A major crisis erupted at National Spot Exchange Ltd. (NSEL) on Thursday after it suspended most trades on its platform, prompting the government to order an enquiry by commodity regulator Forward Market Commission (FMC) even as the Securities and Exchange Board of India (SEBI) began a separate probe amid a crash in shares of the two listed group companies.
Potential default
The government said it was seriously looking into the matter, and had sought a report from the FMC within a day. The Consumer Affairs Ministry, the Finance Ministry and SEBI were keeping a close watch on the situation, Food and Consumer Affairs Minister K. V. Thomas said. NSEL, which provides an electronic platform to farmers and traders for spot trading in farm products and bullion, among others, said it would meet all obligations towards brokers and clients who had traded on its platform. Speculations, however, were rife about potential default on pay-outs running into Rs.5,000-6,000 crore.
As a result, the share price of NSEL’s promoter entity Financial Technologies (India) Ltd. fell by 65 per cent to touch a 52-week low, while another group firm Multi Commodity Exchange (MCX) saw its stock plunging by 20 per cent.
NSEL’s suspension of trade in all contracts, except for ‘e-series’ products such as gold and silver, came a fortnight after the government asked it not to launch new contracts.
The bourse blamed “loss of trading interest” and “abrupt structural changes in marketplace” for suspension of trade. However, there have been speculations that the bourse did not have adequate stock of commodities to make the delivery.
Settlement deferred
NSEL said it was deferring settlement for all pending contracts for 15 days, raising concerns about potential defaults and liquidity problems at brokers’ and clients’ level.
SEBI has also launched a separate probe, and is looking into potential violations of rules related to insider trading, fraudulent trade practices and possible payment defaults.
The FMC is seeking clarifications from NSEL about the rationale behind its decision to defer the settlement, while the government said the problem was the exchange’s “own creation“.
Consumer Affairs Secretary Pankaj Agarwal said NSEL’s credibility had been “dented”, and the government had been telling it for the last one-and-half to two years to act as per terms and conditions. The market was also abuzz about possible spill over of default risks to commodity and equity markets as well, because of many brokers with exposure to NSEL had significant presence on the trading platforms of MCX and other exchanges.
FTIL Chairman and Managing Director Jignesh Shah said the NSEL matter did not entail any financial liability on the company and its businesses. MCX also said there would be no impact on its operations and financials.
However, shares of both FTIL and MCX tanked, while stocks of many brokerage companies were also affected.
“I have talked to SEBI and the Secretary to the Department of Economic Affairs on this issue. We are all in touch,” Consumer Affairs Secretary Pankaj Agarwal told PTI.
“We are all shocked. About the impact, we are studying the legal implication. The government is fully seized of the matter. It is legally examining every aspect. This was NSEL’s own creation,” he added.
Daily volumes fall
The Consumer Affairs Ministry is the nodal Ministry for commodity trading markets, and, therefore, NSEL comes under its purview. The exchange’s daily volumes have fallen sharply to about Rs.350 crore, from over Rs.1,000 crore in June.
“The Department of Consumer Affairs has asked the FMC to seek information from NSEL regarding the rationale of the exchange for the above decision, its plan of action for meeting the settlement obligations of all the open contracts, and other relevant information in this regard,” Mr. Thomas said.
On receipt of response from the FMC in this matter, he said, the Department of Consumer Affairs would take necessary action to protect the interests of market participants in NSEL.
“The government is seized of the matter in all its seriousness Senior officials of both Departments, as also that of statutory regulators such as FMC, SEBI etc are in constant touch with one other in assessing the situation,” Mr. Thomas said.
