Issues raised by whistleblower fake; charges aimed at destroying MCX: PS Reddy

Suresh P Iyengar Mumbai | Updated on September 10, 2019 Published on September 10, 2019

MCX MD PS Reddy.   -  KSL

MCX, the country's largest commodity exchange, was in news recently following allegations levelled by a whistleblower . Speculation about wrong-doings at the exchange saw its stock price crashing last week. PS Reddy, Managing Director, MCX, in an interview with BusinessLine scotched all rumours and vouched that all-is-well with the exchange. Excerpts:

What is the truth behind the letter from the whistleblower?

The so-called whistleblower issue is absolutely fake. We do not have any employee by name Charul Singh who was named in the letter. The issues raised in the letter are all humbug. The allegation that bad quality cotton stocks delivered by two international players are being passed on to domestic investors is absolutely thrash. The two international players in question have simply delivered what they have bought in the previous delivery cycle. They have not bought anything from outside the country. The accusations are made to destroy a vibrant exchange platform which has helped the trade hedge its risk.

Being a monsoon season, there may have been some moisture in the cotton but it is absolutely within the contract specifications. Whenever a buyer has a doubt on the quality, he can call for retesting. Just making a wild allegation that the exchange is passing on bad quality stock to buyers without any evidence is not correct. The buyer who has been named by the whistleblower has been trading on the platform ever since cotton futures was launched. He has been a major player and has never complained on quality.

Do you think the quality issue was raked up to avoid taking delivery of cotton bought at a high price particularly after the recent price fall?

I cannot comment on the pricing aspect. But it is a fact that cotton prices have crashed internationally and I am not aware what price the cotton stored in the warehouses were bought.

Read more: Global cotton prices down 26% on weak demand

No issue was raised with the exchange. All regulated trading platforms have a well established complaint redressal mechanism. This issue made out of nothing will not deter us from launching more agriculture contracts. We have sought SEBI permission for launching a few agriculture commodities. Once we get approvals, we will launch.

What is the truth behind the allegation that funds were siphoned off?

The contract mentioned in the report was worth ₹20 crore and was not increased even by a penny. The contract was to develop software for spot commodity platform for gold and natural gas. The RFP (request for proposal) was floated in November 2017. The contract was awarded after a competitive bidding process with participation of three international companies. A sub-committee scrutinised the applications and a technical committee with representation of IIT professors were involved in selecting the winning bidder. All the allegations made in this regard are figment of one’s imagination. They just wanted to sensationalise the whole issue.

Was there any issue in gold delivery?

The allegation is out of context. For handling gold delivery, we have three designated vaults: Brink’s India, Malca-Amit JK Logistics and Sequel Logistics. Brink's and Sequel have an insurance of ₹500 crore each and Malca had ₹1,000 crore insurance. In all, we had insurance cover of ₹2,000 crore for gold delivery. It so happened one of our customers had certain stocks already lying in his account at Brink’s. So it was easier for him to shift that to the cleaning account by just doing an accounting entry instead of moving the gold to another vault. Once we came to know about this, we requested Brink’s to increase the insurance cover overnight but it could not happen. After the incident, we have not only increased the insurance cover across the three vaults but also taken additional floating cover which will provide insurance across the three vaults. I think the issue arose because an usually large quantity of gold was delivered at one vault.

Is 90 per cent of MCX’s business coming from top 15 brokers? Who drive the turnover through algo trading?

Again, it is sheer nonsense. Algo-driven trade contribute 35 per cent of our turnover. They are very important to provide liquidity. Their contribution is much smaller compared to equity markets. It is not like we have ignored anybody. A broker who is small today may become big tomorrow, so we cannot afford to ignore him today and hope to attract him later.

Do you think this was done to crash the stock price?

I really do not know the motive behind the allegations but the fact is the stock price has crashed and poor retail investors would have suffered a loss. May be somebody who is envious of growth is playing dirty tricks.

Are five exchanges fighting for market share in a shallow market leading to this kind of disruptions?

I do not want to point finger at anyone but at the same time we will not take it lying down. We have already requested SEBI to investigate the issue and the subsequent stock price crash. We will go to the bottom of the issue to ascertain the fact. Investors have lost ₹5,500 crore in market capitalisation. We have consulted our lawyers for future course of action. Media houses cannot publish anything based on a letter without verifying the authenticity of facts. Talking of shallow market, the MCX is working to get more physical market participants on the platform particularly after SEBI made compulsory delivery of commodities on all contract expiry. We hope to increase the pie rather than fighting in a small market.

Are bank-owned broking firms active on your exchange?

A few bank-owned broking firms are active while some are putting their back office in place. Another issue they face is that non-agriculture commodities are not allowed to be stored in WDRA (Warehouse Development and Regulatory Authority) registered warehouses. In equity market, one opens a three-in-one account involving trading, demat and banking. All are well linked. That kind of arrangement can work in commodities if we have repositories for non-agriculture commodities. This is currently the missing link and SEBI is working with the WDRA. A working committee is looking into it for framing guidelines for non-agriculture commodity repository. The WDRA has to announce guidelines following which warehouses handling non-agriculture delivery need to register with the WDRA. Once we have this, the pace of investment will increase.

Why there is a delay in mutual funds and alternative investment funds entering commodity market?

The custodian piece is still missing. SEBI wants custodians to vouch for quality and quantity of goods lying at the warehouses. Custodians claim that the goods are lying with the WDR- registered warehouses, so they cannot vouch for it. In equities, they are managing funds and equities are moved in and out after the trade; the depositories are responsible for the securities.

SEBI has allowed trading on commodity indices. Has the MCX applied?

We are working on it. We had discussions with market participants and taken their feedback. We are in the final stage of filing with SEBI for index trading in the iComdex Composite Index and in iComdex Bullion.

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Published on September 10, 2019
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