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A forensic audit ordered by the markets regulator into the role of National Commodity and Derivatives Exchange (NCDEX) management in the castor seed payments crisis did not find any evidence of wrongdoing, according to two people familiar with the developments.

In January, NCDEX suspended castor seed contracts expiring in February and beyond, suspecting manipulation and concentration of trades. The suspension came after 10 clients defaulted on their pay-in obligations to four brokers after castor seed prices crashed in February. It was then noticed that these 10 clients had accumulated large outstanding buy positions equalling 10% of the country’s annual production.

The Securities and Exchange Board of India (Sebi) demanded an explanation and in a 2 March interim order barred 16 entities, including four trading members and their defaulting clients, from accessing markets for suspected fraudulent and unfair trade practices. Sebi also ordered a forensic audit into the role of the NCDEX management.

Chartered accountants Mukund M. Chitale and Co. was hired to conduct the forensic audit.

“The forensic audit was completed last month and the final report has been submitted to the board of directors at NCDEX and Sebi. The report has laid the onus of the crisis on the brokers and trading members," said one of two people cited above.

The second person confirmed that the forensic audit did not find any involvement of the NCDEX management in the castor crisis.

“Sebi had directed the board to examine the role of all the participants including trading members, brokers, management and to fix responsibility. However, management hasn’t been found to be at fault," he said.

“The forensic audit report is a matter between Sebi, the auditors and the NCDEX Board. The exchange management will not comment on regulatory matters," said an NCDEX spokesperson in an emailed response.

In an interview to Mint on 4 July, a senior official of the exchange said that the exchange plans to approach the capital markets regulator for permission to relaunch its castor seed contracts suspended five months ago.

“With learnings from the castor incident, the exchange took a variety of measures and enhanced the risk management and surveillance capabilities. We have tightened our internal risk management tools and also effectively addressed the grievances of genuine investors," said Samir Shah, managing director and chief executive, NCDEX.

“We are hoping that in the next few months, we can request Sebi for a re-launch of castor contracts," Shah added.

“This comes as a welcome step as it marks the conclusion of the uncertainty that was introduced when the castor seed contract was banned," said Girish Dev, managing director and chief executive of Geofin Comtrade Ltd (formerly Geojit Comtrade Ltd). Dev added this would allow the exchange to relaunch the contracts.

A second market participant, who declined to be identified, said that a clean chit for the management will help, but does not absolve the exchange of all responsibility.

“The commodity exchanges are still ill-equipped to manage such crises as they do not have an adequate settlement guarantee fund (SGF). To prevent such a scenario from occurring again the exchanges should equip their SGF at the earliest," said this person.

As on 30 June, NCDEX had an SGF of 126.05 crore.

NCDEX is one of the two leading national commodity exchanges in India. In terms of average monthly turnover, it lags behind Multi Commodity Exchange Ltd (MCX). NCDEX has around 10.61% of the average monthly turnover while the rest is accounted for by trades on the MCX platform. The total turnover in the commodities segment for MCX was Rs.5.09 trillion in March, while for NCDEX it stood at Rs.60,417 crore, according to the latest data available from Sebi.

Agricultural commodities account for 98.6% of NCDEX’s turnover and bullion brings in 1.4%.

National Stock Exchange of India Ltd holds 15% in NCDEX. Life Insurance Corp of India (LIC) and National Bank for Agriculture and Rural Development (Nabard) hold about 11% each.

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