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The NSEL crisis has thrown up a series of questions that the government and regulators need to answer first. The government needs to come out with more clarity on the ownership, management and running of stock and com..

15 Nov 2013

By George Iype
It is an irony that the Indian government is in the perpetual habit of examining rules and regulations and interpreting them only when financial scams and other scandals hit investors and markets.

The typical case in point is the plethora of issues that have sprung out of the crisis-ridden National Spot Exchange Limited (NSEL), which has defaulted a huge Rs 5600/- crore to thousands of commodity trading investors.

NSEL has been promoted by entrepreneur Jignesh Shah-led Financial Technologies India Limited (FTIL). Interestingly, FTIL is also the promoter of the world’s third largest commodity bourse Multi-Commodity Exchange (MCX), which is the only listed exchange in India.

FTIL, a technology company that has been making exchange and broking platforms, went ahead with big ambitions in the last 10 years. Shah’s business acumen and smartness to find big opportunities in the exchange eco-system saw the birth of global exchanges in Singapore, Dubai, Botswana and Bahrain, all using the FTIL software.

Shah did not stop with setting up and running commodity exchanges. After a fierce legal battle with the Securities and Exchange Board of India (SEBI), the Indian government was forced to give license to a new stock exchange that FTIL promoted last year: the MCX Stock Exchange (MCX-SX).

It was the government of India arms—SEBI, the Forward Markets Commission (FMC), the Finance Ministry and the Ministry of Food and Public Distribution—that gave approvals to all FTIL exchange ventures that include MCX, MCX-SX and NSEL.

Though FMC was overseeing NSEL functioning, the exchange operated on a regulatory vacuum for some strange reasons. The government approved the existence of a commodities spot exchange without assigning a regular to manage it. The NSEL management made its own rules and regulations and started the now-defunct novel method of spot trading in commodities on an exchange platform.

Brokers, investors and clients who were lured by the ‘amazing’ returns of 12 to 20 per cent that the NSEL spot trading platform offered put their money in the safe hands of an exchange. In India, there was never any major incident wherein investors distrusted a stock or a commodities exchange approved by the government.

The NSEL scam has forced Shah and team get out of the director boards of MCX and MCX-SX; they have lost the management control over these exchanges. FTIL and Shah are now caught in a series of major legal and financial issues that FMC, SEBI, Ministry of Company Affairs and even the Reserve Bank of India (RBI) have raised against them. It is going to be a long-drawn out battle that could perhaps lead to Shah’s ventures getting handed over to institutional investors.

The Economic Offences Wing of Mumbai Police and the Enforcement Directorate has begun attachment of properties of the borrowers from NSEL; NSEL top brass led by ex-CEO Anjani Sinha and team have been arrested and put in judicial custody; and investors whose Rs 5600/- crore are stuck with a handful of shady companies and borrowers are hoping that they may get their money back in course of time.

Interestingly, the NSEL scam has brought to the fore an important issue that the Finance Ministry or the Indian government has so far been sleeping over. Suddenly, as if out of slumber, the Finance Ministry now says that the ownership and management of stock and commodity exchanges need to be segregated.

This hints at a serious question: should private companies and entrepreneurs be not allowed to set up stock and commodity exchanges in India? The Finance Ministry now feels the ownership, governance and management structure at FTIL and the exchanges promoted by FTIL need to be examined and necessary steps taken, in a “non-disruptive manner”, which will ensure the stability and integrity of the capital and commodity markets.

The question is if the government is now regretting giving permission to FTIL to run stock and commodity exchanges in India, given the fact that these exchanges were run by the software from the parent company. It is now hotly debated in the government circles that nowhere in the world is a software providing company is in the management control of running exchanges.

Has SEBI, FMC or the Finance Ministry formulated any law or regulation that disallows private companies from operating exchanges in the country? If so, why did the government give permission to FTIL to run exchanges in the country? Did the government realize too late after the NSEL scam that FTIL was not ‘fit and proper’ to run exchanges? Why did not the government ensure that stock and commodity exchanges are public institutions? We have the best examples of the National Stock Exchange and the Bombay Stock Exchange, which are public institutions, and not individually-owned.

The NSEL crisis has thrown up a series of questions that the government and regulators need to answer first. The government needs to ensure that FTIL, as a holding promoter company of NSEL, should pay back the money collected from thousands of investors that has been used to buy real estate and build malls by shady borrowers.

At the same time, the government needs to come out with more clarity on the ownership, management and running of stock and commodity exchanges in India, as financial markets are the foundation stones of the liberalized Indian economy.

George Iype is Founder and Managing Director of Commodity Online Group. He can be contacted at george@commodityonline.com

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15 Nov 2013
Who Owns? No One They Are Virtual, Ask Who Earns From? Answer: Jigneshes (plural form of Jignesh) & Shah's of INDIA ( Corrupt Leaders)
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