Editorial: Going beyond Jignesh

May 09 2014, 04:14 IST
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SummaryHow did a spot exchange become a futures one?

Given that the Mumbai police has arrested Jignesh Shah, presumably it feels it has enough on his role in the R5,600 crore National Spot Exchange Limited (NSEL) scam. Apart from the Grant Thornton forensic report that suggested Shah was fully aware of the goings on in NSEL, former CEO Anjani Sinha has also said as much repeatedly, after he recanted his statement that he and his team alone were responsible for the scam—apart from Sinha, 8 others were arrested before Shah, and many more interrogated over several months. And given how, though an exchange cannot possibly be selling financial products to investors, various brokers were marketing NSEL products to their clients, the Mumbai police has said it is also investigating the role of brokers. Since most of the trades on NSEL were synchronised ones, the role of the brokers is critical.

What is important, however, is to also focus on the events that led to NSEL being able to convert from a simple commodity exchange—and a spot exchange at that—to one where financial products were on offer. The way it worked was simple. Trader A sold wheat, say, to trader B; trader B, in turn, sold this wheat back to trader A, but to be delivered at some time in the future—the difference in the price was the interest rate. All contracts were executed simultaneously, to ensure all parties had legal paperwork to protect their interests.

The obvious question, of course, just as in the case of Sahara and Saradha, is how NSEL managed to fly under the radar for so long. This is where the role of the ministry of consumer affairs comes in. As long as clients couldn’t sell ‘futures’, and you can’t on a spot exchange, there was no problem. But in June 2007, the ministry came up with an exemption under the Forwards Contract Regulation Act and allowed NSEL what it called ‘forward contracts of one-day duration’. This is what allowed a spot exchange to convert into a futures one; and since a spot exchange is not regulated by the Forwards Markets Commission, this allowed NSEL to remain unregulated. How was this allowed to happen and why did no one pay any attention?

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