The Greenspan of NSEL crisis?

BC Khatua was the chairman of the Forward Markets Commission between 2007 and 2011, when the bourse was born and grew fast.

After the global financial crisis of 2008, Time magazine published a list of 25 people who could be blamed. Third on the list was Alan Greenspan. Explaining the rationale for putting him on the blameworthy list, Time said “…the super-low interest rates Greenspan brought in the early 2000s and his long-standing disdain for regulation are now held up as leading causes of the mortgage crisis.”

If one were to prepare a list of the people under watch over the National Spot Exchange (NSEL) collapse, one could not leave out B C Khatua, chairman of the Forward Markets Commission (FMC) between 2007 and 2011, when the bourse was born and grew fast.

The 1976-batch IAS officer was working as Sales Tax Commissioner in Maharashtra, the home state of the then minister for consumer affairs, when his appointment became public in May 2007.

Within weeks, on June 5, 2007, the gazette notification to exempt National Spot Exchange (NSEL) one-day forward contracts from the ambit of the Forward Contracts (Regulation) Act, 1952, which governs FMC, was published.

Khatua probably did not have much say in that. But,was the notification a licence to turn a blind eye? In the words of Paul Joseph, the ministry official who signed that gazette notification and later went on to work with MCX-SX, the understanding was that FMC would look into matters if and when there were violations.

In his four years at the helm, did Khatua not have a shadow of a doubt? Did he not know that the greatest campaigners against “dabba trading” were its chief practitioners? To say he was unaware would be a great injustice to the man’s deep knowledge and clear understanding of the market he regulated.

Khatua knew his territory like the back of his hand. During a long interview in August 2009, he had given me and a former colleague the low-down on the commodities market and the need for it to be regulated separately. He had defended his right to regulate NSEL’s e-gold contracts, which the Securities and Exchange Board (Sebi) of India was uncomfortable with. But Khatua had dismissed Sebi as a younger regulator and claimed even Gold Exchange Traded Funds, then under Sebi, had to be regulated by FMC.

And, it was not that the NSEL pair product was a great secret. Several news reports suggest that concerns were raised about the nature and delivery cycles of the one-day forwards as early as 2010. In fact, towards the end of Khatua’s tenure in 2011, NSEL made an application to trade one-month forward contracts. Khatua was widely quoted as saying the commission had received such an application and was examining it.

So, did the NSEL management know that the kind of paired trades it was offering were on shaky regulatory ground and, therefore, sought an FMC stamp?

If so, what kind of examination did FMC under Khatua do? After all, a regulator has to consider all possibilities and motives in the process of “examination.”

Greenspan admitted in a Congressional hearing that he had “made a mistake in presuming” that financial firms could regulate themselves. NSEL, like other scams of the past, also appears headed for a parliamentary panel probe. Khatua, whose son is employed with FT Group, might have some explaining to do.