 "FT scrip tanks on National Spot Exchange settlement fears")
The stock of FT, which owns NSEL, closed at Rs 191.75 on NSE, with 32.9 million shares (trading value of Rs 826 crore) traded on both the bourses. The traded volume was 71.5 per cent of the company’s paid-up equity.
The sharp fall drew the attention of the Securities and Exchange Board of India (Sebi), which ordered a probe into the role of stock market operators and brokers; as well as the Forwards Market Commission (FMC), which swung into action to enquire about the trading suspension.
Sebi is also probing the daily records of the brokers with direct or indirect exposure to NSEL contracts. The market regulator, said to have held a meeting with FMC officials on the matter on Thursday, wants to assess the risk of the chain of events on the system. “The audit is to ensure there has been no misuse of clients’ money — such as through use of margin money set aside for equities to settle claims involved in NSEL trades,” said a person familiar with the matter.
Two weeks back, the consumer affairs ministry had objected to NSEL’s contracts of various maturities, including intra-day square-offs. These contracts allowed traders to buy/sell and roll over. Many brokers had been attracting clients (high networth individuals) to invest in NSEL’s fixed-maturity (25-30 days) contracts, promising returns of over 15 per cent. Before the Department of Consumer Affairs raised its objections, brokers had used the platform to go long or short on commodities.
Last week, the exchange had shifted all contracts to trade-to-trade which meant clients would have to compulsorily settle transactions either by cash or delivery and no intra day square off was permitted. However, the exchange’s decision put brokers, who had promised their clients hefty returns and rollovers, in a fix.
When clients rushed in for cash settlement, the exchange, which has Rs 800 crore as settlement-guarantee fund, found there were demands of over Rs 5,400. The exchange offered them to settle through delivery of goods. This, HNIs buyers, obviously did not want.
This led to a payment crisis, as brokers (read sellers) did not have the capacity to pay and go for cash settlement, and buyers immediately refused delivery of goods. NSEL MD & CEO Anjani Sinha said: “The exchange has physical commodity stocks worth Rs 6,200 crore, which has been audited by independent auditors. We are confident that the temporary disequilibrium in settlement on the exchange can be taken care of with this.”
Anand Rathi Commodities Executive Director Priti Gupta said: “Settlement has to be in delivery for buyers and cash payment to sellers. NSEL had a meeting with leading brokers and we have been told that the exchange will start making payments in a couple of days.”
According to broking sources, most of the leading brokers are finding themselves in financial trouble due to settlement pressure from clients. “They were under the impression that they would keep on rolling over contracts by paying more than 15 per cent to clients. But, with objections from the Department of Consumer Affairs, NSEL’s change in format has substantially raised the demand for cash,” said a compliance officer with a leading brokerage house.
Some brokers already had a whiff of NSEL’s decision on suspension of trading. That helped them square off the positions early. Sebi, in its investigation of the crash in shares of FT and MCX, is looking whether the brokers, who were aware of the trading suspension, passed on the information to operators. The market is abuzz with speculation that a Mumbai-based operator, known for his short-selling skills, had heavily gone short on FT stock futures before the event.
“There will be no respite for the (FT) stock till everything is settled. What if there is a further shortfall after quantity verification? How much will be the loss to business at a later stage? Now the question is about solvency,” said independent market analyst SP Tulsian.
Govt assures protection to market participants
The consumer affairs ministry on Thursday said in a statement that it had noted the measures taken by NSEL and said the government was seized of the matter in all seriousness. It and the finance ministry were closely monitoring the situation.
The statement also said the department of consumer affairs, FMC and Sebi were in touch in assessing the situation. The department had also asked FMC, the statement added, to seek information from the exchange on the rationale for its decision and plan of action for meeting settlement obligations. “Based on the FMC report, necessary actions will be taken to protect the interest of market participants in NSEL,” said the statement. Meanwhile, a ministry official said on the condition of anonymity the exchange was asked to settle contracts within 15 days but it extended the delivery date by 15 days, in violation of terms of undertaking.