Home >Politics >Policy >NSEL must separate ownership from management: report

Mumbai: One of the two working groups set up by the government to examine possible violations by National Spot Exchange Ltd (NSEL) has called for separating the ownership and management of its parent Financial Technologies (India) Ltd or FTIL, controlled by entrepreneur Jignesh Shah, from the crisis-hit commodities exchange.

And no single shareholder should be permitted to dominate the functioning of an exchange or exercise management control, the group said in its report while ruling out a systemic risk being posed by the crisis. A copy of the report was reviewed by Mint.

Stressing the need for diversified ownership, the group pitched for a swift segregation of ownership and management of FTIL and NSEL, and application of more stringent “fit and proper" criteria to the entire senior management of the revamped structure.

FTIL owns 99.99% of NSEL, which slipped into a payments crisis after it suspended trading of forward contracts on 31 July without specifying any reason.

It needs to settle 5,600 crore owed to 148 members/brokers, representing 13,000 investor clients.

NSEL has defaulted on the first five of its scheduled weekly payouts.

The working group has expressed concern over any single individual or private entity owning a large financial services empire and recommended separating ownership from control and management.

This needs to be applied to all segments of the financial sector in order to ring-fence it from reputational and other risks arising from individuals owning the firms and to prevent a recurrence of episodes like the NSEL crisis, it said.

The group has recommended that similar norms should be followed for all entities running more than one exchange, even if they operate in different market segments. FTIL also controls the Multi Commodity Exchange of India Ltd.

An NSEL spokesperson said the exchange had no comment to make because it had not seen the report yet.

The working group, headed by Reserve Bank of India deputy governor K.C. Chakrabarty, however, said the NSEL crisis was not significant enough to pose systemic risks and the government should not use taxpayers’ money to bail out NSEL.

“Many of the investors in NSEL are high net-worth individuals who are expected to be well aware of the risks being assumed," it said in the report.

Ramesh Abhishek, chairman of the Forward Markets Commission (FMC) that regulates commodities futures markets and oversees NSEL; Rajeev Kumar Agarwal, a whole-time member of the Securities and Exchange Board of India; and C.S. Mohapatra, adviser, department of economic affairs, are members of the working group.

An investors’ forum demanded action to recover money owed to them.

“Most of the money which is invested in NSEL represents our lifelong saving... How can somebody call us high net-worth individuals? We want police to investigate and recover the money which is lying in the system and give it back to us," said Sharad Saraf, president of NSEL Investors Forum, a lobby group.

J.N. Gupta, founder of Stakeholders Empowerment Services, a corporate governance research firm, backed the working committee’s recommendation against a government bailout.

“I support the working group’s recommendation that taxpayer’s money should not be used to bail out NSEL...why should profits be shared by private entities and their losses by the public?" he said.

The working group’s report comes in the wake of concerns about the lack of institutional guidelines for spot exchanges.

Unlike in stock exchanges and commodity futures exchanges, there exist no guidelines for a spot exchange on equity structure, corporate governance norms and provisions for independent directors to strengthen the board.

In the absence of such norms, a large clearing member on NSEL, Indian Bullion Market Association, was promoted by NSEL. Senior executives of NSEL also served on other promoter-owned firms.

These concerns are not confined to the present troubles at NSEL alone, but in general to all financial entities, including banks, mutual funds, insurance companies and stock brokers where inter-connectedness can pose crises that can lead to systemic disruptions, the group said.

According to the group, even though the spot exchange was developed to provide a platform to farmers to facilitate transparent, direct marketing and facilitate efficient price discovery, NSEL’s exchange platform was used primarily for speculative purposes, pushing the interests of farmers to the background.

It said emphasis should be first placed on enhancing credit facilities to farmers and developing marketing and other related infrastructure for agriculture and only after that should the spot exchanges be allowed to operate in a calibrated manner.

It even questioned the need for spot bourses when there are already well functioning futures exchanges.

Among other recommendations, the working group called for empowering FMC with statutory powers by providing financial and administrative autonomy through legal amendments.

Besides, all commodity warehouses should get accredited and registered with the warehousing regulator Warehousing Development and Regulatory Authority and all controls applicable to the securities market should be made applicable to spot trading as well.

Similarly, all risk management structures such as position limits, market-wide limits, a settlement guarantee fund, and audits must be in place.

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