Till Wednesday, it was smooth sailing for investors such as S. Kumar and Santosh Dhaktode, but 24 hours after the National Spot Exchange (NSEL) suspended trading, their fate is uncertain just as their brokers.

Even as market regulators – SEBI and Forward Markets Commission – are busy seeking financial details from the exchange, brokers have asked investors to wait for a week to get clarity on their payment schedule.

S. Kumar trades in raw wool on the NSEL and has an outstanding of Rs 4-5 lakh. He follows his broker’s instruction on his trading position. The exchange has over 800 members and several investors such as Kumar are now left high and dry in the process now.

“I’m an investor and have nothing to do with wool. I follow my broker’s instruction on the trading pattern. I have to receive Rs 4-5 lakh settlement from my broker,” he said.

Santosh Dhaktode, on the other hand, works as an accountant in a private firm. He was not aware that his broker is using his money to buy and sell arecanut and coriander seeds on the NSEL.

“I was just not bothered as long as I got my money,” said Dhaktode, without revealing the amount his broker owes him.

Like the duo, most investors are hardly aware that they are investing in obscure commodities such as raw wool that is sheared from sheep, wool top (a semi-processed product from raw wool) or even if their brokers are investing in rajma (kidney bean).

Crucial information such as production, demand and price information on these commodities are not available in the public domain. Neither are they traded on the commodity futures exchange, which is regulated by the Forward Markets Commission.

Mode of operation

Explaining the modus operandi, a broker said that an investor can make 15-20 per cent return on an annualised basis without taking delivery of either commodity.

Once the stockist or a supplier having any commodity deposits the goods at the exchange warehouse, he sells it to the investor on a T+1 (trade plus one) contract. The investor enters the trading ring after the transfer of warehouse receipt in his name.

He makes money by selling and buying in T+21 or T+30 contracts, where the delivery needs to be given only after 21 and 30 days, respectively.

“Till Thursday, it was a win-win situation for all. The stockist was happy with the fee and the investor also ended up making money,” the broker said adding, that the situation has changed now.

NSEL was operating independently without any regulatory framework. It was provided exemption by the Government under Section 27 of FCRA (Forward Contract Regulation Act) to conduct forward trading in one-day contracts. The exemption came with stiff conditions, including a ban on short selling and launch of contracts over T+1.

After several complaints of irregularity, the FMC was empowered to seek information from the exchange and even inspected its records. The Government banned the exchange from launching new contracts after the FMC found the exchange breaching norms such as delivery of the outstanding positions after 11 days.

Ramesh Abhishek, Chairman, FMC, said: “The exchange cannot blame the Government action for the trouble it is facing now. You cannot depend on a perpetual trading on the exchange. You cannot wait for people to reinvest by way of rollover of their position or fresh infusion of funds to carry out the settlement obligations. This is not acceptable.”Though the exchange claims that it has collateral worth Rs 6,200 crore against the payment liability of Rs 5,400 crore, this has not been ascertained by the regulators. Investors have little option but to keep their fingers crossed and wait till the regulator gathers details.

suresh.iyengar@thehindu.co.in

(This article was published on August 2, 2013)
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