Were Brokers to Blame? Brokers might have known something was wrong. After all, you don’t get an exchange everyday where you have to coordinate between a buy and a sell on the phone. Many, though, fell prey to the machinations themselves. They promised investors a return of, say, 12 percent, and then took that money to NSEL and decided to make the 3 percent extra that NSEL promised. Now, when NSEL has defaulted, brokers want to put the blame on the exchange – but just like the exchange, they promised the money, which they have to pay. SEBI must act and ensure these brokers pay. Also, brokers are expected to be fiduciary agents of their customers – should they have exercised more caution before recommending such an investment?
Where is the Money? The short answer is: we don’t know. The Enforcement Directorate and a Mumbai Police Special Investigations Team (SIT) are trying to find the money. It’s gone abroad through hawala, says the SIT. Others claim it has gone to fund real estate, where there is no swift liquidity. Yet others claim the money was used to prop up FinTech and MCX shares in the stock market – so when those stocks fall, the amount of money that can be recovered reduces. It is also believed the money was siphoned for political interests or for personal gains of the personalities involved. Jignesh Shah, the ambitious promoter of FinTech, started out as an engineer on the BOLT system for the Bombay Stock Exchange in 1989. After learning the ropes, he set up FinTech in 1995 and established a presence in brokerage back-office and terminal software across India. Then he set up MCX and a slew of other exchanges in India and abroad. Shah won a battle against SEBI in 2012 about a circumvention of regulation in their new MCX-SX stock exchange. He had aggressively taken away market share from other exchanges. He had sued people who Seasonal Magazine
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Jignesh Shah wrote against him and kept media as a friend with a big advertising budget. NSEL’s exemption from the Department of Consumer Affairs was attributed to Shah’s influence. But it is now apparent that everything is not clean in the FinTech empire. It would be a surprise if someone with Shah’s business sense let all this happen without knowing where the money has gone.
What Happens to MCX and FinTech? FinTech, at Rs 111 per share, is down over 70 percent from its 31st July price
MCX is a wellregulated commodities futures exchange. The volumes in it haven’t come down quite as much as one would suppose. Its share price fell 60 percent after NSEL’s shutdown announcement on July 31 but has now recovered to a 40 percent fall.
of Rs 540. It derived a large portion of its profits from NSEL – the trades resulted in outsized earnings through exchange fees. But the sudden lack of profit is not its only problem. If it is declared unfit to run exchanges – and it has about nine of them – that would destroy the enterprise. Apart from this, there are potential fraud charges if more dirt is discovered. MCX is a well-regulated commodities futures exchange. The volumes in it haven’t come down quite as much as one would suppose. Its share price fell 60 percent after NSEL’s shutdown announcement on July 31 but has now recovered to a mere 40 percent fall. The expectation is that regardless of what happens to its promoter FinTech, MCX will be sold – and there are willing buyers.
The Future? The NSEL crisis shows the investment community one thing: we do not have adequate regulation or enforcement. That if there is a crisis, the ‘agreement’ will not be sacrosanct; it will be secondary to the interests of the parties who have better political and business connections. This default will trigger other issues, and in a country already branded as crony capitalist, the lack of will to enforce laws and put people in jail for fraud will hamper future investment. Decisive action is required, but the window for action is fast shrinking. There is a political fallout to this crisis, but the details on that are sketchy at best. The problem really is: we have lost trust. The entire financial system is based on trust – for example, if everyone tried to withdraw his or her bank deposits at once, we’d have to shut everything down. Every attempt to undermine this trust must be dealt with heavily. NSEL’s ‘getting away’ will leave us all with a deficit worse than a fiscal or current account one: the Deficit of Trust. (By Deepak Shenoy for Grist Media. Deepak Shenoy is a founder at Capital Mind, a financial data, commentary and analytics site.) SM