NSEL may lose exemption on 1-day carry forward facility

The regulator found that traders were involved in 'short sale' through selling of their positions without having underlying commodity in their stocks

The Forward Markets Commission (FMC), the commodities derivatives market regulator, might withdraw the exemptions granted to National Spot Exchanges Ltd (NSEL).

NSEL, a spot commodity trading platform, is promoted by Financial Technologies (India).

An official from the consumer affairs ministry told Business Standard that FMC had found breaches of the conditions under which NSEL was granted exemptions to allow carry forward contracts for a day. Spot exchanges are as a rule allowed to trade on spot bases only but to offer flexibility to farmers, such a carry forward facility was allowed.

NSEL’s daily turnover is Rs 650-700 crore, of which a little over two-thirds is from agri commodities. It is difficult to ascertain how much comes from the carry forward facility.

The regulator found traders were involved in ‘short sale’, through selling of their positions without having the underlying commodity in their stocks. For example, trader A sold an agri commodity on NSEL when the price was quoting higher without owning the underlying product. Since the T+1 (settling on the next day of purchase) contract was allowed for settlement in 11 days, trader A re-booked the commodity on a price decline within this period. This means the contract remained opened for over 11 days in a forward contract, through the law defines this as a futures contract.

FMC had given exemptions to spot exchanges, including NSEL, for being allowed to offer one-day forward contracts provided members would not resort to such short sales. It had apparently found NSEL was without a mechanism to verify if the seller had a physical stock or not.

Since FMC had given such exemptions with the ministry’s permission, the latter has written to the regulator to take action against NSEL. The earlier notification itself says, “in case of exigencies, the exemption will be withdrawn without assigning any reason, in public interest”.

“Following this, NSEL would be able to settle contracts in the prescribed period. But the leverage of 11-day settlement would be withdrawn,” explained the official. The ministry had issued a show-cause notice in October last year to NSEL after it found violation of some conditions set by the government for operating the exchange.

Consumer affairs minister K V Thomas had said earlier the ministry had asked FMC to act against NSEL. “We came to know that the ministry has sent a letter to us. But nothing has come to us so far,” said an FMC official.

Spot commodity exchanges are not regulated directly by the FMC  though there is a proposal to grant it this power.