Long battle awaits NSEL investors

In its first payout on Tuesday, National Spot Exchange Ltd (NSEL) was able to pay only half the money due to investors.

While the NSEL Investors’ Forum is considering taking the legal route and filing a suit against the exchange and its promoters, anxious investors stuck in the mess have many legal options.

Legal experts say the options investors have in this situation can broadly be categorised as:

• Against whom can the action be taken?
• Should investors come together to take action or fight their battles individually?
• In which case should action be taken against a brokerage?
• Who should sue NSEL and its people?
• Should one file a civil case for recovery of money or a criminal case for misappropriation?

Hariani & Company’s managing partner Ameet Hariani says an NSEL investor may take criminal action against those who induced him/her to invest in NSEL on the basis of false information, either about returns from investment or about the company. In this case, an investor can take action against NSEL, its promoters, or the brokerage.

An investor may also take action against the exchange and the people running it. “If investors have transaction receipts from the exchange’s godowns, they would be secure about their investment. Such investors may have only factored in losses by virtue of the underlying asset. In such a case, investors can take legal action against the exchange and its people because this event (exchange defaulting) was unknown to them,” Hariani says.

Experts say investors can recover their money if the exchange’s stocks are insured - they would have to file a case and be paid by the policy. But in this case, an insurer could prove there was no stock available and, therefore, payment might be refused.

Senior Supreme Court counsel Y P Trivedi says despite many options to recover money, the battle would be a long-drawn one, as the exchange didn’t have money.

Experts believe it is unlikely small investors would get their money back. “There is no regulatory framework, as the Forward Markets Commission can only seek information from NSEL. It has no powers beyond that. There is no assurance of payment, as NSEL has no money, the counterparties to the trades have failed to honour their commitments and the stock base is questionable. Also, the relationship between NSEL and its investors is only contractual. The only remedy for the investors, therefore, would be to seek redressal for breach of contract in a civil court and/or initiate criminal proceedings. Quite a few penal sections would be attracted to NSEL’s actions,” says Sajid Mohamed, partner at PDS & Associates.

As of today, even government intervention would be helpful only when the officers on special duty submit their report to the board, say experts. Both the government and the court can give a timeline to the exchange to raise the funds and repay investors.

Investment experts feel the authorities should attach the exchange’s properties to repay investors. However, it is likely they would take this step only when there are no alternatives.