 "The exchange is responsible for settlement: Ramesh Abhishek")
The NSEL issue has raised doubts in the minds of several market participants whether or not the exchange will complete their settlement. Ramesh Abhishek, chairman, Forward Market Commission talks to Rajesh Bhayani on various issues revolving around the problem. Edited excerpts:
How serious is the NSEL crisis?
If the NSEL completes settlement and participants get their money or commodity, as the case may be, then it is good. On Thursday, the managing director of NSEL was called to the commission to explain what had happened. He told us that the value of stock that is there in the warehouse as collateral is worth Rs 6,200 crore whereas the liability of payment to those who have invested is Rs 5,400 crore.
They have a settlement guarantee fund of Rs 800 crore. What we have asked them is -- to what extent is the composition of this settlement guarantee fund -- because you cannot pay one client or member from the fund, from the margin of another member.
They have a settlement guarantee fund of Rs 800 crore. What we have asked them is -- to what extent is the composition of this settlement guarantee fund -- because you cannot pay one client or member from the fund, from the margin of another member.
Why all these things now? Could this not have been settled earlier?
This was going on since over a year. Last year the Ministry of Consumer Affairs notified that all trades under the exemption given to three spot exchanges under section 27 of FCRA should be reported to the FMC. As a result, we have found that there are violations like short selling, as the exchange had no mechanism to figure out that the seller had the commodity before selling or not, based on which we asked ministry to take actions.
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Who regulates the spot exchanges?
We have clarified a lot of times that there is a regulatory vacuum with respect of spot exchanges. Three spot exchanges were exempted by the government under Section 27 of FCRA to conduct forward trading in one day contracts. This was done to boost volumes so that their economic viability improved. However, there were many conditions also like they cannot do short selling, etc and we were seeking information about their trades and as required we are advising the government.
Do you see the possibility of NSEL’s decision of suspending trading in contracts other than e-series, having a rippling effect on commodity futures exchanges?
This has absolutely no impact on commodity futures exchanges as futures exchanges are well regulated. Regarding other impacts, I can only say that FMC and Sebi are in touch with each others.
What action concerns you the most?
One of the reasons they gave us is the recent government order created uncertainty in the market and that is why the trading interest was lost. So we have pointed out that the obligation of the exchange to settle their contracts cannot depend on a perpetual trading on the exchange because it has many other implications that unless people reinvest by way of rollover of their position or there is fresh infusion of funds, the exchange cannot honor its settlement obligations. That is not acceptable because it has many serious consequences and implications.
Is the fear of default serious?
At this point I don't think we should have any such apprehension. The NSEL is very confident that they will be able to honor their obligations of all the open contracts and they are going to give us all the detailed information. So we will analyse that information and we will advise the department of Consumer Affairs accordingly. Right now we are waiting for the detailed feedback. What they have told us is that there are 23 entities that will have to pay to the exchange and exchange. NSEL MD also told use that after 15 JULY they have paid Rs.1200 crore to market participants.
Do they really have stock as claimed?
The detailed report will come to use from them and as we all know the exchange is squarely responsible for the quantity and quality of the stocks that they have held as collateral because otherwise what is the role of an exchange if they cannot guarantee settlement, if they cannot ensure the quality and quantity of goods which is held in their warehouses that is the main role of the exchange, they have to guarantee and honor all the settlement obligations.
What are the options before the government in case of any default?
I can only say that if there is default by the exchange in completing settlement or by participants in meeting their obligations, than there are respective law enforcing agencies which will take required actions.