The Forward Markets Commissions recent tantrums reek of vendettas that benefit no one

The Forward Markets Commission has been on its toes in the recent past with the ongoing NSEL crisis. The Commodity market watch dog has been working overtime to resolve the crisis along with the investigation agencies, Courts, current management and Board of NSEL as well as the Board and management of FTIL.

But given the current scenario and the way FMC has reacted it leaves no doubt of the intentions of the Regulator resorting to some kind of score settling or vendetta in its endeavors.

FMC had deemed FTIL as not ‘fit and proper’ to hold stakes in any exchange post the NSEL crisis. The Regulator had also laid down a precondition to MCX that FTIL was required to dilute its complete equity in the Exchange before it launched any new contracts.

MCX and FTIL had both filed replies assuring that the minority stake of the latter would be diluted before September 30^th, 2014.

Ironically, FMC was still left unhappy and unsatisfied and has now laid down yet another condition which requires MCX to initiate actions based on the PwC Audit report commissioned by the regulator. Only after this new condition is met, the FMC will then allow new contracts to be launched on the Exchange.

The PwC report was tabled more than a year ago and contains a disclaimer from the auditor that no views/clarifications were taken from concerned parties, in this case MCX and FTIL which therefore make the findings and the report itself a one-sided story.

So even if the FMC does require action to be initiated by the MCX management on the basis of the report, this would be highly inappropriate and one-sided again.

The FMC seems to be working ad-hoc and on whims and fancies that are insatiable. This not only puts MCX, the largest commodity Exchange in the country, but also all stakeholders associated with it in a distressed situation, since the Exchange won’t be able to launch any new contracts for the year ahead.

The repercussions of this will be felt throughout the commodity value-chain. It will not only disturb market equilibrium but also has the dangerous ability of throwing the entire commodity market in commotion and disarray.

Devil within – Insider Trading

Insider trading is truly the devil inside for any listed corporation. This devil has reared its ugly head, now and then, running firms, those around it and in most cases the devil himself, to the ground. The recent high profile case of Raj Rajaratnam and Rajat Gupta, white collared hi-flyers of the financial world in the US and now charged of insider trading is still fresh in the mind.

While other countries have tried to put in place checks and balances to keep a tab on any untoward movement of stocks, India seems to be lacking behind. Most investors and analysts assume that if any particular stock witnesses extreme movements on the upside or downside it’s due to information not yet in the public domain.

India introduced insider-trading rules and regulations in 1992. The Securities and Exchange Board of India (SEBI) has been making genuine efforts in detecting, investigating and bringing to book guilty parties involved in insider trading. But there is a lot more that needs to be done. SEBI has recently been allowed to go through phone records of investors it is investigating, giving the regulator a bit more teeth in probing insider trading. The government started allowing SEBI to access the phone-company records of calls made. SEBI is still not allowed to use wire taps which are used by governments of other countries to expose insider trading.

SEBI has also been using technological software to aggregate trades connected to related companies, individuals and mailing addresses. The regulator also uses Personal Account Numbers to track trades. But insider traders have managed to hoodwink the regulator by operating through bogus firms or using PAN numbers of friends, relatives or colleagues.

Though insider trading is difficult to prove SEBI has been making efforts to crack down on the practice. Investors, a large chunk of trading community, who are not privy to information either, lose money or the opportunity to make money due to insider trading. SEBI has done a laudable job in unearthing insider traders and has been a good law enforcer. While nobody has been jailed for insider trading till date, the market regulator has taken many cases to court. In India, insider trading is an economic offence, not a criminal one. Judicial process in the country can take a long time but SEBI has the authority to suspend accused from the market and to impose penalties upto Rs.25 crore or three times the gain made from insider trades.

There is still a lot more desired from policy makers, bureaucrats and regulators that needs and can be done to ensure interests of the minority investor are safe guarded and this evil of insider trading rooted out. It’s a collective effort and the law has to deal strictly with offenders creating fear amongst those who might think of indulging in such unethical practices in the future. 

Status of India’s Biggest Corporate Heists

If there were no bad people, there would be no good lawyers: Charles Dickens

Slow investigations have allowed the people behind India's biggest corporate heists to enjoy immense impunity. Here’s a snapshot of where things stand as far as India’s biggest corporate heists are concerned.

Satyam Computers: An accounting scandal involving Rs. 72 bn where B Ramalinga Raju confessed to having cooked up the accounts of the Company and inflated its bank balances. He has, along with his family members, also been accused of laundering money through a mesh of hundreds of companies.

Status:  Mr. Raju walked out of jail in late Nov’11 after the CBI failed to charge him on time and the ED delayed launching criminal prosecution because of lack of clarity on which court will hear the matter. Besides Raju, all 10 accused are also out on bail.

Ketan Parekh Securities: Ketan Parekh was involved in circular trading and stock manipulation to the tune of Rs. 12.5 bn through 1999-2001 in a host of companies. Like Harshad Mehta, he too borrowed from banks like Global Trust Bank & Madhavpura Mercantile Co-op Bank, and manipulated a host of stocks popularly known as K-10 stocks.

Status: Parekh – who spent only one year in jail – has been banned from trading till 2017. His name though, continues to haunt the street as he has been accused of pulling the strings from the backstage.

Speak Asia: Speak Asia – an online business survey firm that collected ~Rs. 20 bn from more than 2.4 mn investors, in a ploy to fill surveys and guaranteeing to quadruple their income in one year – was accused of running a Ponzi scheme. A criminal case was registered against the firm in 2011, some accounts frozen and its business shutdown.

Status: The Economic Offences Wing hasn’t yet filed a charge-sheet in the case. As per media reports, Speak Asia has not refunded money to its panelists and its key management personnel are absconding, with no convictions made till date.

Saradha Chit Fund: Saradha Chit Fund is one of the biggest Ponzi schemes in West Bengal – involving Rs. 20.6-24 bn– lured investors to deposit money with the promise of abnormally high returns. Eventually it collapsed resulting in massive defaults.

Status: Various agencies including ED & SFIO are probing the misappropriation of funds. Sudipto Sen, its CMD was arrested earlier this year and the ED has been granted his custody for interrogation. Kunal Ghosh – an MP from TMC who was accused of involvement in scam – has been called for questioning by SFIO, but not arrested yet.

Reebok India: After acquiring acquired Reebok International – the parent of Reebok India – in 2005 Adidas AG claimed that it had uncovered a fraud of the magnitude of Rs. 8.7 bn at Indian operations of Reebok. The SFIO claims to have found evidence related to falsified documents amounting to sundry debtor charges up to Rs. 5 bn.

Status: Since then, 12 people, either former employees of Reebok India, including its former MD Shubhinder Singh Prem and former COO Vishnu Bhagat have been arrested.

Tata Finance: IECL – a subsidiary of Tata Finance (TFL) – entered into a transaction with two broking houses to buy 2.15 lakh shares of TFL at Rs. 91 per share. However, the transaction took place on later dates when the market crashed with TFL’s shares slipping to Rs. 35 per share. The brokers bought 2 lakh shares from five entities controlled by the TFL MD Dilip Pendse and his associates.

Status: TFL filed a criminal complaint with the Mumbai police, and after two years, the probe was handed over to CBI. Mr. Pendse was in Tihar jail for only 11 months.

Public Sector Banks – IOB & SBI: The PSBs have cumulatively lost a massive sum of Rs. 227.43 bn due to cheating and forgery during FY11-FY13 alone, as per media reports on the basis of an RTI reply. While IOB is the worst hit with Rs. 32 bn loss, SBI lost Rs. 27.12 bn.

Status: As per the documents available, over 6,000 employees – lower/mid-level employees including some CMDs & directors of different banks – are under the scanner but no arrest is made.

United Bank of India: With Ms. Archana Bhargava as the CMD, the bad loans of United Bank of India trebled to Rs. 85.46 bn at the end of Dec’13 from Rs. 29.64 bn in Mar’13 amid widespread irregularities in loan disbursement. This RBI appointed Deloitte as the forensic auditor, and initiated a fresh credit audit.

Status: After the RBI sought removal of Ms. Bhargava, the government permitted VRS to her despite serious charges about loans of Rs. 8 bn being disbursed with Rs. 3 bn collateral overruling the board to extend a loan of Rs. 1 bn to a developer.

The Latest & How it is Different from the Above Cases?

National Spot Exchange (NSEL): As a brokers’ broker the money exchanged for trading of contracts on NSEL never belonged to NSEL, which itself acted as a market place against small transaction fee. NSEL neither received money nor paid money on its trading platform on its own account. The payment crisis emanated in the wake of suspension of trading due to government directive, while 24 members defaulted to make pay-in and had a total outstanding of Rs. 5,541.12 crore.

Status: The EOW of Mumbai Police attached 235 assets of the 21 defaulting members and three NSEL accused persons, which is amounting to ~Rs. 3,790.03 crore. Like other scams, the key employees are responsible for the crisis, but unlike most of them promoter of FTIL, FTIL and other directors of FTIL/NSEL. Despite lookout notice some of the defaulters are roaming free even undertaking foreign trip. In other cases when the accused are set free from jail, in this case the promoters are taken to task, which is shocking.

Three things every commodity investor should be aware of.

Commodity investing has witnessed an upward swing in the recent past. The sluggish stock and real estate markets made investors give a serious thought to commodity trading. Here are three important things commodity investors need to keep a tab on to minimize losses.

Risk Management

Volatility functions at the core of the commodity market. This could lead to premature exits or holding on for too long. As one would research a company thoroughly before investing into its stock, the same holds true for commodities. Comprehensive research about the commodity would help an investor make informed and knowledgeable decisions. Knowing factors that affect commodity pricing and behavior is quite necessary. This would help an investor exit if there are changes in fundamentals of the commodity.

Inadequate understanding of Production and Consumption market

It’s equally important to understand and stay informed on where the commodities you have invested or wish to invest in are produced as well as consumed. It could look tedious but drought situations in Maharashtra to transport strikes across India could impact the commodities trading price on the exchange. Keeping a track of consuming geographies where the commodity is exported or utilized is equally important.

Watch

It’s a must to watch your investments daily. Not months or years but by the hour. Measurement of commodity position will depend accordingly. Volatility in prices can be triggered by insignificant events posing a major trickle-down effect on investments, especially in the futures market.

Commodity investments take effort and are a good investment to have in your portfolio. The gains outweigh the risks provided one can comprehend the investment. Most of the times investors are clueless of their investments in commodities let alone know its in-depth functioning. Patience and a conscious approach in understanding the nitty-gritty’s should deliver profitability.