NSEL says safety fund intact, but consists mostly of commodities

Written by Banikinkar Pattanayak | New Delhi | Updated: Aug 10 2013, 10:19am hrs
NSELAnjani Sinha, NSEL managing director & CEO
The National Spot Exchange (NSEL) said on Friday its settlement guarantee fund (SGF) was worth Rs 720 crore, though its composition had changed with a higher share of warehouse receipts. NSEL has suspended trading and settlements of one-day forward contracts since July 31.

Speaking to FE, NSEL MD and chief executive Anjani Sinha said the fund made up of the initial margin, ad hoc margin and security deposits of members and a part of the exchanges income had not seen any significant drop in value.

The slump in the SGF is a misconception and its just the composition that has changed. Since members are also allowed to provide cash, warehouse receipts, FDs or guarantees as margin, some members have provided warehouse receipts instead of cash. So there is around Rs 720 crore in the SGF but the cash component has fallen, Sinha explained.

Of the roughly Rs 720 crore in the SGF last month, before trading was suspended, Rs 670 crore was in cash which is now down to R65 crore. Warehouse receipts currently account for the largest chunk of the fund, at Rs 665 crore.

Following the exchanges decision on July 22 to confine all contract settlements to 11 days and the governments direction to settle running one-day forward contracts and stop fresh contracts, the market equilibrium was disturbed, causing a liquidity crunch for buyers, Sinha said. Some of the sellers have been given cash and NSEL took warehouse receipts between July 22 and 31, he explained. When the buyers pay up, the warehouse receipt will be endorsed in their favour, he added.

Currently, outstandings on NSEL stand at R5,580 crore. NSEL has said it has stocks of commodities worth R6,039.35 crore; as of Tuesday, it had 1.37 million tonnes of commodities, with sugar and paddy making up close to 70%.

NSEL said last Sunday that eight of its members were willing to pay Rs 2,181 crore, or 39% of total outstanding positions, on or before scheduled dates, which may stretch up to September 13. It also said 13 other members, with a combined outstanding of Rs 3,107 crore, had offered to pay 5% of their total dues every week while negotiations were going on with three processors who owed it Rs 311 crore. Moreover, it claimed to be holding post-dated cheques worth R4,900 crore submitted by buyers.

After a meeting of officials with the Forward Markets Commission (FMC) and NSEL along with members and processors on August 4, it was decided that those who chose to pay their dues in a staggered manner would have to pay interest at 16%.

On July 31, NSEL was forced to suspend one-day forward contracts and defer settlements after the government said the exchange was violating rules by allowing contracts of tenures longer than 11 days. On August 6 the exchange stopped its e-series contracts, marking the end of trading on its platform for the time being. E-series contracts function like the cash segment in equities and offer commodities in demat form in smaller denominations.

Trouble began last year when the FMC discovered that NSEL permitted trading without verifying whether sellers had stocks, in effect allowing short-selling by members.

Short-selling refers to the selling of commodities without underlying assets, in the hope of buying them at a lower price before the delivery date. FMC had also discovered that the contracts traded on the exchange for which the settlement period exceeded 11 days were non- transferable specific-delivery contracts, which was in violation of the Forward Contract Regulation Act.

Spot exchanges were allowed to offer one-day forward contracts provided members would not resort to short-selling and outstanding positions at the end of the trading day would result in delivery. For its part, the exchange has affirmed that there were no clear-cut guidelines on the delivery period of a contract exceeding the 11 days, something both the FMC and the consumer affairs ministry dont seem to buy.