Indian brokers said a lack of oversight allowed the nation’s biggest spot commodity exchange to stretch settlement dates, prompting a government clampdown that sparked a two-day, 73 percent crash in its parent’s shares.
The National Spot Exchange Ltd. suspended some contracts after the government on July 14 asked the bourse not to start new obligations until further notice. The NSEL broke rules by allowing settlement longer than 11 days and permitting sale of goods traders didn’t keep in its warehouses, according to the Forward Markets Commission, which regulates futures trading.
“There was some leeway in the rules,” Harish Galipelli, head of commodities and currencies at JRG Wealth Management Pvt., said in an interview from the southern city of Hyderabad. “The argument NSEL was following was that the contract takes place now and delivery takes place after 20 days.”
Regulators globally are expanding scrutiny of markets from power to metals after banks rigged the London interbank offered rate, a benchmark for $300 trillion of global interest-rate contracts. The suspension by the Indian exchange followed two weeks of communication between the NSEL and authorities, and prompted the government to ask the FMC to oversee a settlement between the brokers and the exchange.
“The exchange was allowing short selling by its members by not insisting that the goods sold on their platform be kept in their warehouses,” Ramesh Abhishek, chairman of the FMC, said in an interview to Bloomberg TV India. “This is contrary to the government’s conditions” for spot exchanges, he said.
Shares of parent Financial Technologies (India) Ltd., an operator of exchanges, plunged 23 percent to 147.5 rupees, extending yesterday’s 65 percent crash. The move by the NSEL doesn’t “entail any financial liability” on the Blackstone Group LP-backed Financial Technologies, founder Jignesh Shah said in a statement yesterday.
Reliance Capital Asset Management Ltd., the country’s second-biggest money manager with $16.5 billion in assets, sold 1.19 million shares of Financial Technologies yesterday, exchange filings show. The fund held 2.27 million shares, or 4.94 percent of the company, as of June 30, data compiled by Bloomberg show.
Financial Technologies’ profit fell 14 percent to 2.27 billion rupees in the year ended March 31. NSEL accounted for 56 percent of the exchange operator’s net income, according to exchange filings. Financial Technologies also owns 26 percent of Multi Commodity Exchange of India Ltd., the nation’s biggest commodity futures bourse. Shares of the company, which counts NYSE Euronext as an investor, plunged by the 20 percent limit for a second day to 408.5 rupees.
The FMC will “seek information from the NSEL regarding the rationale” to suspend contracts, Food Minister K.V. Thomas said in a statement yesterday.
NSEL provides an electronic platform for farmers and traders to buy and sell commodities with compulsory delivery. The obligations are single-day trading contracts resulting in compulsory delivery, according to NSEL’s website.
“Trading will resume when the government clarifies or issues new guidelines,” Anjani Sinha, chief executive officer of the NSEL, which traded 185 billion rupees ($3 billion) of goods in June, said in an interview yesterday. “The government said that let us decide the new rules because of the ambiguity in the regulatory framework.”
The exchange, which began operations in 2008, on July 23 reduced the settlement to 11 days before halting the contracts on July 31. The reduction meant “there weren’t any takers for the financing activities,” which led to the suspension of contracts, said Deena Mehta, managing director of Asit C. Mehta Investment Interrmediates Ltd., which funded investors trading on the NSEL. “Enough time was not provided to unwind.”
NSEL accounts for more than 98 percent of the country’s electronic spot market in commodities, according to its website. Physical raw-material bourses operate separately from futures exchanges in India.
The International Organization of Securities Commissions, a Madrid-based group representing regulators from more than 100 countries, set tougher guidelines July 17 for publishing benchmarks for everything from raw materials to equities.
In India, the stock market regulator tightened disclosure norms for hedge funds last month, while the FMC in 2012 clamped down on excessive speculation in the futures market. The commodities futures regulator will look at the feasibility of the plan and oversee the process of settlement, Abhishek said. The NSEL assured to meet its obligations in a meeting with brokers body today, Deven Choksey, managing director at K.R. Choksey Shares & Securities, said by phone from Mumbai.
Government departments are passing the “buck to the FMC and the FMC once again passes the buck to the government of India saying that we are not the regulator,” Kirit Somaiya of Investors’ Grievance Forum, which represents retail investors, said in an interview to Bloomberg TV India. “Who is going to investigate and act?”