The notices, served under the Prevention of Money Laundering Act, were received by investors over the past fortnight, two persons familiar with the matter told ET. The agency has asked investors to share details about their trades between 2009 and 2013 – the year thousands lost money after a payment default by NSEL.
Among other things, the ED, in its notices to investors, has asked them to state the following: names of the broker intermediaries; whether the investee companies – in cases where investments were not by individuals – were permitted by articles of association to trade or place a deposit with NSEL; the extent and quantum of funds borrowed for the trades; the identities of the lenders; and, most importantly, complete details of all sources of funds for all the trades during the four-year period.
“From the nature of the questions, it is clear that ED is trying to find out whether some of these investors were fronts for brokers, or, whether some of the investors laundered money by giving unaccounted cash to brokers who in turn lent them back to the investors to trade on NSEL. But, while there may be such cases, a lot of genuine investors, salaried people, pensioners, and HNIs invested their tax-paid money under the impression that NSEL was a regulated platform like other stock exchanges. There was a belief that exchanges don’t fail – people had forgotten about the Calcutta Stock Exchange crisis of 2001,” said a senior broker.
If the lender was an associate company of the broker or its non-banking finance arm, investors have to share the name, addresses and PAN of these entities as well as the collaterals given to raise funds. “Not all investors have the old records and documents. Some of them had paid tax and penalties after the matters reached for income tax appeals,” said a chartered accountant who is an adviser to some of the investors. The I-T notices were served about seven years ago.
According to the notices issued by the Mumbai ED office, investors have to also spell out the total amount earned from the trades of NSEL, the outstanding standing as on July 31, 2013, if any legal proceedings have been initiated against the brokers, and whether the amounts have been written off as “bad debt”.
There were 273 brokers representing more than 12,700 investors who traded on NSEL. Thousands of wealthy investors, companies, as well as state-owned undertakings, had used NSEL to invest in a complex, high-return, seemingly guaranteed, financial product that several brokers were selling. The deals on NSEL appeared simple: An investor would lend money for 25-36 days against commodities like castor seed, wool and sugar stocked in warehouses while the platform matched the orders of investors and borrowers to generate returns that were as high as 15-16%.
The transactions involved two contracts – ‘T+2’ and ‘T+25’ – that were simultaneously signed by borrowers and investors.
Under T+2 – which meant money changed hands two days after a trade – investors gave money and collected a letter from their brokers. The letter said a certain commodity was stocked in a warehouse. This was based on a warehouse receipt that borrowers submitted to NSEL. After 25 days, the borrower was supposed to pay back the money and take back the receipt. The cycle did not end there. Borrowers paid interest to investors after 25 days and the two parties would roll over positions by entering into two new contracts. This went on for months.
The music stopped in July 2013 when the government directed NSEL not to issue any new contract and the positions could no longer be rolled over. A year before that the commodity market regulator had warned that the contracts were not legal.
