Home / Market / Stock-market-news /  Whatever FMC can do has to be done as per law: Ramesh Abhishek

On 31 July last year, National Spot Exchange Ltd (NSEL) defaulted on paying investors in its paired contracts, triggering a scandal, outcry and multiple investigations, leading up to several high-profile arrests. In this period, commodities market regulator Forward Markets Commission (FMC) has been battling some critics who have called it a weak regulator and others who challenge its very jurisdiction. However, chairman Ramesh Abhishek says FMC has done all it could, given its limitations. It is still not happy with the pace of investigations and does not know when the crisis would be finally resolved, Abhishek said in an interview. Edited excerpts:

One year has passed since the NSEL crisis came to light. Are you satisfied with the way things have progressed since then?

Many important things have happened in the last one year. Firstly, the modus operandi of NSEL, the way it worked, the problem and the shortcomings have been exposed and brought into public domain. We got two forensic audits conducted on NSEL, which brought out all acts of omission and commission and were properly documented. Secondly, the responsibility of the management, the board of directors and the holding company have been subject to enquiries and investigations. Based on the forensic audit, we declared the promoter entity and three key persons as unfit to work in the regulated commodity market.

Various other investigating agencies are looking into the other liabilities and they have even taken action, including arrests and chargesheets. Thirdly, 10% of the money involved in paired contracts has been recovered. However, most investors of e-series contracts have achieved financial closure. So, the main concern is about 5,000 crore of pending payouts to over 10,000 clients.

There is a perception that FMC is a weak regulator and it was the other agencies such as the Economic Offences Wing or the income tax department that did better investigations in the case.

One should appreciate that whatever FMC or a statutory authority can do has to be done as per the provisions of the law. FMC has been given powers under FCRA (Forward Contracts Regulation Act) and can regulate those entities that have been registered and recognized under FCRA. NSEL was not an FMC-regulated entity and so we did not have any jurisdiction. The government gave an exemption to NSEL and two other entities to do one-day forward contracts trading.

For the first time in August 2011, the government wrote a letter to FMC, saying we should supervise the exchanges (like NSEL). We then started the process of developing a reporting format. But we also told the government that FMC can be empowered only through a notification and not merely a letter. The government issued a notification in February 2012, but FMC’s role was curtailed by stating that NSEL will give information only if asked by FMC.

However, we asked for certain data, and for the first time in December 2011, NSEL gave us a report. FMC analysed the report and found that NSEL was not complying with the exemption notification issued to it. We asked for certain clarification. While we did not have enough powers, we still gave a report to the government and said that the exchange is violating certain norms.

The government then issued a show-cause notice to NSEL. Finally, on 12 July 2013, the government decided to bar NSEL from launching any new contract, which ultimately led to the collapse of NSEL. No role was prescribed for FMC, but we still took the initiative. In August 2013, the government issued a notification saying FMC will supervise the settlement of outstanding contracts. If we had exceeded our mandate, then we could have been accused of acting with an ulterior motive.

So do you think that if instead of a supervisory role, had the government given a regulatory role to FMC, the crisis could have been handled in a better manner?

There is a lot of difference between supervisory and regulatory powers. Regulation of an exchange involves a number of things. There needs to be a shareholding structure which does not give too much importance to one single entity. If you look at the FMC-regulated market, then the maximum one could hold was 26%, which has been brought down to 5% and 15% for a select category of entities. There are rigid corporate governance and risk management norms for disclosures, transparency, contract specification, client limits, etc. How can you do these things for an entity which is not regulated by you?

A supervisory role is just about checking if an entity is compliant with certain conditions and there is no obvious wrongdoing. Everybody is wiser with the benefit of hindsight. Last year, before the NSEL crisis erupted, we had told the government that forward trading in an unregulated entity is not in public interest.

Are you satisfied with the measures that you have taken to manage the NSEL crisis?

Our first concern was that the impact does not travel to the regulated market. Different markets are insulated from each other so that the risk of one market does not cross over to the other market. So we took a number of actions to ring-fence our exchanges, primarily MCX (Multi Commodity Exchange of India Ltd). Our next objective was to bring as much information as possible in the public domain.

We forced them to disclose the maximum possible information. That helped create complete public awareness. Then we started a series of enquiries to find out what was going on at NSEL. We kept sending regular reports to the government. Around 20 days after the crisis erupted, we wrote to the government that there is enough information showing signs of fraud, criminal conspiracy and money-laundering, and so a multi-agency investigation should be launched.

But what happens to the trapped investor money?

So far as the money is concerned, investigating agencies like EOW (Economic Offences Wing, Mumbai Police), ED (Enforcement Directorate) and CBI (Central Bureau of Investigation) are doing their work. They would be aware where the money has gone since it is part of their investigations. We are not privy to that investigation. The MPID (Maharashtra Protection of Interests of Depositors) Act has been invoked under which the assets of entities can be attached and the money can be recovered through the process of liquidation. The process is time-consuming, but it is going on.

What we have done is that we formed a monitoring and auction committee of NSEL investors and brokers to help us in supervising the case. Through this committee, we directed the exchange to file recovery suit against all defaulters. Some entities gave post-dated cheques that bounced; so that needed to be pursued under section 138 of the Negotiable Instruments Act. We told the exchange to strengthen its recovery team and issue advertisements in papers to “name and shame" the defaulters. So, we are also pursuing the matter to make defaulters pay.

When can we expect this case to be resolved?

It is difficult for anyone to indicate a time frame by when this whole thing will be resolved. These are all legal matters involving criminal investigations and trials which have to follow the laid-down processes.

Are you happy with the pace of investigations and the recovery process?

We are not happy at all. We are pursuing the case with the board of directors and the management of NSEL to take action to expedite the process.

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