The point of this business is to allow for the trading of commodities at current prices through an electronic platform that facilitates countrywide participation of sellers and buyers and, thus, better price discovery. As such, a spot exchange should normally allow only one-day contracts with actual settlement in the next couple of days. The NSEL, on the other hand, permitted contracts for as long as 25 to 40 days. Some players even entered into three- and four-day buy contracts and much longer 20- to 25-day sell contracts - which were, clearly, illegitimate. The DCA and the FMC could not have been unaware of these malpractices - some of which are almost parallel to futures trading. While the FMC at least has an excuse for inaction, that it lacked jurisdiction over the spot exchanges, the department cannot offer even this defence.
Strangely, though the DCA served a show-cause notice to the NSEL about a year ago, it chose to wait till the actual crisis broke out before taking any concrete action. And when it finally did intervene, the DCA, as well as the NSEL, acted in a piecemeal manner, thus creating a panic in the market. The consequential chaos has been exacerbated by justifiable disbelief in the NSEL's claims that it holds adequate stocks of commodities in its accredited warehouses, as well as in their quality and actual worth. Neither the participants in spot trading nor the FMC, which has belatedly been roped in to set things right, were convinced about the NSEL's ability to stick to the unduly protracted payment schedule extending up to March next year - and they have been proved correct now. Investigation of the NSEL should not stop only at convenient scapegoats within the exchange's management; all those who held real power in the set-up should also be part of the probe.
To avert such fiascos in future, the spot trading bourses must be brought under an efficient and effective watchdog. There, of course, are several candidates for this job, including the FMC, the Securities and Exchange Board of India (Sebi) and the Warehousing Development and Regulatory Authority. However, considering the dissimilar nature of the commodities and financial markets, a duly empowered FMC may be better suited for this task. In its current avatar, the FMC is a toothless body incapable of doing justice even to regulating the futures trading. It will, therefore, need to be thoroughly revamped and given statutory powers similar to those of Sebi. This can be done by modifying the Forward Contracts (Regulation) Amendment Bill, pending before Parliament since 2010, which seeks to bestow greater autonomy and authority on the FMC. Unless this is done expeditiously, the objective of ensuring fair and transparent commodity business through both spot and futures exchanges is unlikely to be met.