Other than investors/lenders, everyone, including the management of National Spot Exchange Ltd (NSEL), the Forwards Markets Commission (FMC) and the Ministry of Consumer Affairs, knew, since long, there was no physical stock of any commodity against which money was being borrowed on the exchange. A copy of a show-cause notice by the Ministry of Consumer Affairs to the NSEL chief executive in April 2012 said, “NSEL has not made it mandatory for the seller to actually deposit goods in the warehouse before taking a short-position through a member of the exchange. The exchange system has no stock check facility that validates the member’s position. The exchange allows trading on the exchange platform without verifying whether the seller member has the stocks with him or not.
In this way, the exchange has violated conditions stipulated that no short-sale for the members of the exchange shall be allowed.” The notice added the FMC had found of the total contracts, 55 offered for trade by NSEL had settlement periods exceeding 11 days and that NSEL was never granted any exemption on non-transferable delivery-based contracts. “Therefore, all contracts traded on NSEL with settlement period exceeding 11 days are a violation of the provisions of the FC(R) Act.” It also questioned why action shouldn’t be taken against the exchange within 15 days of the receipt of the letter. When contacted, an NSEL spokesperson said, “NSEL had replied to the ministry’s show-cause notice in details at that time. But instructions from the government came only in July 2013 for stopping the launch of new contracts and, subsequently, for squaring off open position for all contracts.” Observers said this meant the government and the exchange already knew physical stocks were never mandated form borrowers/sellers, but this wasn’t conveyed to the lenders or buyers of contracts. A broker who is part of the investor forum fighting the NSEL says, “The show-cause suggests the government and the exchange knew there was no stock, though the broking community did not know this. Also, if the government knew of this, why was action taken only in August 2013?”