 "Govt puts NSEL in a spot")
In effect, this means NSEL’s operations will come to a halt from Tuesday, as the exchange had on July 31 suspended trade in all other contracts, following a direction from the consumer affairs ministry not to launch new contracts because of violation of rules.
The ministry has also asked the exchange to seek fresh permission for launching e-series contracts, which enabled retail investors to buy and sell gold, silver, copper, zinc, lead, nickel and platinum in the demat form.
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The e-series contract volumes of Rs 250-300 crore accounted for almost 30 per cent of NSEL’s trade volumes in July. But the volume tumbled to a mere Rs 10-15 crore in the past few days, after NSEL suspended trading in all other contracts and put e-series under “trade-for trade”, which bars intra-day square-offs.
The e-series contracts functioned like the cash segment in equities but offered commodities in the demat form in smaller denominations. The clearing and settlement, pay-in and pay-out mechanism on NSEL was based on T+2 settlement cycle.
The ministry’s late-evening announcement came as a surprise for NSEL, a subsidiary of the Financial Technologies group, which had earlier in the day sought to calm investors’ nerves by setting up a four-member independent committee to advise and monitor settlements of trade amounting to about Rs 5,500 crore.
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The announcement came after the exchange on Sunday said most of its trading members had proposed to settle outstanding contracts over several months of forward trading suspension.
The FT shares gained 30.9 per cent from their previous close on BSE to end the day at Rs 197.95, with huge volumes. This was a strong recovery after the stock lost 73 per cent over two sessions, following the commodity exchange’s suspension of trading in most forward contracts last week. However, in view of the ministry’s decision later, market analysts are not sure how the stock would behave when trading begins on Tuesday.
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The exchange was expected to announce the final settlement schedule for all outstanding contracts on August 14, Shah said.
Later in the day, the Forward Markets Commission (FMC) told the exchange it had to give priority to the 7,000 small investors with exposure of less than Rs 10 lakh each. NSEL has a total of 13,000 investors. FMC also asked Multi Commodity Exchange, another FT group firm, not to take any financial burden on itself without the regulator’s permission.
FMC, which is holding a series of meetings with various intermediaries, has already asked the exchange to deposit in an escrow account the money it is collecting from borrowers. Sources in the consumer affairs ministry said a notification would be issued shortly to make FMC the regulator for spot commodity exchanges, too.
The oversight committee, set up by NSEL in consultation with FMC, is chaired by Sharad Upasani, former Company Law Board chairman. It will have as members former Bombay High Court judge R J Kochar, former Sebi & LIC chairman G N Bajpai and former Maharashtra director general of police D Sivanandan.
Additionally, NSEL has also constituted two committees of members (seller side) and plant owners to convince counterparts in their respective fraternity and settle the issues, if any, in case of payment delays.
“All these committees have been formed for smooth payout of dues in the entire system of spot commodity trade and avoid anything that might have a consequential impact on the larger market,” Shah said.
Talking about the drastic decline in the settlement and guarantee fund from Rs 800-odd crore to a mere Rs 60 crore, Shah said: “The fall was based on the calculation of the stocks and margins paid on those to the exchange. There could have been a similar decline in the overall payout overdue also.”
NSEL said it would start trading only after the government clarified its stand on 11-day contracts. If such contracts are not allowed, the exchange will diversify its business. It will begin procurement on behalf of government agencies like Nafed. Also, the exchange will look for new business opportunities in related space.
Eight entities are willing to pay about Rs 2,181 crore according to the scheduled date, or even earlier. Another 13 have offered to pay about Rs 3,107 crore in weekly instalments, while negotiations are on with three others for payments of Rs 311 crore.
Significantly, the exchange removed the addresses of all its warehouses from its website. At the press conference, Shah did not answer many of reporters’ questions. He said the questions being put to him were too micro and only CEO Anjani Sinha would be able to answer those.
Shah also could not shed any light on whether NSEL had adequate stocks in its warehouses to cover a potential default, and why the exchange’s risk apparatus had failed to detect the problem.
He also did not give the exact value of outstanding trades, despite repeated questions, and said the number would later be disclosed on the NSEL website. He said broker-wise exposure to the contracts would also be put up on the website.
WHAT ARE E-SERIES CONTRACTS?
- Investment products that enable investors to buy and sell commodities in demat form and hold these in their demat accounts
- A market segment that functions like the cash segment in equities, but offers commodities, in smaller denominations
- Provide option for intra-day trading and demat delivery in respect of positions outstanding at the end of a day