NSEL Crisis – Can We Acquit Brokers?

                                                               

Why Brokers are Equally Guilty as Defaulters? ·    They pushed investment into NSEL platform assuring higher yield following internal due diligence as eye-washer ·    Most of the brokers carried out  purchases without clients order and without securing warehouse receipt/delivery order ·    They even collected transaction charges and sales tax for stocks that didn’t exist in warehouses ·    They undertook financing activities in line of NBFC  to earned additional return on money lent ·    They enjoyed lion’s share of arbitrage profit, while NSEL received trading fee only ·     They failed from the perspective of market intelligence being either “deliberately ignorant” about the state of affairs or they simply didn’t care two hoots so longs as their earning and commissions remained intact

Unfolding of crisis at National Spot Exchange (NSEL) involving Rs. 5,600 crore of payment has certainly raised eyebrows on the functioning of very seasoned broking community who have been crying hoarse that they have been taken for a ride, while the Exchange along with its parent company and other group companies has paid a huge price for misdeeds by few key employees, brokers and handful of investors. The person who built the FT edifice has been on judicial custody while the involved key officials have been out on bail and most pertinently no question is asked to the brokers who were very actively involved in the process that led to the massive defaults. Moreover, there is no concrete action against the defaulting members even after one year. All the investors / brokers made financial gains until July 2013 when the market was halted due to government directions. However, entire blame shifted to the NSEL thereafter. Thus the current situation resembles a scenario marked with “multi-polar gain with unipolar responsibilities”.

Willful Participation in T+2 & T+25 Contracts to Make Arbitrage Profits: During 2012-13 the equity markets were not doing well and many brokers participated in T+2 & T+25 contracts to make arbitrage profits. The brokers – supposed to be experts and knowledgeable – participated in the contracts after duly assessing the risks and after exercising due diligence. They pushed investment into NSEL platform assuring higher yield to the clients/investors for higher brokerage income. Meanwhile, many brokers sold these contracts as part of portfolio management.

Funding Clients like NBFC to Earn Additional Return: Most of them also funded their clients to earn additional return on money lent, while luring the clients of 15-16% “risk free annualized return”. The brokers provided funds to their clients at 10-12%, and the clients in turn invested that money on NSEL trading platform expecting to earn 15-16%. Thus the brokers earned 10-12% as interest + 3-4 basis points commission on trades where there was 3-4% 'risk-free' spread for the investors.

Assuring Existence of Stocks in Warehouses: Besides, assuring their clients with regard to return and safety, the brokers even assured about existence of stocks in warehouses. Even several brokers visited warehouses of the borrower members for verification, but never complained to NSEL about missing/shortfall. Again, since some of the brokers were acting as C&F agents, then the onus to check stocks in the warehouse partly falls on them.

Trading without Clients’ Order & Warehouse Receipt/Delivery Order: Even at times, purchases were carried out by the brokers without clients order and even without securing warehouse receipt or delivery order.

Massive Last Minute Client Code Modifications: Again, though changing of client code was allowed on NSEL, it was observed that there were massive “last minute client code modifications” by a single brokers.

Collecting Transaction Charges & Sales Tax for Stocks that Never Existed: What’s more, they even collected transaction charges and sales tax for stocks never existed.

Hence, all brokers failed from the perspective of market intelligence being either “deliberately ignorant” about the state of affairs or they simply didn’t care two hoots so long as their earnings and commissions remained intact.

Now, they are adhering to “Head I Win; Tail You Lose” strategy to safeguard their vested interests.