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Panels may suggest bringing all exchanges under single regulator

NSEL, promoted by Jignesh Shah-led Financial Technologies (India) Ltd, is facing the problem of settling Rs5,600 crore owed to 148 members/brokers, representing 13,000 investor clients, after it suspended trading of forward contracts on 31 July without specifying any reason. Photo: Ramesh Pathania/Mint (Ramesh Pathania/Mint)
NSEL, promoted by Jignesh Shah-led Financial Technologies (India) Ltd, is facing the problem of settling Rs5,600 crore owed to 148 members/brokers, representing 13,000 investor clients, after it suspended trading of forward contracts on 31 July without specifying any reason. Photo: Ramesh Pathania/Mint
(Ramesh Pathania/Mint)

The two committees appointed by the government are likely to submit their report on 16 September

Mumbai: The two committees appointed by the government to examine possible violations by National Spot Exchange Ltd (NSEL) and suggest measures to plug loopholes may recommend bringing all exchanges under a single regulatory body and not permitting stand-alone spot exchanges to operate, said two persons familiar with the development.

The committees have also recommended that all commodity warehouses be governed by the commodities market regulator, and that the restrictions placed on commodities futures markets should be extended to spot markets, one of the persons said on condition of anonymity.

Both the committees are likely to submit their reports on 16 September, the person added.

NSEL, promoted by Jignesh Shah-led Financial Technologies (India) Ltd, is facing the problem of settling 5,600 crore owed to 148 members/brokers, representing 13,000 investor clients, after it suspended trading of forward contracts on 31 July without specifying any reason.

After regulatory intervention and voluble protests by investors with exposure to the exchange, on 14 August, NSEL unveiled a payout plan under which it would pay 174.72 crore a week for 20 weeks and 86.02 crore a week for the following 10 weeks, and 1,219.71 crore in the 31st week, which falls after 11 March 2014.

However, the commodities exchange has defaulted on the first four of its scheduled weekly payouts.

On 3 September, department of economic affairs secretary Arvind Mayaram and head of a government panel on the matter told Mint that two working groups were set up to look into violations by NSEL.

Both the working groups were asked to complete their tasks within two weeks and submit their report to a special team for further consolidation and finalization of the report for submission to the government.

The first group, headed by director of Enforcement Directorate Rajan Katoch, is looking into possible violations of laws and regulations by NSEL, its associated companies and participants. It includes representatives from directorate of revenue intelligence, Securities and Exchange Board of India (Sebi), Reserve Bank of India, Forward Markets Commission (FMC), Serious Fraud Investigation Office (SFIO), department of consumer affairs and the Central Board of Direct Taxes, CBDT.

The second group, headed by an RBI deputy governor, is working on suggesting measures to ensure the NSEL developments have no impact on the financial system. This group includes the FMC chairman, a Sebi member, and adviser, Financial Stability and Development Council, in the department of economic affairs. When contacted, FMC chairman Ramesh Abhishek acknowledged that he has put forward few of the above points to the second working committee.

The first person, cited above, added that other recommendations include having all risk management structures, position limits, broker-wise limits, margin levels, and the settlement guarantee fund (SGF) overseen by the single government-appointed regulator.

The groups, the person added, have also suggested that the word “exchanges" should be appended only to “spot entities" that are regulated, for which the ministry of corporate affairs (MCA) would require companies to produce a “No Objection" certificate from the regulator concerned before it can allot any name.

Other suggestions include warehouses being kept outside the control of exchanges and governed directly by the regulator overseeing the commodities markets. This would eliminate conflict of interest, the first person added.

FMC had on 2 September directed national commodity exchanges to register their warehouses with the Warehousing Development and Regulatory Authority (WDRA). WDRA, the second group has suggested, should be merged with the FMC. The second group has also suggested that commodity swaps and warehouse receipt trading should be allowed.

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