Comments
For three years from June 2007 when it received permission from the Ministry of Consumer Affairs to commence spot trading in commodities, the National Spot Exchange Ltd (NSEL) struggled to attract market participants.
Then, some time in the latter part of 2010, the exchange, emboldened by the absence of strict regulatory oversight, expanded its operations to include ‘novel products’.
Punters joined in steadily to take advantage of the new ‘services’ NSEL offered, which included paired contracts of T+2/T+25. Despite whispers of unauthorised deals, including those struck for the above paired contracts, punters felt safe to do business because of the lack of regulation.
It was only after February 6, 2012, when the Government notified the Forward Markets Commission as the designated agency on behalf of the ministry that things started to move. The FMC found glaring anomalies in NSEL operations. Here is how it all happened:
February 6, 2012 : FMC named as the designated agency for spot markets (Consumer Affairs Ministry notification S.O 228 (E)). Armed with this power, FMC asks for trade data from spot exchanges in prescribed format. Analysis of NSEL trade data reveals that: (a) 55 contracts offered for trade are with settlement period exceeding 11 days, which violates FCRA, 1952; and (b) condition of ‘no short sale allowed by the exchange members’ is breached.
FMC writes to the Ministry of Consumer Affairs, saying NSEL not fulfilling the two conditions of permission under which it was set up.
April 27, 2012 : The ministry issues a show-cause notice to the exchange regarding violation of conditions (vide Letter no. 12/3/003-IT). NSEL submits its reply to the ministry (vide its Letter dated May 29, 2012).
August 2, 2012 : Responding to a request on May 31 from the ministry for its comments, FMC after a thorough study of NSEL’s reply points out that: (a) the exchange does not insist on ownership of goods before allowing members to sell and that transactions not backed by ownership of physical goods violate the ‘no short sale’ condition; and (b) contracts in which settlement period goes beyond 11 days are forward contracts (known as NTSD — non-transferable specific delivery — contracts), which are within FCRA ambit.
Meanwhile, tremendous amount of political pressure is brought on the Ministry of Consumer Affairs not to precipitate the matter but settle amicably. Lobbying at different levels within the bureaucracy gets rampant. At the highest levels in the ministry, it was felt that NSEL’s operations were indefensible, but caution was preferred to knee-jerk government intervention that could potentially dent market confidence. Even as policymakers weighed options, the exchange’s business continued.
December 2012 : It is noticed that NSEL’s Web site cites FMC as one of the regulators of the spot exchange (the others being State Agriculture Marketing Board and Warehouse Development Regulatory Authority).
February 14, 2013 : NSEL confirms modification of content after FMC objects to the incorrect use of its name as regulator of spot exchange.
April 29 : A query from the ministry (Letter 12/3/2003-IT) as to the nature and quantum of penalties levied in the event of FCRA violation leads the FMC to point out on May 13 that it has no such powers; says penalties are imposed by courts only on conviction for violation of the provisions.
July 10 : Consumer Affairs Secretary holds meeting with spot exchanges (NSEL and NCDEX Spot Exchange). The ministry seeks an undertaking from NSEL that: (a) no further/fresh contracts will be launched until further instructions; and (b) all existing contracts will be settled on the due dates.
July 22 : NSEL submits an undertaking saying, “We undertake not to launch any further/fresh contracts in new commodities and/or not in places till further instructions from concerned authority.” It also promises to “undertake that we shall settle all the contracts traded on the exchange on their respective ‘settlement due dates’ as per contract specification notified by the exchange.”
July 31 : NSEL announces that trading in all contracts, except e-series contracts, stands suspended until further notice; that delivery and settlement of all pending contracts will be merged with immediate effect; and to defer it for a period of 15 days. The crisis comes to a head.
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.