NSEL crisis: Are stock brokers as blameless as they claim?

Santosh Nair
Moneycontrol.com

It is not often that you see the shrewd stock brokers of Dalal Street crying hoarse that they have been taken for a ride. And that too, coming from some of the seasoned players in the industry.

With more evidence surfacing of the flimsy risk management systems at the National Spot Exchange, there is reason to believe that the entire spot commodity trading operation on the bourse was being run on the lines of a Ponzi scheme.

Also read: NSEL sacks MD Sinha; bourse payout fails

The stock brokers, who enthusiastically sold the product to their high networth clients as an assured return scheme, are now demanding strict action against NSEL promoters.

On the face of it, it may appear that brokerages are fighting on behalf of their clients who had lent money on the NSEL and have not been repaid.

But a good part of the angst could have to do with the fact that many brokerages had funded their clients to trade on the NSEL. Lenders on the NSEL could expect to earn 15-16 percent annualised return, which till last week was being touted as 'risk free'.

So brokers would provide funds to their clients at 10-12 percent, and the clients would in turn lend that money on the NSEL, expecting to earn 15-16 percent.

With the borrowers (commodity plant owners) on the NSEL having defaulted, brokerages who had loaned money to their clients stand to lose much more their clients.

Brokerages claim that their responsibility is restricting to complying with KYC (know your client) norms and margin collection, and that it is the responsibility of the bourse to make good the losses. Fair point. But the stock brokers need to answer a few questions themselves.

1. Having been in the business for so long, did they really believe something like a 'risk free' 15-16 percent return was sustainable?

2. Given the lure of such a high return, did any of the brokers do a random check of even a single warehouse to verify NSEL's claims?

3. What about market intelligence? Were the brokerages completely clueless as to what was actually going on, or did they choose to play along as long as they were earning their commissions from their clients?

The buzz in broking circles is that a section of the brokers are angry at two veteran brokers managing to get a substantial portion of their money back by coercing the bourse to dip into the settlement guarantee fund.

The government needs to act tough against NSEL, but the stock brokers who goaded their clients into investing on NSEL are not entirely blameless either.