NSEL: The inside story

The success story of NSEL seems to be turning into something else now. Heres whats
happening
Livemint First Published: Fri, Aug 02 2013. Updated: Sun, Aug 04 2013. 06 24 PM IST
Falling stocks of the exchanges parent and affiliate, brokerages keen to distance themselves from
the exchange, a government investigation, and a possible payment crisisover the past 48 hours,
the success story of National Spot Exchange Ltd (NSEL), promoted by Jignesh Shah, seems to be
turning into something else. Heres whats happening:
Whats at the core of the problem?
A product that wasnt approved by the government. A spot exchange is not supposed to offer
forward contracts, but NSEL, it is now widely believed, offered 20-25 day (and some say 40-day)
forward contracts. Worse, there have been reports that some of these contracts are so-called
naked contractswhich means there is no underlying commodity.
Whats the fear?
That there is no underlying commodity is the fear. NSEL says it will sell the commodity and meet its
payment obligations, but what if there are no commodities.
Surely, there are warehouse receipts?
Yes, but these have been issued by a group company and theres no clarity on the presence of
commodities.
How did events unfold?
Until a year ago, the Multi Commodity Exchange of India Ltd (MCX) group was the darling of the
finance ministry. Then the regime in North Block changed. An investigation by the commodities
regulator Forward Markets Commission (FMC), which comes under the consumer affairs ministry,
followed. And in early July, NSEL was asked to pull the plug or face the consequences.
What happens now?
The finance and consumer affairs ministries, FMC and the Securities and Exchange Board of India
(Sebi) are all looking at related issues. It isnt immediately clear whether they will also investigate
group companies such as Financial Technologies (India) Ltd and MCX.
Could rivalry be behind recent events?
Unlikely. To be sure, with MCX launching a stock exchange, MCX-SX, there has been serious
lobbying by BSE, the National Stock Exchange, and MCX itself, each trying to undermine the other
in some way, but this commodities settlement crisis seems real.