Govt orders commodity regulator to probe why NSEL suspended trading

New Delhi: A major crisis erupted at National Spot Exchange today after it suspended most trades on its platform, prompting the government to order an enquiry by the commodity regulator FMC, while Sebi also began a separate probe amid a crash in shares of two listed group companies.

The government said it is seriously looking into the matter and has sought a report from Forward Markets Commission (FMC) within a day. The consumer affairs ministry, finance ministry and Sebi are keeping a close watch on the situation, Food and Consumer Affairs Minister K V Thomas said.

National Spot Exchange Ltd (NSEL), that provides an electronic platform to farmers and traders for spot trading in farm products and bullion among others, said it would meet all obligations towards brokers and clients who have traded on its platform. Speculations, however, were rife about potential default on payouts running into Rs 5,000-6,000 crore.

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As a result, the share price of NSEL’s promoter entity Financial Technologies (India) Ltd fell by 65 percent to touch a 52-week low, while another group firm Multi Commodity Exchange (MCX) saw its stock plunging by 20 percent.

[caption id=“attachment_1003833” align=“alignleft” width=“380”] Representational Image. Reuters[/caption]

NSEL’s move to suspend trade in all contracts, except for ’e-series’ products like gold and silver, came a fortnight after government asked it not to launch new contracts.

The bourse blamed “loss of trading interest” and “abrupt structural changes in marketplace” for suspension of trade. However, there have been speculations that the stock exchange did not have adequate quantity of commodities to make the delivery.

NSEL said it is deferring settlement for all pending contracts for 15 days, raising concerns about potential defaults and liquidity problems at brokers and clients level.

Sebi has also launched a separate probe and is looking into potential violations of rules related insider trading, fraudulent trade practices and possible payment defaults.

FMC is seeking clarifications from NSEL about the rationale behind its decision to defer the settlement, while government said the problem is the exchange’s “own creation”.

Consumer Affairs Secretary Pankaj Agarwal said NSEL’s credibility has been “dented” and government has been telling it for the last one and half to two years to act as per terms and conditions. The market was also abuzz about possible spillover of default risks to commodity and equity markets as well, because of many brokers with exposure to NSEL have significant presence on the trading platforms of MCX and other exchanges.

FTIL Chairman and MD Jignesh Shah said that the NSEL matter does not entail any financial liability on the company and its businesses. MCX also said there would be no impact on its operations and financials.

However, the shares of both FTIL and MCX tanked, while stocks of many brokerage companies were also affected. “I have talked to SEBI and Secretary to the Department of Economic Affairs on this issue. We are all in touch,” Consumer Affairs Secretary Pankaj Agarwal told PTI.

“We are all shocked. About the impact, we are studying the legal implication. Government is fully seized of the matter. It is legally examining every aspect. This was NSEL’s own creation,” he added.

“The credibility of the exchange has definitely (been) dented,” Agarwal said, while adding that the ministry officials are in touch with NSEL to know about its settlement plans, stocks and liquidity.

The Consumer Affairs Ministry is the nodal ministry for commodity trading markets and therefore NSEL comes under its purview. The exchange’s daily volumes have fallen sharply to about Rs 350 crore, from over Rs 1,000 crore in June.

“The Department of Consumer Affairs has asked the FMC to seek information from the NSEL regarding the rationale of the exchange for the above decision, its plan of action for meeting the settlement obligations of all the open contracts and other relevant information in this regard,” Thomas said.

On receipt of response from FMC in this matter, he said, the Department of Consumer Affairs will take necessary action to protect the interests of market participants in NSEL.

“The government is seized of the matter in all its seriousness and the Ministry of consumer affairs and the ministry finance are closely monitoring the situation.

“Senior officials of both the Departments, as also that of statutory regulators like FMC, SEBI etc are in constant touch with one other in assessing the situation,” Thomas said.

PTI