NSEL: Anatomy of a trade gone sour
Like many small investors, P Dharnidharka, 54, invested in the commodity trades on the National Spot Exchange Ltd. Dharnidharka was promised hefty returns by his broker at a time when stockmarket was volatile and fixed deposit returns were not very attractive.
It looked too good to be true. Thousands of investors like Dharnidharka were lured into trading what looked like exotic derivative contracts on the National Spot Exchange Ltd (NSEL) that promised an assured return of anywhere between 15 and 18% per annum. Every trade would result in earnings of 1-2% in a month or so - guaranteed.
Dharnidharka was delighted at the prospect of earning business income from trading in commodities. No trade could go wrong. Investors and brokers flocked in droves to a well-crafted commodities-trading strategy that was simple to execute and immensely profitable. In the end, it turned out too good to be true.
Nobody asked crucial questions. How can commodities traded on an exchange always turn a profit for investors? How did the trade work? Who were the commodity traders? Where were the warehouses? Nobody knew that one day the music will stop. And it did.
Looking back, when the NSEL commenced operations in October 2008, it started as an exchange to facilitate commodity producers to find buyers for their products. Spot exchanges normally offer T+2 or T+3 delivery. Any buy or sell transaction should be settled within a few days. If you purchased on the exchange, you paid your dues in two or three days and took delivery the next day of whatever you had bought whether castorseed or wool.