Spot scam

On December 17, the Forward Markets Commission (FMC) made a crucial decision in the beleaguered National Spot Exchange Ltd (NSEL) saga. The commission, now functioning under the Finance Ministry, found Jignesh Shah, his company and his key personnel, Joseph Massey and Shreekant Javalgekar, not “‘fit and proper”’ to manage any commodity exchange in the country.

This, perhaps, could be the beginning of the end of Shah’s dream run in the realm of commodities market ever since he floated Multi Commodity Exchange of India Ltd over a decade ago. More problems could be in store for him since the Economic Offences Wing of the Mumbai Police has not ruled out his arrest.

The origins

Shah alone cannot be faulted for the problem that has shaken the very foundation of the commodities market. There were various factors; the first and foremost is the Government Order (G.O.) passed by the Consumer Affairs Ministry on June 5, 2007, which, in trying to bypass the powers of State governments, allowed spot trading in some 50 commodities—including in bizarre ones such as raw wool—–in the garb of “one-day forward” trading. Curiously, the order said trading should adhere to the rules of areas where the spot trade takes place. The exchange was exempt from the Forward Contract (Regulation) Act, 1952, which essentially took away the FMC’s ’power to supervise its functioning.

The boom

NSEL’s annual results show that the exchange really took off some time in 2011-12, the year when its profits began to zoom. The FMC‘’ says that the NSEL board of directors, at a meeting on March 30, 2012, praised former managing director and CEO Anjani Sinha for the exchange’s ’performance during 2011-12. The FMC order says that NSEL and its directors were fully aware of what made things turn around during that fiscal.

The government seemed to have had an inkling of the developments in NSEL and the first step to tackle it was taken on February 6, 2012. That day, NSEL was brought under the FMC’s control after the latter was given powers to control spot exchanges. A show-cause notice was issued by the FMC on April 27, 2012, on the violations made by NSEL. But the latter chose to ignore it.

After that nothing seems to have happened even though the FMC told the Consumer Affairs Ministry on August 2, 2012, that there were violations in NSEL trading activities. There was a hiatus again though the FMC responded again on April 29 this year to the Ministry on penalties for violations, saying that only the courts could levy fines.

The suspension

Matters came to a head on July 10 after the Consumer Affairs Ministry told NSEL that it could not offer new contracts any more and all contracts had to be settled on the due date. NSEL tried in vain to get over this by attempting to introduce T+10 contracts. On July 22, it gave an undertaking to the Ministry to heed to its suggestions.

Things got murkier on July 31, when NSEL was asked to suspend its operations, leaving hundreds of investors in the lurch with dues running to Rs.5,600 crore. While the FMC and the police are looking into the issue, it would be only in the fitness of things if a high-level probe is ordered into the entire gamut of issues.

In particular, it begs the question: why is the government taking such a long time to act after having issued a notice to NSEL in April 2012? The suspicion is that there could be more to it than meets the eye.