National Spot Exchange Crisis

 

What is a spot exchange?

It is an electronic version of the age-old mandi, where buyers and sellers meet to exchange goods and money

2) How many spot exchanges are there in India?

NSEL; NCDEX Spot floated by the NSE group; and R-Next, floated by Reliance Capital, are the three main spot exchanges

3) What led to the NSEL crisis?

NSEL offered a pair of contracts for which settlement was due in two days and a second for which settlement was due in 25-50 days. This allowed speculators to make financial returns without actually taking physical possession of commodities

4) What happens to the underlying commodity?

The commodity is required to be delivered physically. But the exchange facilitated use of electronic warehouse receipts, enabling investors to avail of the arbitrage, without taking physical possession of goods

5) Did NSEL try to stop this round tripping?

Not really. In fact, it made it easier in some contracts.

For example, the contract specifications said, “Storage charges are waived off for those members and their constituents who sell jeera on JEERUNJH25 out of the delivery receivable against the purchase position of JEERAUNJH2 contracts”

6) What did the government do?

On July 12, it asked NSEL to stop this and to wind up

7) What was NSEL’s response?

It gave an undertaking saying it would do so, but asked for 15 days’ time

 Why the sudden suspension?

The directive was to close the contracts and settle these on July 31. But NSEL cited “grave emergency” and market “disequilibrium”, deferring the settlement by another 15 days. Later, it said it wanted another 5 months for this

9) Why is NSEL not settling?

There is fear the underlying stock is insufficient to cover the liabilities. While the exchange claimed it had stock worth Rs 6,200 crore, an independent analysis shows there may be shortfalls. Business Standard visits to godowns didn’t show satisfactory results

10) Who are affected?

All those who have exposure to the exchange—brokers, high net worth investors and companies, too. Since many of these are also exposed to other market segments such as stocks and the banking system, there could be ripple effects.

Panic action on spot crisis draws flak

Recently the National Spot Exchange Ltd. (NSEL) has come under flak for the way it has sought to handle the crisis-situation. Market pundits are of the view that in emergency situations such as this, the practice is to give buyers and sellers sufficient time to sell-out or buy-in their outstanding positions. When outstanding contracts are ‘closed out’, the practice is to give contracting parties 15 to 20- day time to liquidate their outstanding positions, they point out.“If outstanding contracts are still pending on the due date, they are usually assigned to the respective buyers and sellers. Even after assigning, if any client or constituent does not take delivery or give in pay-in amount, all the outstanding must be closed out on the due date,” they argue.

The objective is two-fold. For one, it gives buyers and sellers an opportunity to settle the contracts. For another, it also ensures that there is no panic in the marketplace. The Ministry of Consumer Affairs or Forward Markets Commission (FMC) (both are aware of forward deals in the spot exchange) can issue such a direction so that the money due can be recovered and there will be a smooth settlement process,” says a top commodity analyst. “This is the accepted practice in settlement of outstanding contracts in an emergency situation,” he adds.

It is quite possible for any of the constituent to approach the court of law, they argue. “In that case, the whole process will get vitiated, and there will be further delay,” says a corporate lawyer, who did not want to be quoted. “This (not giving a chance liquidate outstanding positions) will also lead to prices either going up or crashing. This may not be acceptable to the constituents,” he argues.

 

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