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Business News/ Opinion / Online Views/  Lessons from the NSEL crisis
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Lessons from the NSEL crisis

There is need for a comprehensive inquiry by an independent agency into what exactly went wrong

Illustration by Jayachandran/Mint (Illustration by Jayachandran/Mint)Premium
Illustration by Jayachandran/Mint
(Illustration by Jayachandran/Mint)

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 India’s largest commodity derivatives bourse, MCX, and dominates the market for retail trading platforms in the country.

FTIL’s 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 NSEL’s accounts is his relative, Shah’s 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 entrepreneur.

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 group—and 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 Sebi’s chief, was sympathetic to the finance ministry’s cause.

The finance ministry made its own set of charges against Abraham but he was subsequently cleared by the Prime Minister’s Office. It is still not known what action was taken based on Abraham’s allegations. Abraham’s 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-SX’s application after revising its guidelines for stock exchanges, and later granted it the required approval.

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.

What should be done to prevent the recurrence of NSEL-type episodes? Tell us at views@livemint.com

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Published: 17 Sep 2013, 08:40 PM IST
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