public, who invested in good faith and are still visiting courts to get their money back, even after 20 years.

Let me come directly to the point before someone starts thinking about it as an outcry of a chronic loser who has lost money in the market due to NSEL/FT/MCX crash. Well, I am not much leveraged into stock markets and have hardly tried my luck so far in F&O, the only reason being lack of risk appetite. Here, my point is only to make out that people indeed know what they are doing before something like this goes wrong “suddenly” and then a chaos spreads. We loved the Joker in ‘The Dark Knight’ and some of us even clapped in theaters when he said- “I am an agent of chaos”. But some of us are indeed agents of chaos, as they keep on wrongdoing while knowing it for sure that it’s going to go haywire someday. We have so many regulatory bodies who are supposed to look over the operations of market movers so that scams and scandals are kept from happening. Frankly, SEBI & CCI have been indeed doing well in this regard, but when it comes to derivatives markets, FMC still seems like either a toothless tiger or a headless elephant to me. Regulatory authorities should really be conservative, however unfair it seems to market prosperity. What we need is a sustained and pragmatic growth, not a frenzied and ephemeral one! Western models of promoting market prosperity have been proven wrong again and again so far and the think tanks in these countries are now contemplating over the austerity measures. Some of them are believed to be in touch with RBI to teach them ‘control’. I wonder if they will change their minds after seeing how RBI “controlled” the rupee recently.

Govt. is still speechless when the press asks- why FMC was sitting over the decision of NSEL procedural short-comings which were spotted at least a year ago. Are these decisions also “timed” perfectly? Did someone influential say in a high-level FMC meeting -“ hey, let’s wait for a downward spiral of sensex and only then ask NSEL to stop spot trading and settle the outstanding contracts first. By that way, it will cause less harm.” So, meanwhile, the clueless investors may continue investing and the shameless onlookers may continue having fun watching them.

I am sure every one of us has asked himself/herself this question at least once in a while- “is the sensex true reflection of market potential or economy?” The real question is how many of us got a convincing answer to this question. 

And our beloved finance minister quotes- “people buy unnecessary gold, which widens CAD and rupee so depreciates.” So folks, it’s us who are responsible for everything, not the government!

But there is a point in FM’s quote, however illogical it may be. We should really stop buying gold, as we have to have some reserve cash to buy onions J J