NSEL default: Spot exchange regulation issue remains

Till this is addressed clearly, questions thrown up by NSEL controversy aren't likely to settle

The crisis of payment settlement at National Spot Exchange Ltd (NSEL) is likely to persist till the question of which entity is to regulate such exchanges isn’t clear.

As reported earlier, there is an official recommendation on bringing the commodity futures market regulator, the Forward Markets Commission (FMC), under the finance ministry. It is presently under the department of consumer affairs (DCA); the finance ministry is the nodal one for both the capital and financial markets derivatives regulator. FMC had earlier been told by DCA to take charge of sorting the mess at NSEL

A regulatory expert said, on condition of anonymity, “Bringing FMC under the finance ministry could be a first step. The next obvious step will be to merge it with the Securities and Exchange Board of India (Sebi). While this might be a good move in itself for regulating the derivatives market, the issue of regulating spot commodity exchanges remains.”

SLIPPERY GROUND

• Bringing FMC under FinMin is seen as a first step towards merging it with Sebi
• Move won't solve the current problem, which arose because there was no regulator for spot exchanges
• Sebi has expertise in regulating financial derivatives (commodity futures are also financial derivatives), but no expertise in regulating spot commodity exchanges
• NSEL-appointed supervisory committee focuses on recovering money from NSEL borrowers.

Part of the reason for the NSEL crisis was because there was no regulator and the exchange is accused of interpreting the rules as suitable. Including NSEL, there are presently three online nationwide spot commodity exchanges.

FMC was asking for some years to have spot exchanges and warehouses under its jurisdiction, in addition to its existing responsibility. This hadn’t been conceded. Now, the finance ministry has raised the issue of merging FMC with the securities market regulator, Sebi. It says Sebi has the expertise and experience to regulate all financial derivatives, including commodity futures.

Quite some time earlier, the Warehousing Develop-ment and Regulatory Auth-ority (WDRA) had put a set of proposals on its website on regulations for spot exchanges. This, too, wasn’t taken forward by the DCA or by other wings of the government.

Also, nearly three years earlier, when the Financial Stability and Development Council (FSDC) was set up, the then FMC chairman and then consumer affairs secretary were invited. However, that was the only such invitation from FSDC. The reason given was that FMC was not an autonomous regulator like the others on the FSDC.

When NSEL suspended trading on the last day of July, the issue of systemic risk also came up — several members of the capital market were also members of NSEL. Sebi, however said there was no such risk.

However, the past few days of stock price crashes suggest several brokers stuck in NSEL were sellers.

FMC has used its new power over NSEL to issue warnings to the latter; its focus for now is to ensure money dues are paid to investors. This is also the task set for itself by the supervisory committee appointed by  NSEL. The latter panel is to meet again this week to take stock.