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    Stung by NSEL, government may withdraw waiver to bourses

    Synopsis

    The consumer affairs ministry under Sharad Pawar had in 2007 exempted one-day forward contracts offered by these exchanges, beginning with NSEL.

    ET Bureau
    MUMBAI: Seven years after it granted a waiver to national spot exchanges from regulatory oversight, the government is set to withdraw the controversial exemption to prevent a potential repeat of the Rs 5,500-crore payment crisis on the National Spot Exchange Ltd, or NSEL.

    The finance ministry, which is now the parent ministry handling administrative and legislative issues relating to the commodities market after the NSEL scam broke out in July last year, has issued show-cause notices to two spot exchanges--NCDEX Spot Exchange (NSPOT) and National APMC -- seeking to withdraw the exemption, said a person with direct knowledge of the issue.

    The consumer affairs ministry under Sharad Pawar had in 2007 exempted one-day forward contracts offered by these exchanges, beginning with NSEL, from the purview of the Forward Contracts (Regulation) Act, or FCRA. The exemption was given on condition that the exchanges would not permit short sales -- selling a commodity without owning it -- and ensure that all outstanding positions at the end of the day resulted in delivery. The consumer affairs ministry had oversight over commodities futures at the time. It moved to the finance ministry after the NSEL payments scandal.

    Section 27 of the FCRA Act empowers the government to exempt certain contracts from the ambit of the legislation. In other words, electronic spot trading in commodities by exchanges was not regulated because of this exemption.

    "The central government may, by notification in the official gazette, exempt, subject to such conditions and in such circumstances and in such areas as may be specified in the notification, any contract or class of contracts from the operation of all or any of the provisions of this Act," according to the provision.

    The exemption, however, was violated by the now defunct NSEL, which allowed members to not just roll over their positions but also settle contracts after 25-36 days, in excess of the 11-day norm for spot contracts after the trading date.

    A government directive to NSEL in July last year not to launch any new contracts and to settle all existing contracts then triggered a payments crisis, which led to a blowup on the spot exchange.

    After the Forward Markets Commission or FMC, the commodities futures regulator, flagged violations in 2012, the ministry of consumer affairs directed NSEL to suspend trading in July 2013. NSEL is promoted by Financial Technologies or FTIL, the flagship company of Jignesh Shah.

    Subsequently, the exchange defaulted on several of its weekly payments after which FMC was empowered by the government to oversee settlements on NSEL.

    After the scam became public, the government was severely criticised for granting the exemption with demands for a probe into how this had been approved by the consumer affairs ministry. The CBI is now investigating this aspect, including the role of certain senior bureaucrats in the ministry of consumer affairs involved with the decision to grant NSEL an exemption in 2007, apart from officials of state-owned MMTC for authorising investments in contracts on NSEL.
     
    Finance minister P Chidambaram has said that NSEL violated conditions laid down for a waiver from rules from the start. "Yet it carried on business since it was not a regulated entity. So there is much more to the way NSEL started business than what meets the eye," he told reporters last year, soon after the government carried out changes to business rules to transfer administrative oversight of the commodity markets and the regulator from the ministry of consumer affairs to the finance ministry.

    Chidambaram had announced during his tenure as finance minister during UPA-1 a proposal to bring the commodities futures market under the regulatory oversight of capital market regulator Sebi or the Securities and Exchange Board of India. But this had to be abandoned in the face of resistance from the Pawar-led ministry. The Financial Sector Legislative Reforms Commission or FSLRC, which was mandated to rewrite all laws in the financial sector in India, has recommended that oversight of equities, commodities, pension and insurance markets be tasked with a single agency, the Unified Financial Regulatory Authority or UFRA, thus doing away with regulatory silos.

    Unlike NSEL, the other spot exchanges did not offer any such contracts and did not take advantage of the regulatory waiver. The government now wants to completely shut out the possibility of any exchanges misusing the provision and has decided to withdraw it, said the person cited earlier.

    After the NSEL payment crisis, the government modified rules to authorise FMC, which regulates futures trade in the commodities market, to collect information from the spot exchanges and to ascertain whether they were complying with the rules while granting a regulatory waiver. The FMC confirmed that NSEL had violated rules.

    NSPOT is an almost fully owned subsidiary of commodity exchange NCDEX while National APMC has been promoted by Neptune Overseas Ltd, the erstwhile promoter of plantations bourse NMCE, and Gujarat Niyantrit Bazaar Sangh, an association of APMCs (agricultural produce market committees) of Gujarat. NSPOT will support the government's move to ensure that the market operated within a regulatory framework.

    "I have not received any such show-cause notice," said Rajesh Sinha, executive vice-president of NSPOT. "But if the ministry feels the exemption should be withdrawn we are fine with that. We have long demanded the need for clarity in regulation. Had this market been regulated, it would not have come to such a pass," he said in an obvious reference to the NSEL fiasco.

    NSPOT operates in 15 states and is on course to report a turnover of Rs 10,000 crore in FY14. It operates purely as a spot market with no intra-day netting allowed -- purchase and sale transactions are completed on the same day.



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    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

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