NSEL’s licence in Maharashtra was suspended in December

Mumbai: The Maharashtra government suspended the licence of National Spot Exchange Ltd (NSEL) in December, documents reviewed by Mint show—the latest in the string of surprises that have surfaced since 31 July, when the exchange abruptly suspended trading in all one-day forward contracts without assigning a reason, although it is likely that impending government action forced its hand.

add_main_imageThe exchange promoted by Financial Technologies (India) Ltd (FTIL), which only partially fulfilled its first payout obligation to investors on 20 August, effectively indicated in a statement on Monday that it would fulfil the second obligation on Tuesday to an even lesser extent.

However, it continued to present itself as part of the solution and not the problem by saying in the statement that it had initiated an investigation into five of its defaulting members and also its former chief executive officer and management team.NextMAds

The website of NSEL describes the exchange as a “national-level, institutionalized, electronic, transparent spot trading platform for commodities” and states that it had obtained licences from Maharashtra, Karnataka, Gujarat, Madhya Pradesh, Odisha and Rajasthan.

The truth, according to a 26 December order signed by Kishore Toshniwal, a former director of agricultural marketing, Maharashtra, is that: “the private market licence...issued...and subsequently renewed...is hereby suspended till further orders.”

Interestingly, the order seems to suggest that all wasn’t well at the exchange even then. It directed NSEL to “ensure transparent transactions at the electronic platform operated by them and submit details thereof to the Directorate of Agricultural Marketing”.

Deepak Taware, the current director of agricultural marketing, said: “The licence stands cancelled under APMC Act (Agriculture Produce Marketing Committee Act) and there is no revocation… NSEL cannot operate as a market in Maharashtra.”

An NSEL spokesperson admitted that the Directorate of Agricultural Marketing had cancelled its licence because it found that the exchange was not following a competitive bidding process. The spokesperson said this was because the exchange followed a so-called pull-matching price discovery process, in which buyers and sellers meet on an online platform to determine price. He confirmed that the licence remains suspended.

Before issuing the suspension order on 26 December, the directorate issued a show-cause notice on 12 December asking NSEL to explain why its licence should not be suspended in view of the violations of terms and conditions of the licence and the trading undertaken by the exchange. For instance, NSEL was to make payments to the farmers on the same day as the transaction, but it did not do so.sixthMAds

In its reply, NSEL said the exchange was operating in full compliance with the provisions of the licence and had not contravened any of its conditions. It also submitted that all transactions were executed through an electronic trading platform. It also clarified that trading, delivery and payment were completed on the same day, and that the exchange did not extend the delivery or payment schedule in any transaction.

The 26 December order seems strangely prescient.

The directorate’s investigation showed that NSEL was violating a necessary condition for the licence—that agricultural produce be sold by way of electronic negotiations between buyers and sellers through competitive bidding in a transparent manner. It observed that competitive bidding did not take place on trading terminals operated by some of the NSEL members, and cited their names.

The directorate also found the exchange was in violation of another condition—that the website and all trading terminals display open, high, low, close, average traded price and all other relevant market information on a real-time basis. Two terminals didn’t have this information, the directorate found.

“The operators of the terminals were unable to show this authority (the directorate) the mechanism of price information display for the farmers and sellers at the NSEL terminals operated by them. Monitoring by NSEL is totally ineffective and there is total failure on the part of NSEL to ensure transparency in transaction at their terminals,” the directorate said in its 26 December order.

The directorate also found that farmers were selling their produce to the sub-broker appointed by the member of NSEL at a predetermined price, while the licence condition stipulated that the seller should be allowed to submit his own selling price.

Under the licensing conditions, NSEL was also required to have an online trading and clearing system with national reach and an efficient clearing and settlement system, maintain a settlement guarantee fund, ensure transparency in operations and decision-making, and provide for delivery of commodities, backed by warehouse receipts. The directorate found no such mechanism was in place at the two terminals operated by NSEL through its members.

It was also observed that transactions did not take place in the electronic trade platform and did not get cleared through a bank.

It wasn’t immediately clear whether the revelation of the 26 December order will spur regulators to act against NSEL and its promoters.

NSEL, which seems to have led a charmed life, out of the purview of any regulatory scrutiny till things went wrong, released on 14 August details of how the ₹ 5,600 crore the exchange needed to settle would be squared. The plan said that starting 20 August, ₹ 174.72 crore would be paid out every week for 20 weeks, and ₹ 86.02 crore every week for the following 10 weeks. The remaining ₹ 1,291 crore would be settled on the 31st week, the exchange said.

However, the commodity exchange failed to collect enough funds from members to meet the first weekly payout of ₹ 174.72 crore. The second weekly payout is due on Tuesday. Till Monday night, the exchange had managed to collect only ₹ 11.9 crore of the ₹ 174.72 crore due, according to an update on the NSEL website.

On Monday evening, the exchange said it has initiated investigation against five of the defaulting members who did not have adequate commodities in the warehouses to meet their dues.

The five are Ark Imports Pvt. Ltd, Lotus Refineries Pvt. Ltd, NK Proteins Ltd, Vimladevi Agrotech Ltd and Yathuri Associates.

“Non-delivery of commodities or its withdrawal is a breach of faith and breach of contractual arrangements. The exchange will also take similar recourse for other defaulting members who are not cooperating,” NSEL said in a release late on Monday.

The exchange added in its statement that nine defaulting members—the five named above and Loil Overseas Foods Ltd, NCS Sugars Ltd, Spin Cot Textiles Pvt. Ltd and Tavishi Enterprises Pvt. Ltd—had not paid any money. It said it has asked all nine to hand over their collateral and submit their books of accounts.

A Mint investigation published on 21 August showed that many of the 24 members who owe money do not have the financial wherewithal to make the payments, raising questions about their provenance and the quality of the exchange’s due diligence systems that allowed them to trade far in excess of their means.

Meanwhile, National Bulk Handling Corp. Ltd (NBHC) sought to allay concerns of users of its services, and said in a statement that its exposure in NSEL warehouses is less than 3%.

NBHC offers integrated services in commodity and collateral management including supply chain and collateral management, warehousing, quality assaying, and control and certification

The value of the stock in the warehouses managed by the company as on 19 August was approximately ₹ 6,500 crore across locations in 19 states, the statement said.

Shares of FTIL rose 7.45% on Monday to close at ₹ 144.25 each on BSE on a day the 30-share benchmark Sensex index ended 0.21% higher at 18,558.13 points.

Ami Shah and PTI contributed to this story.