The ex-CEO of the National Spot Exchange Limited (NSEL) has now decided to take the entire blame of the 5,500 cr. scam. So first there was a Ponzi scheme (Madoff style) and then, a sudden admission of guilt (Madoff style).
Anjani Sinha has filed a statement with a magistrate that he’s to blame.
Sinha said that out of the total outstanding of Rs 5,572.75 crore, Rs 1,201 crore was the fund borrowed by the buyers for paying interest and other expenses to keep the circle moving and show that things are normal. The problem became acute as the business model of the exchange was worked out in a way where fund borrower on the exchange has been allowed to be used as delivery centre. This means borrowers' factories were treated as warehouse and the exchange allowed them to borrow money and also keep stock with themselves.
Anjani said that entire mess had happened under his management and accepted full responsibility for entire issue “due to mismanagement, miscommunication and wrong deeds of senior management staff of NSEL.” He categorically said that the board of the NSEL was not responsible as, according to him, “he didn't inform the board about increasing exposure and risk of widespread default and breached the trust of the board members.”
And, says Sinha, he didn’t take any money, but Amit Mukherjee (AVP, has been sacked) and Jai Bahukhandi (AVP) have received some, and travelled in fancy cars and the like. And they didn’t tell the board of the problems:
These buyers have been diverting funds to other businesses including buying real estate but, the business development team members didn’t brought this to the notice of the management. Sinha said, “they even did not inform non availability of stock or pledge of stock with other lenders and simpley allow them (the borrowers) to siphon off funds.” According to the affidavit, the violation done by the warehouse team headed by the Jai Bahukhandi was the most severe one as they didn’t had physical control of stock against which money was borrowed and they made false stock statement.
This looks like a ploy to save the FT and NSEL boards. Yet, if Anjani’s the fall guy, he must know a lot more than he’s saying. Such as: where is the money? Sure, he says some people took some extra money out, but obviously he must know where the money’s gone and can help recover it.
Economic Times has even more details:
NK Proteins, one of the largest borrowers, assured the exchange that its joint venture with the Adani Group, higher cash credit limit with banks and buyers' credit would enable it to liquidate Rs 200 crore of positions, Sinha's affidavit claims. But the exchange remained silent even after NK Proteins failed to meet its commitment.
As Sinha says, "By end of December 2011, it was known to us that he was not having stock to back the exposure. Still, we allowed him to continue because of the fear of widespread default, if we choose not to allow him to rollover." A default by Lotus Refineries, which allegedly "manipulated stocks and issued false statements" was the first hint of a brewing crisis.
The exchange was trapped as Lotus stopped paying. Nonetheless, exchange officials requested Lotus to continue trading. "The problem was if we declare Lotus as defaulter, the entire system comes to a halt. Lotus stock was not in our possession and so, declaring him defaulter meant the entire edifice comes to a standstill (sic)." Soon, the fund movements were turning into a Ponzi scheme.
This whole thing sucks.Now it is outright fraud, the exchange management knew about this as far as December 2011, even before FMC even got wind of any of the problem. They rolled things over for two years!
I’m going to sit back and say this:
- I am not an investor with NSEL (and no family member or even distant relative is)
- I took one look at the “arbitrage” returns after the scam broke out and realized this was a financing scheme with “dummy” stocks. I wrote this way back on august 2 (the problem started to surface on July 31).
- Stock brokers are way smarter than I am.
- Then why the heck didn’t they stop customers from buying this bullshit?
- Why did they put their own money into such a scheme?
- FMC and the Agri ministry is smarter than I am.
- How come, if they knew or even suspected, they didn’t act?
- If dummy stocks can cause this crisis, then why aren’t all the banks doubling up on all warehouses to cross check stocks? What are they waiting for? Why aren’t all warehousing corporations, specially the FT owned NBHC, getting a forensic audit to ensure such an issue isn’t now system wide?
- The answer is that no one wants to stop the music, which has been playing for a long time.
They might sacrifice an Anjani Sinha to absolve themselves but I think the problem is now systemic – any attempt to unravel the crisis will result in way too much coming out, and potentially hurting even the banking system. But is that really that unacceptable?