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A commodity market is a market that trades in primary rather than
manufactured products. Soft commodities are agricultural products such as
wheat, coffee, cocoa and sugar. hard commodities are mined such as (gold ,
rubber and oil)Commodity markets can include physical trading and derivatives
trading using spot prices, forwards, futures, and options on futures. Farmers
have used a simple form of derivative trading in the commodity market for
centuries for price risk management.
A financial derivative is a financial instrument whose value is derived from a
commodity termed an underlying.Derivatives are either exchange-
traded or over-the-counter (OTC). An increasing number of derivatives are
traded via clearing houses some with Central Counterparty Clearing, which
provide clearing and settlement services on a futures exchange, as well as off-
exchange in the OTC market.
Derivatives such as futures contracts, Swaps (1970s-), Exchange-traded
Commodities (ETC) (2003) forward contracts have become the primary trading
instruments in commodity markets. Futures are traded on
regulated commodities exchanges. Over-the-counter (OTC) contracts are
"privately negotiated bilateral contracts entered into between the contracting
parties directly".
Exchange-traded funds (ETFs) began to feature commodities in 2003. Gold ETFs
are based on "electronic gold" that does not entail the ownership of physical
bullion, with its added costs of insurance and storage in repositories such as
the London bullion market. According to the World Gold Council, ETFs allow
investors to be exposed to the gold market without the risk of
price volatility associated with gold as a physical commodity.

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India commodity market consists of both the retail and the wholesale market
in the country. The commodity market in India facilitates multi commodity
exchange within and outside the country based on requirements. Commodity
trading is one facility that investors can explore for investing their money. The
India Commodity market has undergone lots of changes due to the changing
global economic scenario; thus throwing up many opportunities in the process.
Demand for commodities both in the domestic and global market is estimated
to grow by four times than the demand currently is by the next five years.
Commodity trading is an interesting option for those who wish to diversify
from the traditional options like shares, bonds and portfolios. The Government
has made almost all commodities entitled for futures trading. Three multi
commodity exchanges have been set up in the country to facilitate this for the
retail investors. The three national exchanges in India are:
Multi Commodity Exchange (MCX)
National Commodity and Derivatives Exchange (NCDEX)
National Multi-Commodity Exchange (NMCE)
Commodity trading in India is still at its early days and thus requires an
aggressive growth plan with innovative ideas. Liberal policies in commodity
trading will definitely boost the commodity trading. The commodities and
future market in the country is regulated by Forward Markets commission

The wholesale market in India, an important component of the India
commodity market, traditionally dealt with framers and manufacturers of
goods. However, in the present scenario, their roles have changed to a large
extent due to the enormous growth that the economy has witnessed. The
lengthy process of wholesalers buying from manufacturers; then selling it to
retailers who in turn sold it to consumers does not seem feasible today. An
improvement in the transport facility has made the interaction between the
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retailer and manufacturer easier; the need for a wholesale market is gradually

The retail market in India is currently witnessing a boom. The growth in the
India commodity market is largely attributed to this boom in the retail market.
Policy reforms and liberal government policies have ensured that this sector is
growing at a good pace. Some of the reasons attributed to the growth of retail
sector in India include the large population of the country who has an
increased purchasing power in their hand. Another factor is the heavy inflow of
foreign direct investment in this sector. More than 80% of the retail industry in
the country is concentrated in large cities.

Despite having a robust economy, India's share in the global commodity
market is not as big as estimated. Except gold the share in other sectors of the
commodity market is not very significant. India accounts for 3% of the global
oil demands and 2% of global copper demands. In agriculture India's
contribution to international trade volume is rather less compared to the huge
production base available. Various infrastructure development projects that
are being undertaken in India are being seen as a key growth driver in the
coming days.
The aim of commodity exchange is to provide a regulated forum for buyers and
sellers of future contracts to meet and trade.
1) The traders in commodity exchanges will help to raise liquidity of contracts
by taking risks.
2) They help to promote transparency in the discovery market prices for
individual commodities based on their demand and supply.
3) The traders in commodity exchanges carry out various hedging strategies
and the commodityexchanges safeguard the customers against price
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NSEL (National Spot Exchange Ltd) Scam

The NSEL scam is a systematic and premeditated fraud perpetrated in the
commodity market of the National Spot Exchange that is based Mumbai,
India. The NSEL is a company promoted by the Financial Technologies
India Ltd and the NAFED.
The NSEL scam is estimated to be a Rs. 5600 crore (around US$ 0.9 billion)
fraud that came out to light after the National Spot Exchange failed to pay
its investors in commodity pair contracts after 31 July 2013.
It was subsequently discovered that most of the underlying commodities
did not exist and the buying and the selling of commodities like steel,
paddy, sugar, ferrochrome etc. was being only conducted only on paper.

What is a SpotExchange?

Commodity spot trading is about buying and selling a commodity, paying
cash for and receiving your goods on the spot. Which signifies that the
buyer and seller agree on a price and deliver their side of the contract

NSEL was a spot exchange designed to help this activity, with the added
feature of being electronic (so buyers and sellers can be in different
locations) and anonymous (the buyer and seller dont know who the other
side is).

The important feature of any such exchange is that the exchange has to
stand guarantee to either party that it will ensure the contract is settled. If
the buyer cant bring in the money for any reason, the exchange should
then sell the goods to someone else and recover the money (and make up
the difference). And a similar exercise if the seller defaults.

Now, when the seller and buyer are far away from each other, how does the
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Exchangeguarantees delivery? The idea is that the seller must come to an
exchange-designated warehouse and give his goods, which are then tested
and verified for quality and weight. He then gets a warehouse receipt (WR)
that is used for electronic trading. When he sells on the exchange, the
warehouse receipt is transferred to the buyer; this receipt entitles the
buyer to take the goods out of the warehouse, or if he chooses, to retain the
goods there (to sell them later) by paying the warehouse rental charges.

There are rules governing commodity trading, which is regulated firmly by
the Forward Market Commission (FMC). Under the Forward Contracts
Regulation Act, any contract that is called spot must be settled within 11
days that is, both delivery of goods and transfer of money must happen
within 11 days (called T+11). The 11 days give the buyer and seller time
to complete the contract. Thus, this would then not become a forward

Spot contracts, by their nature, were deemed to be out of FMC regulation
by a small notification in 2007 by the Department of Consumer Affairs. This
exemption was given specifically for one-day duration contracts or,
technically those contracts that complete both delivery of goods and
transfer of money within two days, called T+2.

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Basic need to study this NSEL scam:-
To understand what and how this NSEL scam happened.
What were the markets Regulators doing in this period if this happing
from long time?
How & from where Investors would be getting their money back and at
what time frame.
Is faith will be restored in minds of investors. As commodity sector is at
growing stage.

As our research requires a thorough investigation on what exactly happened in
NSEL Scam and what are the effects of that so basic objectives are:-
The impact of NSEL SCAM on commodity market and how it derailed it.
The lessons should investors learn from this scam
Role of Regulators in commodity market.

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This study is aimed at studying the impact of scam on commodity market or
various stakeholders and it also identifies the major irregularities and
corporate governance lapses that led to the scam. It also throws light on
modality of the scam and major loopholes in our regulatory system .this study
is based on secondary data collected from various sources it also discusses the
major area of lapses in nsel . The required secondary data is collected from
news published in newspapers, economic times, business standard, times of
India, and other leading magazines, outlook, business today, business line and
various websites. This research is exploratory research to provide insights and
understanding of the study in better and enhanced manner.

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The crisis-hit National Spot Exchange (NSEL) had the names of all members
with positions not yet settled, including big brokers like Anand Rathi, Motilal
Oswal, and Geojit Comtrade and India Info line. Even state-run MMTC (Rs 220
crore) and PEC (Rs 123.4 crore) have exposures of Rs 220 crore and Rs 123.4
crore, respectively. NSEL said the total claims of 148 members are Rs 5,380
crore, which it will settle in 30 weeks.

Indian Bullion Market Association, set up by NSEL itself, has the biggest
exposure of Rs 1,159.6 crore, followed by Anand Rathi Commodities (Rs 629
crore), India Infoline Commodities (Rs 326.2 crore), Geojit Comtrade (Rs 313.3
crore), Systematix Commodities Services (Rs 277.7 crore), Motilal Oswal
Commodities Brokers (Rs 262.9 crore), AUM Commodities Brokers (Rs 214.7
crore) and Phillip Commodities and Derivatives (Rs 140.1 crore). Emkay
Commotrade has an exposure of Rs 140.1 crore and JM Financial Commtrade
Rs 83.6 crore.

4% 2%
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The greatest drop has been in bullion, for which the value of trades fell from Rs
384,511 crore to Rs 108,919 crore. Experts attribute this to tightened gold
import norms, which reduced the need for hedging. Metals other than bullion
slid from Rs 131,342 crore to Rs 45,880 crore. The impact on agricultural
commodities was comparatively mild, as they fell to Rs 77,828 crore from Rs
The decline on MCX is partly due to the 0.01 per cent commodity transaction
tax (CTT), imposed since July 2013 on all non-agricultural and some agricultural
commodities. Unlike NCDEX, which is primarily driven by agricultural
commodities, MCX draws a larger share of its revenue from metals. The
decline can also be attributed to the National Spot Exchange Ltd (NSEL) scam.

The commodity market started seven years ago. However, commixes
witnessed declining trend in the last three years. In this period, the turnover of
the commodity exchanges slipped from Rs 181.26 lakh crore in 2011-12 to Rs
170.46 lakh crore in 2012-13 to Rs 101.41 lakh crore in 2013-14, the data said.

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Commodity markets face challenging times, says Managing Director, NCDEX.
"Imposition of the CTT has had a major impact," he says. "Further, price
bearishness was seen in the agricultural sector. This could have led to poor
sentiment in commodity trading. In addition to the impact of the CTT, the
events that unfolded in the NSEL case shook investors' confidence in
commodity futures markets." However, corrective measures by the Forward
Markets Commission are expected to help revive the market in 2014.

2011 -12
2013- 14
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But wider impact on MCX:-
Unlike NCDEX, which is primarily driven by agricultural commodities, MCX
draws a larger share of its revenue from metals. The decline can also be
attributed to the National Spot Exchange Ltd (NSEL) scam, which hogged the
headlines by late July 2013.


An innocuous-looking notification from the Forward Markets Commission
(FMC) came in on July 12, 2013. And in the offices of the National Spot
exchange Limited (NSEL), a commodities exchange promoted by the Jignesh
Shah-led Financial Technologies (FinTech), things began to change.

The notification restricted NSEL from making fresh contracts available as they
were likely in contravention of the Forwards Contracts Regulation Act. NSEL
first changed its contract duration to comply, and then when it found
customers leaving in droves, threw up its arms and shut down the exchange.

More than Rs 5,500 crore was due, and over the next few days it became
evident that there was neither the money nor the underlying spot goods to
MARCH JULY 1-15 JULY 1-31 SEP 1-15 DEC 16- 31
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settle trades by over 15,000 investors. Since then, the story has unravelled,

Instead of just making T+2 contracts, the spot exchange designed multiple
contracts. Some of them were T+2 settled, making them spot in nature.
Others were the same product but settled after 25 to 35 days, called T+25, or
T+36 contracts. This was illegal such contracts are forward contracts and
NSEL was not authorized to execute these, but it did. And no one stopped it.
And the concept got worse. NSEL sold what seemed to be arbitrage. You
could buy the T+2 contracts and sell the T+25 contracts and the difference in
prices gave you nearly 15 per cent per year, annualized. Effectively, you would
be the owner of half a ton of sugar or castor seeds or such commodities, for a
period of about a month, which would get sold when you exited.

The exchange practically removed all constraints from investors during this
period the goods would lie in the same warehouse and be sold from there,
and the price difference included a 15 per cent net return after storage
charges, VAT, etc.

This arbitrage was almost guaranteed. NSEL as an exchange stood guarantee,
or so investors thought.

Brokers peddled this product to their customers for over two years. The
number of customers ballooned to over 15,000, each of whom put in at least
Rs 2 lakh to get their superior returns.
It was offering 25-34-day contracts for commodity trading while a
maximum of 11 days are allowed
Warehouse receipts of commodity stocks were being issued without
warehouses actually having stocks
Independent investigations have shown benami investors and owners of
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NSEL has to pay back Rs 5,600 crore of investor money, has already
defaulted twice
Jignesh Shah may face the brunt and be held responsible. But cant
discount his high contacts for now.


Who was on the other side? Thats the question that no one seems to be

Was the arbitrage genuine? It appears not. The contracts were always sold in
pairs. Brokers have reported that no one was allowed by the exchange to just
take one side of any contract you always had to have a buy on the near
contract and a sell on the far side.

A quick look at the Kadi contract for castor seeds, sold in pairs of T+3 and T+36,
shows identical volumes and interest for both contracts in January 2013, and
thats the case with every commodity that had a near and far contract. This is
hardly possible in a real market, so it points to the fact that these contracts
were always executed in pairs.


it turns out now that those on the other side were just 24 members of the
exchange, called Planters or Processors or Borrowers. These members owned
plants that processed commodities or, at least, they said they did. For
instance, NK Proteins owned a plant to process castor seeds in Kadi, Gujarat.
The contract the Kadi Castor Seeds contract was settled at an NSEL
warehouse located inside the Kadi plant of NK Proteins.
Processors like NK Proteins (and there were 23 other such members) were on
the other side of the trade. They would sell at T+2 and buy back at T+23,
offering huge returns.

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The fact that the contracts were executed in pairs indicates a financing
program. Something is placed as collateral to borrow money for a short period
of time. This used to be commonly known as badla financing in the pre-2000
stock exchanges, where shares were collateral. (Badla is banned now; the
financing has moved to the futures market.

Lets say I am a plant owner, and I cant get a loan from a bank. I can effectively
borrow from you at 15-18 percent much cheaper than I can borrow from
banks. And if Im smart, I know that the goods I sell you will remain at a
warehouse inside my premises, so why not cheat a little and tell you that yes,
Ive added more goods to your warehouse, and you, on the other end of the
phone agree.
In this situation I can invent stock that doesnt exist and borrow against it for
15 days; for the interest, I might pay some out, but immediately get it back in a
new contract when I add even more imaginary stock. This was the Ponzi nature
of the game.
Indeed, it turned out that some of these companies had poor balance sheets
incapable of handling such large loans loans of the size of Rs 900 crore. And
the exchange did nothing.
Most investors rolled over their contracts. That is, when the contract was
unwound after T+35, they would enter a fresh round of T+2 (buy) and T+35
(Sell). Meaning, the interest received was also ploughed back into further
purchases; a borrower, on the other hand, was pretending to pay interest,
but was simply creating warehouse receipts for the interest and trading them
on the exchange, while rolling over the contract forever.


all this had to stop sometime, and the circular from FMC stopped it.
First, on 16th July the contracts were cut to T+10. But that would involve too
many pair trades from one a month to three a month, each of which had
higher transaction costs.
Next, some investors smelt a rat and didnt roll over their contracts.
The lack of a rollover shuttered the exchange. When the borrowers were told
that they had to pay back all the money, they simply could not (or didnt want
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to). And it turns out they dont seem to have the goods to back it upeither.
On July 31, NSEL issued a circular saying all future contracts would be stopped.
And because there was a settlement problem, they would have to delay pay-
outs for a while.
Remember, some investors had bought goods on a T+2 contracts, paying
upfront. Now they expected that after their 25-35 days, the other contract
would kick in and they would be paid back money at the higher rate on that
At this point, the exchange should have stood guarantee. Thats the role of an
exchange. But because it didnt get paid from the borrowers, it didnt have the
capacity to pay.


the exchange started to lie. The CEO, Anjani Sinha said on August 1st that they
had a Settlement Guarantee Fund of over Rs 800 crore plus they had all the
stocks in the NSEL warehouses. In a few days they changed that position,
stating they had only Rs 60 crore in cash and the rest of the guarantee fund
was in stock. All entities were supposed to put a tiny amount up to 5 percent
as margin until trade completion. This, too, was unavailable for some reason.

And then, after telling everyone that they would get their money back, the
NSEL management said they had to auction stock to get the money. Soon, even
that avenue was gone as there wasnt any stock.

Jignesh Shah, the founder of FinTech, which promoted the exchange, said in a
press conference that they would have a high-powered committee, including
an ex-SEBI chief, a senior police officer and the like, to ensure settlements
happen. As it turns out, the committee was useless in actually enforcing the

NSEL next created a complex settlement program. After a few days, NSEL
management offered a settlement calendar stretching 30 weeks where
people would be paid back Rs 174 crore per week for 20 weeks, Rs 86 crore a
week after that, and a big balloon payment at the end.
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NSEL couldnt even make the first weeks payments properly it paid up just
half. In the second week, to fend off investor aggression, FinTech dipped into
its resources and paid Rs 177 crore to those with less than Rs 10 lakh
outstanding. There have been three payments till now of Rs 92 crore, Rs 190
crore (including small investor pay-outs) and then, this week on Tuesday, 3rd
September, Rs 15 crore. But in the settlement program, NSEL had promised to
pay Rs 174 crore on each of these three Tuesdays.

In the middle of all of this, it turned out that many of NSELs 24 Processor
members were related to each other. One of the biggest borrowers, NK
Proteins, is owned by the son-in-law of NSELs chairman Shankarlal Guru. Then
there was Indian Bullion Market Association, owned primarily by NSEL, which
participated as a member, allowing parties in the bullion space to buy through
The whole thing began to stink.
N Sundaresha Subramanian of Business Standard visited many of the
defaulting members and found strange results. There was a mall in the place
where 2 lakh tons of sugar was supposed to have been stored, at the address
of a NSEL borrower called Mangla Shree Properties. In Ludhiana, where ARK
Imports was supposed to have 12,000 tons of raw wool, there was apparently
nothing. One borrower had vacated its premises months back, while another
refused to admit they owed anything.

NSELs investors involved clients from nearly every major broker in the
country. Even the Sahara Group, which is under RBI and SEBI fire, was found to
have invested more than Rs 200 crore. Some NSEL board members were close
to political bigwigs like Union Agriculture Minister Sharad Pawar. CEO Anjani
Sinha had earlier in his career overseen defaults in two exchanges in Magadh
and Ahmedabad.

Belling this cat will not be an easy task.

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The FMC was supposed to control regulation of all forward contracts. Although
NSEL had received an exemption, it was only for the T+2 contracts and
definitely not the T+35 contracts. The new FMC Chief, Ramesh Abhishek
followed this up since 2012, but what about those before him?

The Department of Consumer Affairs was the de facto regulator when no one
else was. It had been made aware of the situation over a year ago and should
have taken action, and it didnt.

Even after the scam was unearthed, and the scale of the borrowing discovered,
regulators remain tight-lipped about action. SEBI has barred some of the 24
borrowers from trading on the stock exchange, and FMC has ring-fenced MCX
(a commodities futures exchange which shares the same promoter, FinTech,
with NSEL) from helping the beleaguered NSEL with its cash. However, any
other actions have yet to come through.

Where is the RBI? Banks have lent to operations that involve stocks in
warehouses. In fact, some photos of NSEL warehouses explicitly state that
goods are pledged to certain banks. Are these goods there? Has the RBI asked
banks to initiate a probe? Not yet.

If FinTech is the promoter of NSEL, and NSEL has seen a huge default, the
obvious next step is to declare that FinTech is not fit and proper to run any
other exchange, including MCX. This has not yet happened.

Given this is a huge fraud, it remains astounding that agencies like the CBI, the
Economic Offenses Wing or others have not been brought in to investigate.
The failure of regulation could be because there are too many agencies


Brokers might have known something was wrong. After all, you dont get an
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exchange everyday where you have to coordinate between a buy and a sell on
the phone.

Many, though, fell prey to the machinations themselves.

They promised investors a return of, say, 12 percent, and then took that
money to NSEL and decided to make the 3 percent extra that NSEL promised.

Now, when NSEL has defaulted, brokers want to put the blame on the
exchange but just like the exchange, they promised the money, which they
have to pay. SEBI must act and ensure these brokers pay.

Also, brokers are expected to be fiduciary agents of their customers should
they have exercised more caution before recommending such an investment?



The Enforcement Directorate and a Mumbai Police Special Investigations Team
(SIT) are trying to find the money. Its gone abroad through hawala, says the
SIT. Others claim it has gone to fund real estate, where there is no swift
liquidity. Yet others claim the money was used to prop up FinTech and MCX
shares in the stock market so when those stocks fall, the amount of money
that can be recovered reduces. It is also believed the money was siphoned for
political interests or for personal gains of the personalities involved.

Jignesh Shah, the ambitious promoter of FinTech, started out as an engineer
on the BOLT system for the Bombay Stock Exchange in 1989. After learning the
ropes, he set up FinTech in 1995 and established a presence in brokerage back-
office and terminal software across India. Then he set up MCX and a slew of
other exchanges in India and abroad.

Shah won a battle against SEBI in 2012 about a circumvention of regulation in
their new MCX-SX stock exchange. He had aggressively taken away market
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share from other exchanges. He had sued people who wrote against him and
kept media as a friend with a big advertising budget. NSELs exemption from
the Department of Consumer Affairs was attributed to Shahs influence. But it
is now apparent that everything is not clean in the FinTech Empire.

It would be a surprise if someone with Shahs business sense let all this
happen without knowing where the money has gone.


FinTech, at Rs 111 per share, is down over 70 per cent from its 31st July price
of Rs 540. It derived a large portion of its profits from NSEL the trades
resulted in outsized earnings through exchange fees. But the sudden lack of
profit is not its only problem. If it is declared unfit to run exchanges and it has
about nine of them that would destroy the enterprise. Apart from this, there
are potential fraud charges if more dirt is discovered.

MCX is a well-regulated commodities futures exchange. The volumes in it
havent come down quite as much as one would suppose. Its share price fell 60
percent after NSELs shutdown announcement on July 31 but has now
recovered to a mere 40 percent fall. The expectation is that regardless of what
happens to its promoter FinTech, MCX will be sold and there are willing


the NSEL crisis shows the investment community one thing: we do not have
adequate regulation or enforcement. That if there is a crisis, the agreement
will not be sacrosanct; it will be secondary to the interests of the parties who
have better political and business connections.

This default will trigger other issues, and in a country already branded as crony
capitalism, the lack of will to enforce laws and put people in jail for fraud will
hamper future investment. Decisive action is required, but the window for
action is fast shrinking. There is political fallout to this crisis, but the details on
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that are sketchy at best.

The problem really is: we have lost trust. The entire financial system is based
on trust for example, if everyone tried to withdraw his or her bank deposits
at once, wed have to shut everything down. Every attempt to undermine this
trust must be dealt with heavily.

The NSEL scam only happens to be the biggest of the multiple scams that have
hit the commodities markets, thanks to poor regulation

Prime minister, Manmohan Singh, likes to blame all the lapses of his
government on coalition dharma. Well, in addition to the long list of scams
and dubious decisions that have rocked the nation, the lax regulation and
supervision of commodity futures markets is another example of the wanton
disregard of public interest to appease a powerful political ally.

Over the past month, it has become increasingly clear that what happened in
the National Spot Exchange Limited (NSEL) is clearly an Rs5, 600-crore scam.
Jignesh Shah, promoter of the FT-MCX groups, admits as much, but blames the
now sacked managing director Anjani Sinha for defrauding him.

What is not in doubt is the thorough mismanagement of the whole business of
spot commodities trading. But NSEL chairman, whose son-in-law Nilesh Patels
company owes Rs950 crore to the bourse, strains our credulity when he claims

Remember, India had banned futures trading in commodities for over 40 years.
It was re-started in 2003 with the clearance of four newly minted commodity
futures bourses and, almost immediately, the impact of poor regulatory
framework, disempowered regulator, sloppy supervision and the lack of checks
& balances was apparent. Multiple scams and scandals began to hit the sector
with regularity. The NSEL scandal only happens to be bigger than all the
previous ones. Consider this
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Earlier this year, Kailash Gupta, the founder of the National Multi-
Commodity Exchange of India Ltd (NMCE) was arrested for alleged money-
laundering and cybercrime. In 2011, he had been stripped of his voting rights
and directorship following a fraud. This action itself was taken after several
other irregularities had been detected as far back as 2006. He is accused of
having illegally paid tens of crores of rupees to entities belonging to his family
and his children and was personally accused of having manipulated rubber
prices. Mr Gupta held a 30.18% stake in NMCE through his company Neptune
Overseas. And, here is the first flaw. While the government is at pains to
ensure that no single entity owns over 5% of any exchange, this precaution
was ignored while re-starting commodity futures trading, despite the fact that
any speculation or price-rigging in commodities has a deleterious impact on
the economy.

In 2007, the National Commodities and Derivatives Exchange of India
(NCDEX) stripped its CEO Narendra Gupta of key functions following allegations
of irregularities and a dubious settlement in urad and chana trading with a
sudden change in contract prices. Justice PN Bhagwati had headed a probe
committee to investigate the matter. NCDEX has been set up as a professional
bourse with the National Stock Exchange (NSE) and ICICI Bank among its key

Did the government not realise that there would be problems? In fact, prime
minister Atal Bihari Vajpayee had flagged the issue at the launch of NMCE
itself, when he said, I would like the regulatory system for commodities
exchanges to be strengthened to create confidence among all stakeholders.

Soon thereafter, the bourses began to emulate the capital market by putting in
place all the structures that lend confidence to investorslogistics facilities,
modern warehousing with dematerialised and tradable warehousing receipts
(WRs) and trade guarantees. But these seem to be just a smokescreen.

The Forward Markets Commission (FMC) itself was partially empowered, but
continued to be controlled by the clueless ministry of consumer affairs, instead
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of following the logical course of bringing it under the ambit of the finance
ministry and SEBI (Securities and Exchange Board of India) which have
developed some expertise in dealing with speculation, insider trading and
trading-related fraudulent practices.
A key factor in the NSEL scam is that the warehouses, which were supposed
to stock the products traded through warehousing receipts (WRs), seem to
be empty. Most of these warehouses are located within the premises of key
members/borrowers of the NSEL. How did this happen?

We learn that the Warehousing Development and Regulatory Authority
(WDRA), an independent regulator (that was born out of the warehousing
statute in 2007 but became operational only in 2010), granted accreditation to
eight private warehouses. Did someone grant accreditation to NSELs
warehouses? Did it not matter that all of them seemed to be under the
control of its largest member-borrowers? Has anyone been questioned?
What was the role of National Bulk Handling Corporation, also owned by the
Financial Technologies group which set up the initial warehouses?

Interestingly, WDRAs website ( shows that the regulator is
empowered to punish entities that issue fake or duplicate with imprisonment
of up to three years or a fine that can extend to four times the value of the
goods and a combination of the two.

The website, however, shows no linkage to NSDL (National Securities
Depository Limited) and CDSL (Central Depository of Shares Limited) which
handled NSELs WRs. But NSELs website says that warehouses empanelled
with the Exchange would sign an agreement with CDSL and they alone could
issue WRs to holders of commodities.

These could then be traded on a separate e-auction system. WDRA ought to
have been responsible for checking whether the WRs held in the depositories
were backed by physical stock. Why is it not even in the picture yet? There is
another issue. WDRA has the power to inspect and punish. But does it regulate
depositories? This is a question that I raised six years ago when over half the
new businesses that NSDL ventured into were outside the supervision of SEBI.
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It is only a couple of months ago that NSDL has split its operations, but clarity
over the regulation and supervision of its many business is still missing while
CDSL continues to float unchecked in NSDLs shadow.

Many of the issue pertaining to commodities trading would have been sorted
out if FMC were brought under SEBI, in line with an idea mooted in 2003-04. A
third post of a whole-time director at SEBI was also created specifically to
supervise the commodity markets.

After all, NSEL was set up by a simple exemption granted by the ministry of
consumer affairs, allowing it to function outside the supervision of FMC and
undertake a financing operation with ready-forward transactions under the
guise of facilitating delivery-based spot trades.

Strict regulation and control of commodity markets is a must in India because
the consequences of manipulation, especially of food grains, oil and other
essentials, affect the entire population. Instead, commodity futures bourses
were regulated with a light hand.

Even today, there is little clarity about specific inspection and regulation of
various intermediaries such as depositories, warehouses, inspectors or
accreditation agencies. Unlike the capital market, promoters of commodity
exchanges have been allowed a significantly higher equity stake (of 26%) and
also hold significant stakes in member entities without clear Chinese walls.

But lets not be under the illusion that poor supervision and confused
regulation is limited to the commodities market or the FMC. Forex derivatives,
which are under the joint watch of SEBI and the Reserve Bank of India (RBI),
operate in a similar regulatory vacuum, where some key brokers are allowed to
whip up artificial trading volumes, hold a significant stake in the bourse and
dominate management decisions. It is another issue that is waiting to blow up,
like NSEL.

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There is need for a comprehensive inquiry by an independent agency into
what exactly went wrong
More than a month after trading was halted at the discredited National Spot
Exchange Ltd (NSEL), its liquidity crisis shows no signs of abating despite
several assurances from its management. Even as the exchange keeps missing
its deadlines to settle the claims of investors, details about the working of the
exchange have emerged which seem to suggest that the exchange colluded
with a handful of traders to take advantage of a regulatory vacuum. There is
also a spirited blame game on, with the buck being passed all around.

Although several government agencies have launched investigations into the
financial dealings of the exchange and its promoter group, Financial
Technologies India Ltd (FTIL), there has been little action to settle the claims of
investors six weeks after the payment crisis first erupted.

What is even more galling is that the Securities and Exchange Board of India
(Sebi) has, meanwhile, extended the equity trading licence of the MCX-SX
exchange although there is mounting evidence that the FTIL group (which
also runs MCX-SX) threw several norms of financial propriety to the winds in
running NSEL.

The approach of the commodity markets regulator, Forward Markets
Commission (FMC), which took its own sweet time to wake up to the crisis, has
hardly been any different. Rather than appoint independent experts to resolve
the crisis, it is still relying on an FTIL-appointed officer on special duty to carry
out the settlement process. It is not surprising that progress on settlements
has been tardy.

The implications of the NSEL crisis extend beyond the sorry plight of investors.
It also raises troubling questions about the group that runs Indias largest
commodity derivatives bourse, MCX, and dominates the market for retail
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trading platforms in the country.

FTILs promoters, led by Jignesh Shah, are seeking to distance themselves from
the crisis even as several directors in companies run by the group desert their
posts. Given that a leading NSEL trading member was a group company,
another top trader was related to the exchange chairman, and the man who
audited NSELs accounts is his relative, Shahs claim that he was unaware of
the shenanigans of the NSEL management is difficult to accept at face value, as
many investors continue to point out. But even if Shah was actually in the dark,
the recent events puncture his carefully crafted image of a skilful

The FTIL group has a lot to answer for. So do key government agencies during
its meteoric rise over the past decade.

The list of omissions and commissions is a long one. It starts with the
exemption the consumer affairs ministry granted to the bourse from the
Forward Contracts (Regulation) Act (FCRA).

The exemption was granted with the assumption that FMC would step in if
things went out of hand. But even when volumes picked up at the bourse, FMC
under its former chief B.C. Khatuadid not deem it fit to check the nature of the
trades at the bourse.

During the term of its former chief, C.B. Bhave, Sebi had taken a tough stance
against the FTIL groupand ruled that it was not fit and proper to run an
equity exchange because they had not adhered to fair and reasonable
standards of honesty that should be expected of a recognized stock exchange.

K.M. Abraham, who issued that order, wrote a letter to Prime Minister
Manmohan Singhin 2011 alleging there was pressure from then finance
minister Pranab Mukherjeeto look at a compromise solution to the MCX-SX
application. Abraham had also alleged that U.K. Sinha, who succeeded Bhave
as Sebis chief, was sympathetic to the finance ministrys cause.

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The finance ministry made its own set of charges against Abraham but he was
subsequently cleared by the Prime Ministers Office. It is still not known what
action was taken based on Abrahams allegations. Abrahams order was
overruled by the Bombay high court after MCX-SX challenged the order. Even
though Sebi initially challenged the verdict in the Supreme Court, in its affidavit
to the apex court, it agreed to take a relook into MCX-SXs application after
revising its guidelines for stock exchanges, and later granted it the required

The course of events involving senior public officials and the FTIL group
suggests the need for a comprehensive inquiry by an independent agency into
what exactly went wrong.
NSEL crises has infact opened a Pandoras Box it presents a bad example of bad
strategy and poor corporate governance. In an over regulated country, this is
an example of absence of proper regulation there are the reports that the
government knew about the lapses but did not initiate any action. Infact, the
entire crisis has raised a number of issues related to the functioning of the spot
This crisis is great learning for 1- Regulators
2- Investors
3- As well as exchanges
There is immediate need to regulate exchanges on a comprehensive basis. In
addition the government need to ensure that speculative activities are not
allowed through exchange platforms especially in case of commodities another
important lesson learnt is that regulatory transformation should be smooth
even if some glaring mistakes are found to avoid panic in the market.

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*1+ Deepak Shenoy (2013) NSEL: The 5,500-crore Scam No One Wants to Deal
[3] N Sundaresha Subramanian (2013) NSEL crisis: 'Time for Sebi to take
leadership' Experts say investor sentiment can't be hurt further
*5+ Rahul Oberoi (2013) Lessons From the Crash
*7+ Ramesh Pathania (2013) NSEL: The inside story the success story of NSEL
seems to be turning into something else now. Heres whatis happening

*9+ Rajalakshmi sivam (2013) Explaining the NSEL crisis
strategy/ explaining-the-nsel-crisis/ article4985884.ece
*10+ Suchetha Dalal (Dec 2013) NSEL Poor regulation was not by chance

*11+ National Spot Exchange scam derailed commodity market in 2013
*12+ NSEL Crises: Jignesh Shah proposes haircut to reluctant investors
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[14] NSEL crisis exposes regulatory gaps in systemic institutions'
NSEL crisis: RBI says no single promoter should control any exchange
[15] NSEL crisis: Bourse giving wrong information, says FMC
*17+ NSEL scam derailed commodity market in 2013

[19] The NSEL Scam and History:
*20+ The Deeper Questions on the NSEL crisis
*22+ More NSEL: Just 85 Lakh in Settlement Guarantee Fund

*24+ NSEL crisis: Over 30 brokers under regulatory scanner
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