NSEL's settlement guarantee fund stood at only Rs 85 lakh

NSEL had apportioned Rs 20 lakh during FY 13 out of Reserves and Surplus

National Spot Exchange Ltd (NSEL)’s latest annual report, published in the bourse’s website for the first time since the crisis broke out a month ago, shows the exchange had set aside only a fraction of the amount it claimed to have had as Settlement Guarantee Fund (SGF). Against varying claims its SGF ranged from Rs 839 crore to Rs 62 crore, between July 29 and August 14, the bourse had Rs 84.66 lakh in the actual SGF. In its annual report, the exchange termed it ‘security guarantee fund’, and it appeared under the head ‘reserves and surplus’.

SGF is a separate fund maintained by exchanges, in addition to the margins they collect. This fund has to be created out of the exchange’s own profits, to enable settlements in case of default. From NSEL’s annual report, it is clear the exchange first tried to project the margins it collected from investors as the SGF but later changed the practice and set aside a portion of its reserves. This real SGF was miniscule compared to the unsettled amount — about Rs 5,600 crore.

The magic behind the shrinking fund

• NSEL claimed to have Settlement Guarantee Fund of Rs 839 crore as of July 29
• It gave varying figures during first two weeks of AUgust confusing regulators, investors
• Annual Report shows actual settlement guarantee fund was just Rs 84.66 lakh as of March 31
• NSEL had "Settlement fund" of Rs 706 crore comprising margins paid in by investors
• But this is not same as Settlement guarantee fund, which has to be set aside from exchange's profits/reserves

According to note 35 in the annual report for 2012-13, the bourse said, “Various state APMCs (agricultural produce marketing committees), while issuing a licence for establishing an e-market/private market spot exchange, have laid down to maintain a settlement guarantee fund to meet exchange obligations, but have not given any guideline for the constitution of the SGF.

 In view of such a requirement, an amount of Rs 64,66,448 had been apportioned out of the initial margins of the members to SGF NC and shown under current liabilities in financial year 2011-12.”

However, in 2012-13, it changed the practice. The report added, “In the current year, the said amount has been transferred back to initial margins from members’ accounts and an appropriation of an equal amount has been done, out of the opening balance of reserves and surplus of the company. The company has appropriated for a security guarantee fund an additional amount of Rs 20,00,000 for financial year 2012-13.”

Elsewhere, in the annual report, the bourse said it had a “settlement fund” of Rs 706 crore. “As of March 31 2013, the company has maintained a settlement fund amounting to Rs 70,69,044,892 (previous year Rs 36,06,046,920). The fund comprises of total of initial margin, fixed deposits and bank guarantees collected from the members,” the annual report said.

This, however, isn’t the same as an SGF in the spirit of the term, as it already had positions built on it and could not be used to fill in case of a default. This was exposed when the exchange was unable to make good payment defaults by borrowers for the second consecutive week.