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The Reserve Bank of India has written to the finance ministry to appoint a regulator for spot exchanges, according to two people with direct knowledge of the matter.

RBI has also raised the issue in a 29 August meeting of the Financial Stability and Development Council (FSDC). 

The central bank’s concerns have been prompted by the summons it received from the Gujarat high court regarding the National Spot Exchange Ltd (NSEL) payments scam. A group of investors, called the NSEL Aggrieved and Recovery Association, filed a petition in May alleging that the spot exchange was operating without authorization under the Payment and Settlement Services (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 had exempted regulated exchanges from this rule as clearing and settlement are crucial aspects to their functioning and it wanted to avoid dual jurisdiction. 

The Securities and Exchange Board of India, or Sebi, (after its merger with the Forward Markets Commission, or FMC) regulates commodities derivatives market, but spot exchanges still don’t come under its jurisdiction. 

“Once a primary regulator for spot exchanges is decided by the ministry, then RBI can notify these exchanges as being exempt from the provisions of PSS Act," said one of the two people. 

An email sent to a spokesperson for RBI on Friday was not answered. 

“If the regulator of spot exchanges is not notified and RBI comes out with any regulations on spot exchanges with respect to their clearing and settlement activity, then there is a possibility that these unregulated exchanges could gain a legal status," said the first person. Separately, in its reply to the Gujarat high court, RBI has said that NSEL was not required to seek registration under the PSS Act as FMC was considered to be the “designate agency" for the exchange.

Mint has reviewed a copy of RBI’s reply. 

“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 later in 2011 to make FMC the designated agency for spot exchanges so that it could take “substantial" action if needed. 

Still, FMC, and now Sebi, have denied having regulatory oversight over spot exchanges, Business Standard reported earlier this year. 

In their petition, the NSEL investors make a reference to the minutes of an FSDC meeting in 2011 where it was highlighted that NSEL was providing settlements without RBI authorization. 

RBI is the third regulator to become a party to the numerous cases pertaining to NSEL pending before the high courts of Bombay, Madras, Delhi and Gujarat. So far, the erstwhile FMC and markets regulator Sebi have been made parties to the pleas. Its case will be heard by the Gujarat high court on 6 October.

The NSEL payments scam came to the fore in July 2013 when trading was halted after a settlement failure on the commodities bourse owned by Jignesh Shah-led Financial Technologies (India) Ltd. The exchange failed to meet payout obligations to 13,000 investors adding up to Rs5,574.35 crore.

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