The Commission claims to have taken a series of initiatives to activate the machinery of NSEL to effect expeditious recovery
The National Spot Exchange Ltd (NSEL) allowed defaulting companies to trade without margin money and even gave corporate guarantees to banks for financing them, the Forward Markets Commission (FMC) told dna.
The FMC has contended that NSEL was found to be flouting the conditions of exemptions granted to it by the central government, and on the basis of FMC's fact finding report the government issued a show cause letter to the exchange in April 2012. Despite knowing its wrong-doings, instead of reducing the trading in paired contracts in a gradual manner, NSEL went on to promote them aggressively, so much so that the paired contracts that constituted 30% of the total turnover in 2011-12 went up to 97% at the end of March 2013 and became 99% of its turnover between April and July 2013.
The FMC told dna, in a letter, "The forensic report of consultancy firm Grant Thornton has revealed that defaulters like Lotus Refineries and NK Proteins Ltd had started defaulting as early as April 2012 onwards and NSEL had allowed repeated defaulters to trade without margin money, allowing them roll-over facilities and even giving corporate guarantees to banks for financing the defaulters. The entire scheme of paired contracts being executed on the NSEL platform depended on fresh infusion of funds by market participants. As soon as the fresh infusion of funds stopped, the trading of such contracts collapsed."
"NSEL was pursuing its illegal forward contracts completely ignoring the risks that it posed for the market in graduated and sequenced programme to reduce the impact was possible."
According to the Commission, the show-cause notice was served on NSEL by the government after the total exposure taken by the "borrowing members" was Rs 2,400.75 crore, which increased with more and more exposure generously given to them by NSEL and reached a level of Rs 6,762.65 crore on June 30, 2013. "The FMC contended that the settlement default could have been minimised if NSEL had adopted a graduated programme to reduce such exposure and to free the trade participants from the huge settlement risk that hung on them since 2012."
However, NSEL geared up its trade in paired contracts on a fast-track, completely ignoring the defaults already committed by its members and flouting the conditions of the government. Even after getting more than one year to set its house in order, NSEL defiantly persisted with its illegal contracts without any visible risk management which ultimately triggered a settlement default of about Rs 5,500 crore, said FMC.
NSEL, according to the FMC's communique, conducted its trading in terms of its own bye-laws and business rules and hence, the defaulters have to be dealt with in terms of those bye-laws and business rules in compliance of which they had traded on the exchange platform.
"Therefore, it is the responsibility of NSEL to take all possible measures against the defaulters in terms of its bye-laws and business rules. As a supervisory authority, the Commission has taken a series of initiatives to activate the machinery of NSEL to effect expeditious recovery," said the Commission.
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