Govt nominated commodity markets regulator to oversee NSEL in 2011

FMC was nominated designated agency under 2007 notification through a letter, but it wanted a detailed notification with larger powers

National Spot Exchange Ltd (NSEL) seems to have come under the purview of the Forward Markets Commission (FMC) much before February 2012. After the NSEL payment crisis broke out in August, the regulator had put on its website a series of notifications on spot exchanges issued by the government.

The first notification by the Department of Consumer Affairs was issued on June 5, 2007. The notification, signed by then senior economic advisor Paul Joseph, gave conditional exemption to all one-day forward contracts traded on NSEL from the purview of Forward Contracts Regulation Act (FCRA). The first condition was “no short-sale by members of the exchange shall be allowed. Condition (IV) said “all information relating to the trade, as and when asked for, shall be provided to the central government or its designated agency.”

According to a gazette notification dated February 6, 2012, the words “its designated agency” in the 2007 notification were replaced by the words “Forward Markets Commission”. This has been widely interpreted as the date when NSEL came under FMC.

However, communications from FMC reviewed by Business Standard showed several months before this, the Ministry of Consumer Affairs had nominated FMC as the designated agency, through the first gazette notification.

The designated agency was supposed to provide oversight over all spot exchanges granted exemption under section 27 of FCRA. FMC had also framed a reporting format to monitor the fulfillment of conditions laid down under the 2007 notification and had sent it to NSEL in September 2011.

NSEL investors say the letter disproves the contention that NSEL was an unregulated entity, as it was under the purview of the commodities regulator since 2011, if not earlier. Many investors fighting to recover their dues came into the picture in 2011-12. Confessions by former NSEL managing director Anjani Sinha and its warehouse chief Jai Bahukhandi show most of the 24 borrowers entered into agreements with the exchange in 2011-12.  

 

When an official connected with the regulatory agency was contacted for comment, he said, “After the nomination, the ministry received a request from FMC that a notification to this effect be issued. The regulator also sent a detailed draft notification that would empower FMC to handle spot bourses. But the ministry chose to amend the original notification.”

In a September 13, 2011, letter addressed to the managing director of NSEL, FMC’s deputy director, Vishal Nair, referred to a letter from the ministry appointing FMC as the designated agency. The letter, with the subject “Regulation of national spot exchanges” said, “I am directed to refer to this office letter of even number dated August 10, 2011, on the above mentioned subject, enclosing therewith a letter from the Department of Consumer Affairs nominating Forward Markets Commission as the designated agency for providing oversight over all spot exchanges.”

The letter clarifies a copy of the ministry’s letter nominating FMC was sent to NSEL on August 10, 2011. This means the actual nomination of FMC predates this letter. Following this, FMC took steps to ensure the conditions laid down under the 2007 notification were fulfilled. In the letter, Nair said, “In this connection, this office has framed a reporting format for monitoring the fulfillment of conditions prescribed while granting exemptions under section 27 of FCRA.”

The FMC goes on to seek the exchange’s suggestions on whether a different format of reporting would enable more effective monitoring of the “compliance of conditions”. However, the letter didn’t point to any effort by the FMC to conduct physical checks of commodities to ensure the conditions were fulfilled. If it had, the crisis could have been averted, said an NSEL investor.
NSEL-REGULATED OR NOT?

• MCA gave conditional exemption to NSEL in 2007
• One condition was to have a designated agency
• In 2011 letter, FMC referred to its appointment as the designated agency
• FMC also sought a ministry notification, giving it powers