line with a report by consultancy firm KPMG in 2004, commissioned by the government, Chidambaram proposed that the commodities market be merged with SEBI. But Pawar’s ministry baulked at it.
In 2006, spot trading was allowed in commodities in a new exchange set up by Shah — the NSEL. The spot business was a surprising expansion of the commodities market. The exchange was set up via a government order without involving the Forward Markets Commission. As B C Khatua, former chairman of the Commission, says, spot trading in commodities needs far more ring fencing than futures. Khatua said he had asked the ministry to give them oversight rights. “If we had been given the rights, the scandal at NSEL would not have expanded to such a level.”
In 2008, NSEL was allowed to enter forward trading on spot contracts, with the rider that all trade should be squared in 11 days. Waking up to the profits Shah was reaping, others scampered for permission to set up their spot platforms. NCDEX and NMCE were given the right to set up a spot platform. NSEL grabbed almost all the spot exchange turnover. Since there was no regulator to inspect the markets till 2012, high net worth people could invest huge money with promised returns, and traders with no fear of having to settle their trades with corresponding physical delivery ramped up volumes. When the crisis broke in 2013, the total unsettled trade volume at the exchange was over Rs 5,600 crore.
To run his expanded empire, Shah put together an excellent team and also paid them well. A Finance Ministry official said that Shah rang his doorbell with a huge pay offer, the day after he quit government service. Generous offers brought in Lamon Rutten and Joseph Massey. Rutten left his job as chief of Finance, Risk Management, Information at the Commodities Branch of UNCTAD, Geneva. Massey was picked up from Interconnected Exchange of India where he was the MD. Key advisers to MCX included former SEBI chief G N Bajpai, former finance secretary Ashok Jha, former revenue secretary the late Nitish Sengupta, while the FTIL board included names like P G Kakodkar, former SBI chief.
A surprise was Anjani Sinha, made the managing director of NSEL. Under Sinha in the 1990s and in 2002, investors at the Magadh and Ahmedabad stock exchanges lost substantial money because of “bad delivery of shares”. In both cases, SEBI