The fault for the current payment crisis at the National Spot Exchange Ltd (NSEL) lies principally with the promoters and management of the commodity bourse. But increasing evidence suggests that some of the blame must be apportioned to the Government. The events that led to the crisis suggest that the failure was much more than a mere result of a ‘regulatory’ vacuum. The Forward Markets Commission (FMC), the designated agency for spot markets from February 2012, had identified two major violations based on the trade data it received from the exchange. The first was the payment or delivery settlement period, which in many contracts exceeded 11 days making them ‘forward’ rather than ‘spot’ transactions. The second and even more serious violation was of ‘short sales’ taking place; in other words, traders were selling commodities that did not own. Based on the FMC’s findings, the Department of Consumer Affairs (DCA) served notice to NSEL on the violations as early as April 27, 2012.
The question then is what happened after that? Why did it take as late as July 12, 2013 for the DCA to tell NSEL not to launch any new contracts and settle all existing ones on their due dates? Was there any political pressure preventing action from being taken earlier? What is it that eventually forced its hand? The Government is obliged to answer these questions clearly and must not be allowed to take refuge in diversionary explanations such as the absence of a regulator for spot exchanges or the limitations in the FMC’s mandate.
The NSEL crisis has thrown up another knotty issue that demands to be unravelled. We now know that traders at NSEL, some of them with outstanding dues ranging from Rs 600 crore to Rs 950 crore each, sold commodities to investors on the exchange that they simultaneously contracted to buy back after 25-35 days through separate transactions. This sort of ‘repo’ mechanism apparently gave the traders or so-called processors access to credit from investors who initially bought and then sold back the same commodities to them at higher prices. One wonders whether any serious rice or sugar miller would have been relying on such short-term financing to operate their plants. It is perhaps no accident that the list of ‘processors’ with large outstandings released by NSEL are packed with mostly unknown names. This only adds fuel to the suspicion about the kind of trades that were being put through the exchange. Whether these transactions were genuinely backed by ownership of physical goods is something that the Government needs to independently verify through the FMC rather than leave to the exchange’s management.