{"id":145,"date":"2013-08-06T12:02:00","date_gmt":"2013-08-06T12:02:00","guid":{"rendered":"http:\/\/zerodha.com\/z-connect\/?p=315"},"modified":"2026-02-26T17:24:36","modified_gmt":"2026-02-26T11:54:36","slug":"nsel-fiasco-does-it-affect-zerodha","status":"publish","type":"post","link":"https:\/\/zerodha.com\/z-connect\/general\/nsel-fiasco-does-it-affect-zerodha","title":{"rendered":"NSEL fiasco \u2013 Does it affect Zerodha?"},"content":{"rendered":"

Traders,<\/p>\n

Firstly and most importantly, we as Zerodha are not members on NSEL (National Spot Exchange Limited) and have no direct or indirect exposure to it. This situation at NSEL affects us in no way.<\/p>\n

Coming back to the issue, there is a lot written which is not really in a layman’s language, so here is our attempt to simplify as per our understanding of the situation.<\/p>\n

What is NSEL?<\/h4>\n

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NSEL is the National Spot Exchange Limited and 99% of this exchange is owned by Financial Technologies. It came into prominence with the launch of their e-series which includes e-gold and e-silver. Similar to how you buy stocks and take delivery of it to your demat account<\/a>, you could buy gold and silver and take it in demat form. What also benefited this product was the fact that there are no ETFs on silver and this became the only way to own it in the electronic format.<\/p>\n

Admittedly, e-gold and e-silver are excellent initiatives considering the fact that Indians love investing in them and since it sits in an electronic form and trades on an exchange, you get liquidity, no security issues, and an advantage over gold ETFs where you have to pay the AMC fee.<\/p>\n

But it is not this product that caused the NSEL situation; it was a product that started on the agri commodities. What you need to know is that since this was a spot exchange, it didn’t come under the umbrella of FMC (Forward Markets Commission – \u00a0regulator for commodity exchanges), so basically, NSEL had an advantage of working in an unregulated environment.<\/p>\n

They started running contracts on agri commodities like castor seeds, etc. which were T+2, T+3 and so on until T+35. These were all really forwards in essence since they were unregulated. In a T+2, you get for example castor seeds after 2 days in T+35 after 35 days.<\/p>\n

Imagine that castor seeds T+2 and castor seeds T+35 has a price difference. Assume T+2 is at 700 and T+35 at 714. The quality of castor seeds is the same, so basically a simple arbitrage would be to buy the T+2 and sell the T+35 simultaneously. So you buy castor seeds on T+2, keep the stock in the NSEL warehouse and on the 35th day deliver it to the person to whom you sold the T+35. This way you made a risk free 2% or around 17% annualized return on your investment, if you had kept it in the bank it would have given you only 5% annualized for 35 days. After 35 days you again had an opportunity to take another arbitrage position like above and the crazy thing is how the spread was maintained continuously for the investor to keep reinvesting his funds and make that 17% annualized return which seemed like risk free.<\/p>\n

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What was the problem with it?<\/h4>\n