Customers of some of the biggest names in the Indian broking fraternity who aggressively sold NSEL’s borrowing-lending racket are staring at large outstanding in NSEL. Clients of Anand Rathi Commodities stand exposed to over Rs600 crores while those of Indian Infoline stand to lose over Rs300 crore
The National Spot Exchange Ltd (NSEL) scam is starting to take an ugly turn for retail investors and high net worth individuals (HNIs) who had ‘invested’ through member-brokers into the borrowing-lending racket being run by the Exchange. As is now known, NSEL was an operation to channel money from investors through member-brokers, to a small group of 24-odd NSEL members-borrowers. For this “assured return” scheme, the brokers were collecting a juicy 5%-6% as brokerage, fees and commission. Neither the brokers, nor the investors, had done enough of due diligence and therefore, to their misfortune, found themselves to be lenders without any security, instead of investors in an assured return scheme that their brokers aggressively sold them.
Apart from channelling money from “investors” these member-brokers had also put in some of their own money into the scheme. The borrowers now owe as much as Rs5,380.53 crores in unsettled dues. But which member-brokers were on the other side of the racket, that is, which of the brokers were most aggressive in channelling the money? The biggest was Indian Bullion Markets Association Ltd (IBMA), a group company of Financial Technologies (India) Ltd, the promoter and 99.5% shareholder of NSEL. It is not yet clear, who the “clients” of IBMA were. Who were the other brokers?
They are some of the most prominent names of Indians stockbroking such as Anand Rathi Commodities, India Infoline Commodities and Geojit Comtrade. These people were being actively wooed by FT-MCX group in creating volumes in its various exchanges. While the names of members-borrowers who have defaulted are known, the list of member-brokers who funnelled the money for the borrowing-lending racket at 16%-18% fixed return has not been published so far. Here is the list of top 25. The complete list of those who owed money as well as those who were owed money from the NSEL system in early August, can be accessed at the end of this piece.
|Top 25 Members-brokers Owed To||Amount owed (Rs Cr)||Paid so far (Rs Cr)||Still owed (Rs Cr)|
|Indian Bullion Markets Association||1159.55||24.94||1134.61|
|Anand Rathi Commodities||629.21||13.46||615.75|
|India Infoline Commodities||326.23||6.98||319.25|
|Motilal Oswal Commodities||262.88||5.62||257.26|
|Purvag Commodities & Derivatives||132.58||2.83||129.75|
|JM Financial Commtrade||83.62||1.78||81.84|
|Arihant Futures and Commodities||55.88||1.19||54.69|
|RR Commodity Brokers||49.02||1.04||47.98|
|Nirmal Bang Commodities||46.64||0.99||45.65|
|India Nivesh Commodities||37.92||0.81||37.11|
|Suresh Rathi Commodities||37.7||0.80||36.9|
|Chimanlal Popatlal Commodities Broker||37||0.79||36.21|
|Rainbow Commodity and Derivatives||35.91||0.76||35.15|
|Ludhiana Commodities Trading Services||34.64||0.74||33.9|
Interestingly, among the names are two public sector companies Projects and Equipment Corporation and Metals and Minerals Trading Corporation. What business did these people have to invest in NSEL? Are their boards and respective ministries asking them any questions?
As of now there is a very slim chance of the member-brokers and their clients getting back much money.
On 14 August, NSEL had posted a detailed schedule of pay-in and pay-out from and to its members-borrowers in which it owed Rs5,380.53 to its member-brokers (top 25 disclosed above) while it had to retrieve Rs5,574.35 from other members. Moneylife analysed the payout numbers released by NSEL and compared it with the total amount that NSEL had to settle. We found out that only a total of Rs119 crore, or just 2% of the total dues have been paid out to members, in three pay-out instalments so far. In the three settlements, NSEL has paid just Rs92.12 crore, RsRs12.60 crore and Rs15.36 crore to members from the pay-in proceeds, on 20 August, 27 August and 3 September respectively. But as per the settlement schedule, by now it should have received Rs524.16 crore from those who owe NSEL and paid the same amount to members.
“Investors” who were lured into investing in NSEL’s racket by Anand Rathi, India Infoline and others, have every reason to be worried about not getting back their money in full. While NSEL expects to settle its entire dues by 11 March 2014, this seems unlikely. Are the brokers liable to pay their investors? Given how these brokers operate, they will neither own moral or actual responsibility to pay back their investors. It was just another product they had sold for fat commission.
RBI has taken away the last funding resource from developers, which may lead to cracking of the realty sector that is holding on to inventory since past few years
Reserve Bank of India (RBI)'s latest warning to banks about not lending money to builders or developers under the 80:20 or 75:25 schemes is most likely to crack the realty sector. Over the past few years, developers have been holding on to prices due to availability of finances. And when funding from other sources dried, developers came out with these new innovative schemes in collaboration with banks and financial institutions.
According to Pankaj Kapoor, the managing director of realty research firm Liases Foras, it (the RBI move) will add to the woes of the developer who are facing a cash crunch. “Advance disbursement through 80:20 was a cheaper way to organise finance. In the absence of this too, the liquidity crunch may force the developer to reduce the price to stimulate sales,” he said.
Obviously, developers are aggrieved with the new notification from the RBI. In a statement, Lalitkumar Jain, chairman of the Confederation of Real Estate Developers' Associations of India (CREDAI), said, "Abruptly issuing such circulars, advising bank against established practices only harm the sentiments and disrupts business plans. This at the end creates a setback for projects, affecting end-consumers."
In its notification, RBI has cautioned banks and prospective home-loan customers about the pitfalls of ‘innovative loan schemes’ entailing upfront disbursal of individual housing loans to builders in case of incomplete, under-construction and green-field housing projects. "In view of the higher risks associated with such lump-sum disbursal of sanctioned housing loans and customer suitability issues, banks are advised that disbursal of housing loans sanctioned to individuals should be closely linked to the stages of construction of the housing project or houses and upfront disbursal should not be made in cases of incomplete and under-construction or green field housing projects," the central bank notification said.
Moneylife has been pointing out that high property values and interest rates, coupled with a lower loan- to-value ratio, are
becoming serious obstacles for average homebuyers.
A number of banks and housing finance companies are promoting home loan products such as the 80:20 or 75:25 schemes, which involve tripartite agreements involving lenders, developers and property buyers. The basis of this move is that though these schemes do invariably mention the financial implications to the consumer in the fine print, many consumers are evidently unable to decipher the fine print.
"This move by the RBI is aimed at protecting the interest of property buyers who are not aware of the long-term financial implications of such and similar schemes. It is definitely meant to advance the cause of greater transparency in the Indian real estate sector, and also to protect the financial institutions that provide funding in it," said Shobhit Agarwal, managing director for capital markets at Jones Lang LaSalle India.
What are 80:20 or 75:25 schemes?
Usually builders come up with various schemes during the festive season to sell high-priced apartments to take advantage of the surge in spending. However, flats are not selling and the inventory is increasing. Though builders have tried to keep prices artificially high for over the past few years, they buckled under pressure and launched lucrative schemes to push sales in the residential segment. Among their tactics was making a 80:20 or 75:25 offer.
Under these schemes, a buyer has to pay 20% or 25% of a flat's cost upfront. The rest is funded by the bank after signing a tripartite agreement between buyer, developer and the lender. The developer, who receives full amount, sometimes even before starting construction, offers to pay the equated monthly instalments (EMI) on the loan till he completes the construction. This is contrary to the normal practice in a bank home loan, where the lenders link disbursals to developers depending upon various stages of construction of housing project.
"Even though such schemes look great, buyers should take precaution as they are being offered for under-construction projects. The completion risks of these projects remain and one must check the builders' track record and financial strength before jumping in," a real estate expert had told Moneylife, preferring anonymity.
RBI said such housing loan products are likely to expose banks as well as their home loan borrowers to additional risks. For e.g. in case of disputes between individual borrowers and developers or builders, default or delayed payment of interest and EMI by the developer or builder during the agreed period on behalf of the borrower, non-completion of the project on time. "Further, any delayed payments by developers or builders on behalf of individual borrowers to banks may lead to lower credit rating or scoring of such borrowers by credit information companies (CICs) as information about servicing of loans gets passed on to the CICs on a regular basis. In cases where bank loans are also disbursed upfront on behalf of their individual borrowers in a lump-sum to builders or developers without any linkage to stages of construction, banks run disproportionately higher exposures with concomitant risks of diversion of funds," the central bank said.
Capitalmind.in also calls such schemes as hugely risky (for buyers). "The builder has the full amount, without having constructed anything. They get financing in your name, and get to pay a lower interest because YOU are the one taking the loan (individuals get a lower home loan rate than developers, a distinction I totally disagree with – if anything, individual home loans should be charged a higher rate). If they don’t construct the building, the bank now has no collateral. But since its your loan, you have to repay anyway. This can be a disaster since you don’t have a property now for which you have a loan," says Deepak Shenoy in the report. (http://capitalmind.in/)
Are 80:20 or 75:25 schemes innovative?
No. These schemes are neither new nor innovative. Earlier, during September-October 2012, Mumbai-based builders who turned desperate to sell flats and were offering steep discounts have to their credit a more innovative scheme like 90:10! However, the '90:10' scheme was available only for affluent buyers whose budget was between Rs2 crore to Rs5 crore. Indiabulls introduced the '10:90' scheme for a project located in central Mumbai. For this scheme, it had tied up with HDFC and ICICI Bank to provide loans to customers at that time.
In another option at that time, builders were offering highly discounted rates to those who come up with cash up front. In one case, a posh apartment in central Mumbai was available for Rs16,000 per square foot for full cash-down payment - against the going rate of Rs40,000 per sq ft.
In the past, several developers were offering to pay pre-EMI on a home loan, provided that the borrowers take the advance disbursal facility (ADF). Under the ADF, the entire loan amount is disbursed to the developer and the buyer has to immediately start paying EMIs, even before the construction is complete or before taking possession.
Realty investment through PMS?
Yes. During 2010, asset management companies (AMCs) were offering real-estate scheme cobbled together under its portfolio management scheme (PMS). Investor's money was invested in residential projects under construction with builders, presumably at some agreed price. When the builder sells out the project, the profits were shared between the builder and the financier (the PMS scheme).
The investors are asked to ‘commit’ amounts, 20% or so paid up front. The upfront amount depends on the investment projects identified by the AMC. As they identify more investment opportunities, they make further demands from within the committed amounts. As and when any project is exited, the AMC distributes the money to the investors.
In July, India Inc raised over $3.71 billion from overseas markets through ECBs and FCCBs. The RBI move is aimed at encouraging capital inflows and arrest decline in rupee value
In order to encourage capital flows,
The Reserve Bank of India (RBI) on Wednesday eased external commercial borrowing (ECB) norms by allowing companies to use funds raised from foreign partners for general corporate purposes.
In a notification, the central bank said, “On a review, it has been decided to permit eligible borrowers to avail of ECB under the approval route from their foreign equity holder company with minimum average maturity of seven years for general corporate purposes”.
Till now borrowings in the form of ECB were not permitted to be utilised for general corporate purpose. However, the RBI has put certain conditions for availing the benefits of relaxed norms.
It said, “Minimum paid-up equity of 25% should be held directly by the lender (overseas partner). Also, repayment of the principal will commence only after completion of minimum average maturity of seven years and no prepayment will be allowed before maturity."
The measure is aimed at encouraging capital inflows and arrest decline in rupee value.
India Inc raised over $3.71 billion from overseas markets in July through ECBs and foreign currency convertible bonds (FCCBs). In June, it had raised $ 1.95 billion through this route.