FMC gets more teeth, ensures NSEL settles dues

The government on Wednesday said it has issued a notification giving more teeth to the regulator Forward Markets Commission (FMC) to ensure that the NSEL ensures settlement of Rs 5,600 crore in dues to investors. NSEL is facing the problem of settlement after it suspended trade in one-day forward contracts on July 31 following the government direction. On Tuesday, it stopped trading in e-series contracts in gold also anticipating a notification to this effect. "We have given more powers to FMC to handle the NSEL settlement issue. The situation is under control," Food and Consumer Affairs Minister K V Thomas said on the sidelines of a FICCI event.

A notification has been issued on August 6 giving wide ranging set of powers to the FMC to ensure settlement of dues at NSEL, said Consumer Affairs Secretary Pankaj Agrawala who was also present at the event. "Settlement of all one-day forward contracts at NSEL shall be done under the supervision of FMC and any order or direction issued by FMC in this regard shall be binding on the NSEL," the notification said. Under the notification, the government has also barred the NSEL from offering any contracts including e-series for trading at its platform, Agarwala said. The e-series products are banned as they are forward contracts.

"Right now, we want NSEL to concentrate on settlement. We do not want to complicate the issue," he clarified. E-series contracts are a unique market segment, which function like the cash segment in equities and offer commodities in demat form in smaller denominations. They contributed about 40% of NSEL's turnover in June. Stating that the government is keeping a close watch on NSEL, Agarwala said it will now wait for the notification to take effect and see how the settlement takes place. Asked if small investors would be given priority during settlement, he said that the ministry is waiting for inputs from the FMC on this issue. The exchange, which is promoted by FTIL, plans to submit its settlement plan to the FMC by August 14. At present, FMC does not regulate spot exchanges. Amid the crisis of NSEL, the government is seriously working on new regulations for spot exchanges.

All about NSEL crisis

The recent Rs 5,500 crore payment crisis faced by the Financial Technologies-controlled National Spot Exchange Ltd (NSEL) has raised several questions about the spot exchanges in the country. A spot exchange is an electronic version of the age-old mandi, where buyers and sellers meet to exchange goods and money. India has three spot exchanges - National Spot Exchange floated by Financial technologies, NCDEX Spot set up by the NSE group and R-Next established by Reliance Capital.

NSEL’s recent crisis involved two contracts. In the first contract, the settlement was supposed to happen in two days while the settlement in the second contract was deferred by 25-50 days. This allowed speculators to make financial returns without actually taking physical possession of commodities. As the commodity was required to be delivered physically under the contract specifications, the exchange facilitated use of electronic warehouse receipts thereby enabling financial investors to make use of the arbitrage without taking physical possession of goods. For example, the goods which are delivered in the first contract, which is a buy lies in the warehouse itself till the delivery is due on the reverse leg, which is a sell, helping speculators run amok leading to the unprecedented crisis in the spot exchange.