Little and late

Regulation must follow action on MCX-SX

The appointment of public interest directors on the board of MCX Stock Exchange (MCX-SX) by the Securities and Exchange Board of India (Sebi) on Wednesday and the police action against officials of the crisis-ridden National Spot Exchange Ltd (NSEL) on the same day should have happened much earlier. The delay of more than two months, after the unearthing on July 31 of the NSEL crisis that jeopardised payments of as much as Rs 5,600 crore to investors, was unwarranted. Even the first information report was reportedly filed over a week ago, following the confirmation of fraudulent deals at NSEL by the Economic Offences Wing (EOW) of the Mumbai police. Now that the control of MCX-SX has been entrusted for all practical purposes to a special panel of public interest directors, and some key officials of both MCX-SX and NSEL have resigned, it can be hoped that these exchanges would be run professionally and in a transparent manner. The next logical, as well as welcome, step may be to totally segregate the ownership and management of these exchanges promoted by Financial Technologies (India) Ltd. A suggestion to this effect has already come from the Arvind Mayaram committee. What is important, after all, is to reduce the scope of malpractice of the kind that has led to the virtual collapse of NSEL, the country's largest spot exchange for commodity trading.

The genesis of the NSEL crisis can be traced to the unlawful practice of "paired contracts", under which traders - mostly exchange members - bought spot contracts as well as sold contracts for a future date for the same commodities, in connivance with brokers. However, when the government ordered suspension of trading on NSEL, the investors were left in the lurch - holding contracts that the members could not buy for want of ready cash. NSEL, too, failed to adhere to the payout plan announced by it, due to inadequate and, in many cases, even substandard stock in its warehouses.

Such corrupt practices, which the NSEL management was apparently aware of, were indefensible - though these were sought to be blamed on the absence of any regulator to specifically oversee the functioning of the spot commodity exchanges. Since a sizable part of the deals, such as 10- to 20-day contracts, clearly fell in the domain of futures trading, the commodity sector regulator, the Forward Markets Commission (FMC), should have taken notice. Besides, the Department of Consumer Affairs, which then had the administrative control over both spot and futures trading in commodities, could also not run away from the responsibility of timely action. Now that Sebi, the FMC and the finance ministry are collectively dealing with this crisis - and even the EOW has been roped into it - some feasible solution may, hopefully, be worked out. But a permanent solution lies in putting in place an adequately empowered regulator for exchange-based forward as well as spot trading in commodities on the lines of Sebi. The FMC, in its present form, is too weak to effectively handle this job, especially considering the huge volumes that such commerce attracts. For this, the Forward Contracts (Regulation) Amendment Bill, which has been pending before Parliament since 2010, needs to be revisited and revised to include spot trading.