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The Union Ministry of Consumer Affairs has vested more powers with the Forward Markets Commission to address the crisis at National Spot Exchange Ltd (NSEL).
The notification says orders issued by FMC will be binding on NSEL and any person, intermediary or warehouse connected with the latter. So far, FMC had no legal powers in this regard, as NSEL is a spot exchange and FMC was not legally in a position to audit warehouses and stocks, as members/intermediaries weren’t under its purview.
The notification also specifies that trading will remain suspended on NSEL, including e-series. In a separate move, NSEL on Wednesday declared the stock in its godowns and its value. The disclosure says the stock in its warehouses is valued at Rs 6,032 crore and the total of dues to be settled is Rs 5,571 crore.
When NSEL disclosed stock data in the afternoon, the share price of Financial Technologies, the promoter of NSEL, jumped. It opened on Wednesday at Rs 153.25 and hit the day’s high of Rs 194.40 on the news of stock data being comfortable, before closing at Rs 168.10, a gain of 5.6 per cent from Tuesday. The fall in prices from a high was because, some players later said, the valuation was done by the exchange and it should be from a third party.
Stocks of another FT group company, MCX, opened with a lower circuit of 10 per cent at Rs 298.70 apiece and remained untraded through the day. The BSE exchange has lowered the circuit limit for MCX to five per cent.
NSEL also opened an escrow account for repaying investors with dues below Rs 10 lakh. And, to alleviate concerns on quality and quantity of the commodities in warehouses, it said it had appointed a third-party agency to recheck the quantity and quality in its warehouses. It is also learnt that FMC plans to send its team to examine physical stocks at various locations.
The data shows eight members held outstanding positions almost equivalent to the total stock of the underlying commodities they had in exchange warehouses. This indicates the exchange did not take the precaution of calling for collateral higher than the worth of the outstanding amount. This poses a great risk to the commodity trading system on the exchange platform, given the fear of quality deterioration in agri commodities over a period of time, resulting in a fall in their value.
In the case of a price fall, the exchange would be required to call for margins to cover a client’s position adequately. If the price of the traded commodity declines heavily, possible given the nature of turbulence in fundamentals, and clients defer margin calls, then they will default. To avoid the risk, the exchange should have covered a client’s trade position through higher underlying stocks as collateral, said an analyst.
However, with the transparency in stock position as declared by the exchange, the payment crisis has stopped, if for now. It had begun after NSEL suddenly halted trading in forward contracts on July 31, followed by suspension of its last leg of e-series contracts on Tuesday.
