Gujarat HC seeks explanation from RBI on granting a settlement and clearing licence to National Spot Exchange; RBI says it was the job of Forward Markets Commission
The question of who regulated National Spot Exchange Ltd (NSEL) is turning into a game of musical chairs. A case in the Gujarat high court, which seeks an explanation from the Reserve Bank of India (RBI) on granting a settlement and clearing licence to the spot exchange, is asking this question and there is no clear answer.
This question gains significance in light of the Rs5,574-crore fraud at NSEL, which some say happened due to gaps in regulatory oversight.
“Commodity spot exchange was a case where companies sneaked in through regulatory vacuum. Thus, implementing the provisions of law hasn’t been easy," said Tejesh Chitlangi, partner at law firm IC Legal.
In its reply to the high court, RBI said that the erstwhile Forward Markets Commission (FMC) was the designated agency for spot exchanges. NSEL’s reply, filed last week, referred to FMC as a “coordinating" regulatory agency as well as “designated" agency.
“FMC, which was the coordinating regulatory agency since 2005, when the Prime Minister’s Advisory Council recommended setting up of common national market, wrote a letter to the department of consumer affairs for additional powers to regulate the spot exchanges in 2011," said NSEL.
Both replies were answers to a petition filed by a group of investors. Their plea alleged that the spot exchange was operating without authorization under the Payment and Settlement Systems (PSS) Act, which they claim the central bank knew as early as 2011.
Under the PSS Act, RBI authorization is required to operate a payments system. However, the central bank exempts regulated exchanges from this rule to avoid dual jurisdiction.
“FMC was the designate agency in respect of trades at NSEL and notices were sent by department of consumer affairs and ministry of consumer affairs in respect of trades at NSEL," said RBI’s reply. It added that the finance ministry had written to the consumer affairs ministry in 2011 to make FMC the designated agency for spot exchanges so that it could take “substantial" action if needed.
In their petition, the NSEL investors make a reference to the minutes of a Financial Stability and Development Council meeting in 2011 where it was highlighted that NSEL was providing settlements without RBI authorization.
RBI “acknowledged the growing volumes and increasing retail participation on the exchange", despite a regulatory vacuum, said the petition.
However, experts in financial regulation point out that there is no specific legal standing to the term “designated" agency.
“To my knowledge, no act in India specifies the term designated agency," said an academician, on condition of anonymity as he consults with financial regulators and is a part of various committees on market infrastructure. “A coordinating agency will be lacking even more of a legal position as this would just mean an agency that was just acting as a coordinating body between the spot exchanges and the nodal ministry."
“Going by RBI argument that FMC was the ‘designated’ agency and thus a substantial regulator for spot exchanges, then Sebi should assume regulatory function over spot exchanges," said a Supreme Court lawyer who was consulted on drafting the Indian Financial Code and spoke on condition of anonymity.
However, in June, the Securities and Exchange Board of India (Sebi), which last year merged FMC with itself, replied to NSEL investors saying that complaints relating to their investments were beyond its regulatory functions.
“It has been clarified, that as commodity spot markets/ready delivery contracts were not regulated by the erstwhile Forward Markets Commission (FMC), Sebi was not expected to take up any regulatory function with regard to such (spot commodity) markets," said the letter, a copy of which has been reviewed by Mint.
Sebi, RBI, and the department of economic affairs did not respond to emails seeking comment. An NSEL spokesperson said the spot exchange had been regulated by the FMC, citing correspondence between the Commission and the department of consumer affairs in 2011, as well as the latter and the department of economic affairs confirming that the FMC was the spot exchange’s regulator.
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