The exchange offered two contracts in raw wool. While one, RAWWOOLH2, was settled on a T+2 basis (deliveries and payouts had to be completed two days after the transaction), the other, RAWWOOLH25, was settled on a T+25 basis (deliveries and payouts had to be completed 25 days after the transaction). The contracts could be bought with an initial margin of two per cent.
Officials familiar with the functioning of the exchange said these twin contracts allowed traders to devise pair trade strategies, which allowed them to bet on the commodity without actually holding too much stock. The Bhav copy of the National Spot Exchange on July 26 (the day on which the exchange's parent issued statements assuaging the market) throws up an interesting pattern. RAWWOOLH2 closed at Rs 713; volumes and open interest stood at 4,04,000 kg, or 404 tonnes. RAWWOOLH25 also had identical volumes and open interest of 404 tonnes. The closing price of this contract was Rs 718.
The price differential between the two contracts amounts to a clear 18-per-cent-a-year return for traders. "The settlement cycle allowed traders to buy the near contract and sell the far one and pocket the difference," said an official. By rolling over these contracts, consistent returns could be made for sustained periods.
Portfolio management services of large brokerages such as Edelweiss, Anandrathi and Motilal Oswal were based on such underlying; these were offering up to 15 per cent a year, after taking their respective haircuts.
What happens to all the wool? The wool is stored in a warehouse in Ludhiana. For storing raw wool, the exchange had mandated four godowns in a village called Seerah, near Ludhiana. The godowns were said to be in the premises of ARK Imports. Ministry of Corporate Affairs records show ARK was incorporated in 2011. Three individuals-Anubhav Aggarwal, Rajni Aggarwal and Kailash Aggarwal (the first letters of the names are 'ARK') own the company, with Anubhav holding 98 per cent.
According to the latest stock position provided by National Spot Exchange on July 26, the ARK godowns were holding 11,190.5 tonnes of raw wool. According to data by Wool Industry Export Promotion Council, India's annual wool production stands at "43-46 million kg", or 43,000-46,000 tonnes. This means the warehouse in the distant Ludhiana village held about a quarter of India's annual wool production. Not impossible, but unlikely.
Such anomalies in stock positions across different commodities led to a notice by the Department of Consumer Affairs, government officials said. "The Forward Markets Commission had received complaints, after which the July 12 notice was issued, wherein NSEL (National Spot Exchange Limited) was asked to submit the stock positions and locations of various commodities. They were not able to provide satisfactory details," said a ministry official.
While the positions due stand at about Rs 6,000 crore, stock positions are estimated at Rs 4,500 crore. The official added, "NSEL gave an undertaking, saying they would not issue contracts beyond 10 days, but there were violations. Therefore, in an emergency meeting held in the finance ministry late in the evening, it was decided action would be taken." After this, the exchange was instructed to close the contracts and settle those immediately. Ministry officials are said to be checking with the exchange on why the settlement was deferred by 15 days.