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Mumbai: The day after commodity exchange National Spot Exchange Ltd suspended trading of all one-day forward contracts without assigning a clear reason, the government asked for the rationale behind the action; rumours about a possible default swirled in Mumbai’s trading circles; finance companies that engage in trading on behalf of clients or themselves rushed to issue statements claiming they had marginal or no exposure on the exchange; and shares of the exchange’s parent company crashed.

By the end of the day, there was still no clarity on the rationale, nor the reason why commodity traders wanted to distance themselves from the happenings on the exchange.

On 9 July, business magazine Moneylife had reported that the Forward Markets Commission (FMC), the commodities market regulator, found during a probe that National Spot Exchange allowed trading on its platform without verifying whether the seller had stocks, thus allowing short selling by members.

The report had also cited food and consumer affairs minister K.V. Thomas as saying that the government will soon take action against National Spot Exchange, promoted by Financial Technologies (India) Ltd (FTIL), for violating certain rules while offering commodity contracts.

It wasn’t clear, even on Thursday, whether the suspension that was announced by National Spot Exchange in a late night statement on Wednesday had anything to do with this.

National Spot Exchange said in its statement that the suspension followed a 12 July directive by the department of consumer affairs, without giving details.

It added that these steps were necessary owing to the “abrupt structural changes in the marketplace leading to disruption. This coupled with loss of trading interest due to underlying uncertainties is disrupting market equilibrium".

Still, the exchange’s statement that it would merge the delivery and settlement of contracts (other than the so-called e-Series) and that settlement would be deferred for 15 days, was enough, commodity traders said, to trigger concerns about whether the exchange would default on payments.

Panic-striken investors sent shares of parent FTIL tumbling. FTIL shares closed 64.6% lower on Thursday, the second-largest single-day decline for any BSE200 stock after Satyam Computer Services Ltd plunged 77.7% on 7 January 2009, the day its founder-chairman B. Ramalinga Raju confessed he had been fudging the firm’s books for years. The market capitalization of FTIL slumped to 883.56 crore on Thursday from 2,496.55 crore the day before, with investors losing 1,612.99 crore of wealth.

Shares of commodity bourse Multi Commodity Exchange of India Ltd (MCX), controlled by FTIL, plunged as much as 20% to a record low.

“It is clearly a trust issue. Investors are losing trust in the group at large," said a wealth manager at a leading brokerage, who did not want to be identified owing to the sensitivity of the issue.

According to a Press Trust of India report, capital markets regulator Securities and Exchange Board of India (Sebi) has begun a probe into the crash in the share prices of MCX and its promoter FTIL. It has sought information from the stock exchanges in this regard, PTI said.

FTlL released a statement to BSE stating that National Spot Exchange’s move to suspend trading in one-day forward contracts does not entail any financial liability on FTIL.

“We are confident that NSEL will resolve the situation within the contours of its bye-laws and rules," Jignesh Shah, chairman and managing director of FTIL, said in a statement posted on the BSE.

Meanwhile, National Spot Exchange’s chief executive tried to soothe the nerves of the investors—in vain.

“I don’t think there is any reason to panic. The people who have traded on the exchange, their rights are fully secured," managing director and chief executive officer Anjani Sinha said in an interview on television channel ET Now.

Sinha assured investors that the payouts would be made over a period of time as the exchange liquidated physical stocks of commodities.

The government said in a release that the ministries of finance and consumer affairs were both “closely monitoring the situation". Regulators FMC and Sebi were also involved in the effort, the statement added.

The consumer affairs department has asked FMC to seek information from National Spot Exchange regarding the rationale for the suspension, the plan of action for meeting settlement obligations and other relevant details.

The government said the consumer affairs department will take necessary action to protect the interests of market participants in the exchange after FMC submits its report.

Meanwhile, it seemed for some time on Thursday that brokerages active in the commodities market would be subjected to collateral damage. Shares of at least three financial services firms—Edelweiss Financial Services Ltd, Motilal Oswal Financial Services Ltd and India Infoline Ltd—tumbled to a 52-week low, before recovering by the day’s close.

“People got nervous and misinterpreted that NSEL’s outstanding payments may end up as liabilities for the brokerages to be fulfilled, which actually is not the case," said Deven Choksey, managing director and chief executive officer at KRChoksey Shares and Securities Pvt. Ltd.

India Infoline clarified through a statement that its group does not have any proprietary positions nor has it funded any client positions on National Spot Exchange. Edelweiss followed suit and said in its statement that the company and its subsidiaries did not have any positions whatsoever in the exchange.

Religare Enterprises Ltd’s shares closed 0.4% lower on the BSE. It clarified that its broking unit has no proprietary positions on National Spot Exchange and that its total client exposure on the exchange was less than 5 crore.

National Spot Exchange is FTIL’s most profitable subsidiary with a net profit of 127.4 crore in fiscal 2013. It was also among its fastest growing operations—its revenue grew by 210% to 266.9 crore last year and profit, by 340%.

National Spot Exchange hasn’t suspended trading in its e-series contracts that were designed to allow people to invest in commodities in demat form. e-gold and e-silver were the first securities to be introduced by National Spot Exchange as part of this.

Anirudh Laskar and Ragini Verma contributed to this story.

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