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Business News/ Market / Stock-market-news/  Another commodity exchange, another fraud
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Another commodity exchange, another fraud

Signs of fraudulent trading practices have emerged in another corner of the commodity marketsat Universal Commodity Exchange

Navi Mumbai-based UCX, which was launched last year in April, suspended operations on 16 July, saying that it would “draw up a fresh strategy” for new segments and products. Photo: MintPremium
Navi Mumbai-based UCX, which was launched last year in April, suspended operations on 16 July, saying that it would “draw up a fresh strategy” for new segments and products. Photo: Mint

Mumbai: Signs of fraudulent trading practices have emerged in another corner of the commodity markets. Universal Commodity Exchange (UCX), which suspended trading operations last week citing “prevailing market conditions", was, at the time, under the scanner of the Forward Markets Commission (FMC) for alleged fictitious trades conducted for the undue benefit of a certain set of investors.

The commodities market regulator issued notices to the bourse—the first was in March—seeking an explanation for a sudden increase in trade volume, trades executed by a set of investors familiar with each other, and buy/sell orders in certain contracts being punched at exactly the same time. Mint has a copy of the notices sent by FMC to the exchange.

Similar issues were found in the case of Multi Commodity Exchange of India Ltd (MCX). A special audit of MCX, done by PriceWaterhouseCoopers, highlighted quite a few instances of “specific abnormal patterns" such as “wash trades" or non-genuine transactions. National Spot Exchange Ltd (NSEL), which is currently engulfed in a 5,574.35 crore payment crisis, also saw circular trades to show “substantial turnover and volumes" as per the audit report prepared by Chokshi and Chokshi. NSEL suspended settlement of all contracts last year in August.

Navi Mumbai-based UCX, which was launched last year in April, suspended operations on 16 July, saying that it would “draw up a fresh strategy" for new segments and products.

“Due to prevailing market conditions, it has been decided to suspend the trading activities of the exchange temporarily subject to the approval of the Forward Markets Commission till such time a renewed plan is put in place," said a circular issued by UCX on 16 July. The exchange made no mention of the concerns raised by FMC.

FMC first initiated an enquiry into operations of UCX in February and conducted an audit on the exchange after it noticed that fictitious volumes were being used to push up profits and valuation of the exchange.

“… It is observed that most of the trades are fictitious. You are therefore requested to explain whether the exchange has taken any action against the members/traders for indulging in such type of fictitious/non-genuine trades. The Commission (FMC) has viewed indulgence of the exchange for allowing such types of fictitious trades seriously," said an FMC notice dated 21 March. Thereafter, on 3 April, FMC issued another notice to UCX, asking for details on action taken against members and also for a report on “abnormal trading pattern".

Mint could not ascertain whether UCX replied to FMC’s notices. UCX chairman and promoter Ketan Sheth did not respond to calls and a text message sent to his cellphone. An email query sent to the exchange also remained unanswered.

FMC declined comment on the matter.

Such trades led to a near doubling in the exchange’s turnover from 4,695 crore in December 2013 to 8,660 crore in February. Since then, turnover on the exchange has declined and settled close to 1000 crore. The exchange finally shut shop in July.

“The exchange was not left with any money to carry out the business," said a person aware of the developments asking not to be identified due to the sensitivity of the matter.

As of July, UCX was the smallest of the national commodity exchanges. According to the fortnightly dissemination data by FMC, UCX reported a turnover of 1,111.80 crore between 1 and 15 July. MCX leads the turnover table with 2.09 trillion followed by National Commodity and Derivatives Exchange Ltd (NCDEX) at 56,079.65 crore. Ace Derivatives and Commodity Exchange and National Multi Commodity Exchange (NMCE) clocked a turnover of 1,851 crore and 1,374.41 crore, respectively, during the fortnight ended 15 July.

It is unclear whether any genuine investors have been hurt by the fraudulent practices found at UCX.

“Most of the investors trade on either MCX or NCDEX because they are more liquid and between them they offer the entire range of agricultural and non-agricultural commodities," said an analyst who declined to be identified.

The suspension of trading on UCX comes close on the heels of the Indian Commodity Exchange (ICEX), which stopped operations in April. ICEX also attributed the closure to lacklustre business performance.

Experts say that commodity exchanges can survive only if they are able to provide some value addition to the existing list of commodities and contracts as both MCX and NCDEX provide ample liquidity.

“Value addition is the key to the success of any commodity exchange," says Naveen Mathur, associate director, commodities and currencies, Angel Broking Ltd. “If there is no product differentiator, then there will be no interest as the market already has liquid exchanges. The potential is large but there has to be a seamless integration in terms of logistics, bandwidth and IT infrastructure from a members’ perspective," he says.

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Published: 23 Jul 2014, 11:29 PM IST
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