NSEL versus SMX, a tale of two exchanges - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
NSEL versus SMX, a tale of two exchanges A  A  A


Consider that both the National Spot Exchange Ltd (NSEL) and Singapore Mercantile Exchange (SMX) were fully owned entities of, and under the control and management of, the same group, viz. Jignesh Shah's Financial Technologies Group.

Consider that the former is embroiled in defrauding 13,000 investors of Rs 5,600 crores and has thus destroyed value, whereas the latter has created value of Rs 900 crores by being sold to an international exchange.

What is the difference? Both are, after all, fully owned and managed by the same group.

The difference is the geography they operate in, and therefore, the rules, regulations, and governance in those geographies.

SMX operated in Singapore, an island nation known for its strict rules and regulation, and its willingness and ability to enforce discipline.

NSEL operated in India, a nation known for its corruption, poor governance, lax regulation, delayed justice and its unwillingness and inability to enforce discipline.

This is the only logical conclusion. In a bid to deflect criticism for its failure to govern NSEL, no less a person that the Finance Minister blithely stated that it was an unregulated exchange from day 1 and so the Government was not responsible. This lie was nailed by the High Court, which stated that the exchange was regulated by the FMC. The FMC, for reasons best known to it, slept on the job and allowed the exchange to commit fraud.

The exchange did not register its warehouses, as required by law and had no systems to verify commodity stocks in them. NSEL held fictitious board meetings; directors were known to have been abroad when the meetings were apparently held.

Jignesh Shah has made no visible effort to recover the money from borrowers. All recovery efforts are being spearheaded by the Economic Offences Wing of the Mumbai Police, which is doing a wonderful job.

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And yet the FMC still dithers over deciding on the fit and proper status of Jignesh Shah to run exchanges? What is it waiting for?

The answer is simple. In India, decisions are taken on the basis of who you know, instead of what you know. Political interference is present in every facet of life and serves to detract the rule of law.

The slow speed of our judicial system simply encourages wrong doers, in the knowledge that victims would prefer to settle rather than put their lives on hold for years until a verdict is delivered.

The words of Ayn Rand, in her epic novel 'Atlas Shrugged' which every young person must read, ring very true today. She said "When you see that in order to produce, you need to obtain permission from men who produce nothing, when you see that money is flowing to those who deal, not in goods but in favours, when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you, when you see corruption being rewarded and honesty becoming a self-sacrifice, you know that your society is doomed"

This Government fails to realize that is not only about the 13,000 investors defrauded by NSEL. It is about all investors. Whether in bank deposits, or in bonds, or in hard assets; as long as they feel that the Government does not protect them against the culprits, but serve to protect them against you, they lose faith in such a Government.

This has become evident in the opinion polls, which show the BJP winning in 4 of the 5 states. Results are to be declared tomorrow.

This penchant for putting politics before governance affects the economy adversely. In UP the State Government has mandated a minimum price for sugarcane to be paid by mills to farmers that is uneconomical. The Government wants the farmers' votes. The industry threatened not to crush any cane. The Government then worked out a 'compromise'. A panel headed by agriculture minister Sharad Pawar has recommended that the industry be given loans at 12% interest, which would be paid by the Sugar Development Fund (7%) and by the Government (5%). It also wants import duties to be raised, so that sugar prices are raised domestically, to benefit the industry.

This means that it is the taxpayers (who ultimately pay the 12%) and the consumers (who pay the higher domestic price) who will suffer, because the politician wants the farmer votes.

When such injustices, such as protecting the culprits and punishing the victims, or imposing a cost on honest taxpayers and consumers, become too much to bear, they protest. Governments all over the world are stifling protests. Spain is to pass a law banning street protests (youth unemployment is over 50%, so, naturally, people will protest) and will fine not only those demonstrating, but also those holding placards in protest! France has imposed a fine on a reputed blogger, Mish, simply for referring to another online blogger!. In India there have been arrests of anyone who blog against powerful political leaders.

Add to this the potential environmental disasters, and the potential global conflicts, and the situation becomes depressing. China is willing to go into a military conflict with Japan to enforce its rights over an Air Defence Zone which China wants other countries to take its permission to fly over. China is flexing its military muscle and India is ill prepared to face it, because our political leaders have no strategic vision and are destroying our economic strength for perceived political gains.

The operation to withdraw 1532 contaminated fuel rods from Unit 4 at Tepco's Fukushima plant is a threat to humankind as it is so dangerous. The Government of Japan is contemplating passing a law to prevent any reportage on it! Goodbye freedom of speech.

Stories such as this - http://no-border.asia/archives/9257 - which brings out the fact that the concrete storage meant to house the 1532 fuel rods safely for forty years, have been, in fact, so poorly constructed, that they will not last even one year, would not be published if such a law is passed. Tepco, a company in charge of the Fukushima plant, is financially finished; it is not producing nuclear energy and has no revenue from it. It is saving costs in building the storage facilities.

And India wants nuclear power plants! Will Manmohan Singh please read what the President of Tepco has to say about the dangers of nuclear power plants? Or does the Government not care, so long as it gets its bite of the distribution of orders for the plants? Will it then stifle public protests through laws?

Last week the BSE-Sensex added 204 points to close at 20,996, and the NSE-Nifty gained 83 to end at 6,259. The Sensex gain was entirely due to the 249 points spurt after poll results showed the BJP winning/leading in 4 of the 5 states.

On the economy front, news that the CAD has fallen to 1.25% of GDP was encouraging, as a result of drop in official imports of gold after the hike in import duty. Of course the fact that gold smuggling has shot up and now is more than drug smuggling, is not widely reported.

Core sector growth has, however, fallen by 0.6% in October as compared to an 8% rise in September.

In 2013 foreign institutional investors have invested Rs 97,000 crores, upto November in equities and net sales of Rs 51,000 crores in debt. The worry is that if the FIIs start to withdraw for any reason, there would be no domestic institution capable to stanch the fall.

The reason could be the start of the 'taper', or phasing out of the quantitative easing programme. The US job data has been good, with new job creations being higher than expected.

US economic growth would depend a lot on the price of crude oil.

Everyone talks about the huge reserves of shale oil in the US, and expects the US to overtake Saudi Arabia in a few years. True, the US has large reserves. Equally true, it needs a continuous investment in digging new wells to extract the shale oil/gas.

This investment requires funding, and this funding requires a return. It needs the price of crude oil to be kept above $ 100/barrel. This is also the minimum level that OPEC countries need to sell their crude oil at, in order to fund the social welfare programmes they need to prevent a popular uprising.

So we cannot expect crude oil to be priced lower than $ 100.

India has to find ways to increase its production and to curtail its consumption.

The main reason why the search for increased production has not taken off in India, whilst it has in the US, is because of property rights. In the US it is the land owner who gets a share of the oil/gas produced by fracking in his property. In India he gets nothing. Why, then, should he allow his land to be so used?

India has also not done enough to reduce consumption. Fuel efficiency norms for vehicles, for example, have not yet been mandated. They should have been, years ago. Look at the horrible stage of pollution in China, which sells more automobiles and has more coal fired power plants.

The political mood of the electorate will be revealed on Sunday Dec 8. The market is rising on the belief that the BJP will be elected and on the back of FII inflows. But should the inflows stop, or, even worse, reverse, it would be tough to stanch the fall. Caution is to be exercised.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.
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4 Responses to "NSEL versus SMX, a tale of two exchanges"
Ajay Gupta
Dec 11, 2013
When the controlling authority is itself no control, what about the other agencies they tend to take advantage of the circumstances, it is no exception, you take the case of Developers and Builders in this country is worst. Like 
Dec 10, 2013
What is the remedy concluded for Investors ? especially for e-gold and e-silver demat holders? Like 
Dec 7, 2013
An enlightening reading. Like 
Dec 7, 2013
Excellent sum of the state of affairs prevailing in our country.Is thereany hope of improvement,or at hope that things would not deteriorate further Like (1)
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