NSEL Crisis - State of self regulation

Everyone thinks Indian financial markets are recovering from its mistrust, noncompliance & irregularities. But, the crisis of NSEL gloomed over us again reminding that nothing has changed. While swapping news channels you must have seen the outburst on the fall of share price of FT & MCX. Wondering what is the issue?

Financial Technologies is a technology company founded by Mr.Jignesh Shah around 18 years back. Along with software development, he recently entered into exchange business. MCX & NSEL were the two exchanges dealing in futures market & spot market of commodities respectively. Business was routine till the suspension of forward contracts in NSEL. After which we saw panic selling in FT & MCX, which are the two group companies listed on exchange.

NSEL does forward trading in commodities in which investors buy positions and further sell them to another investor without physically exchanging the commodity. Problem started with brokers “misselling” the forward contracts by mocking 100% risk free return. Current liquidity crisis is due to the imbalance between buy & sell positions. NSEL was allowed to offer only T+1 settlement contracts, but they have also created T+25 settlement contacts. It means buyer is a lender who pays money in two days and expects to receive the cash after 25 days with a risk free return on capital of say 15%, but the sell side transaction which is settled on T+25 is not being honored by the buyer of the other leg of the  contact. Even if one wants to settle this imbalance by selling physical goods, there is no talk about providing delivery of physical stock from exchange. Though company claims physical stock is available at their warehouse, market does not believe their argument.With all these uncertainties, there is a loss of trading interest. This has led to further trade in-equilibrium. Under these circumstances, FT claims it will defer all payments by 15 days and suspended all forward contracts trading except eGold, eSilver & ePlatinum. Company says, it will overcome issues related to settlement as they have assets worth of Rs.6500 cr against the payment due of Rs.5500 cr. But, the stock market is not buying this argument.

If NSEL has done business on virtual stock in their warehouses, it raises serious concern on the trust in financial market. Requires thorough investigation of the matter and guilty should be sent to jail, even if they are rich & powerful. If no action initiated, how can we instill trust in financial market?