NSEL SCAM - ONE YEAR AFTER. ‘We have strengthened the risk management system in exchanges’

The commodity market regulator Forward Markets Commission has played pivotal role in clearing up the mess created by National Spot Exchange. Though FMC did not have sweeping regulatory powers like the capital market regulator Sebi, it managed to cordon off other regulated commodity futures exchanges from the impact of Rs 5,600-crore settlement default by NSEL. An alumnus of the Harvard Business School, Ramesh Abhishek, Chairman, Forward Markets Commission feels that regulators have a responsibility to ensure that the financial markets work properly and ensure ease of doing business. Excerpts:

Q) What action has FMC taken in the NSEL issue?

A) In 2012 FMC reported that NSEL seemed to be violating two of the main conditions for exemption given by the Government under FCR Act. In July last year, the Government ordered NSEL not to launch new contract. This resulted in the exchange suspending trading. The Government also directed FMC on August 6, 2013 to supervise the settlement process at NSEL after which we took a number of actions. We forced the exchange to bring all information in the public domain. Before that there was lot of opaqueness and lack of clarity on members who had taken money through the exchange mechanism. There was no transparency on who were to be given back the money on recovery. Besides, NSEL was also forced to put details in public domain on their warehouses and the stocks lying in it. After that we gave NSEL a number of directions to bring clarity regarding their accounts because they were giving different numbers on the size of their settlement guarantee fund and liabilities etc. When we found that there were many discrepancies we ordered a forensic audit of the exchange. The audit brought out the details of how the exchange was being run without any risk management, lack of accountability and supervision by the board of directors and number of other issues. Based on the audit report and other information we declared the NSEL promoter and key directors as ‘not fit and proper’ for our regulated markets. In the meantime, criminal investigations are also going on under the MPID (Maharashtra Protection of Interest of Depositors) Act and EOW (Economic Offences Wing) is taking appropriate action. A Competent Authority has also been appointed for recovery of funds from defaulters. We are also regularly monitoring the progress of recovery with the board of NSEL. We also constituted a monitoring and auction committee consisting of NSEL investors and members. We have told NSEL to file recovery suits and pursue the cheque bouncing cases against defaulters. They have also bought out advertisement on details of defaulters in newspapers.

Q) There are also some complaints in the e-series settlement?

A) I have met a number of members who were happy that e-series investors got the money back. If there are any specific complaints we can look into it. The money is being transferred directly to the bank account of NSEL investors. More than 33,000 e-series investors have got most of their money back. All the e-gold investors have received full payment. E-silver investors have received 70 per cent of their money.

Q) What action has FMC taken to avoid NSEL kind of incidents?

A) We are constantly strengthening the regulation in the futures market. In last one year, we have revised the equity structure of futures exchanges. Private party can own only up to five per cent of the equity and certain institutions can go up to 15 per cent. The role of promoter has been severely curtailed looking at situation in other exchanges and NSEL in particular. Corporate governance was also revamped including the role of directors and constitution of the board. The risk management system in exchanges has been strengthened. There is a settlement guarantee fund in each exchange. We are also strengthening the warehouses by mandating them to register with WDRA (Warehouse Development and Regulatory Authority).

Q) How many warehouses are registered with WDRA?

A) Over 400 warehouses applied for registration with WDRA. About 260 have been inspected and 59 are registered. We have requested WDRA to expedite the process. We have given time till September for warehouses to register with WDRA. But if the process is taking time we cannot blame the warehouses. We are also planning to prescribe capital adequacy norms, networth criteria and security deposits for warehouses. We will ensure third party audits and more disclosure on exchanges websites so that there is no doubt in the minds of anybody about the quantity and quality of goods in the warehouses.

Q) Do you think the recovery process is sluggish?

A) The pace of recovery from defaulters is slow. In last one year only Rs 350 odd-crore has come. So we are putting pressure on NSEL to expedite things. A committee of members and investors is working with the exchange for last seven months. With the permission of the court, NSEL is also auctioning goods lying in the warehouses. FMC is reviewing the progress regularly. As far as the investigations are concerned they are being conducted by independent agencies.

Q) Marketmen feel regulations are being framed based on recent scams thus affecting the ease of doing business. Your comments

A) Commodity futures exchange norms are gradually being aligned with the securities market. Regulation of any market has to evolve. We have improved many things to ensure it in our market. We have made many regulations to make it easy for people to enter and exit the market. Exchanges now send e-mail and SMS alerts to clients on their trading position. It is a system driven mechanism. Lot of details are now made available on the exchange website. We have brought more transparency in the market.

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