Even as the Securities Exchange Board of India (Sebi) and the finance ministry assessed the situation to ensure there was no systemic risk, the National Spot Exchange Limited (NSEL) on Thursday confirmed that contracts worth Rs 5,500 crore remained outstanding. It added, however, that the exchange had access to physical stocks of commodities worth Rs 6,200 crore.
On Wednesday, NSEL, which is not regulated either by the Sebi or the Forward Markets Commission (FMC), suspended new contracts and deferred the settlement of existing contracts, in the wake of the consumer affairs ministry asking it to do away with contracts over 11 days. Shares of Financial Technologies, the promoter of NSEL, plunged nearly 67% intra-day on Thursday.
Anjani Sinha, chief executive, NSEL, said: “In case buyers do not pay up on the due date, we will auction the stocks of commodities and make the payments.” Sinha, however, allayed fears of a default pointing out there was R800 crore in the exchange’s settlement guarantee fund.
Market players observed that prior to the restrictions, commodity brokers and traders were exploiting arbitrage opportunities thanks to the difference in contract settlement cycles ( T+2 and T+23) offered by NSEL.
With NSEL settlements postponed, sellers’ receivables will be delayed and could result in a cash crunch for some. “With the settlement cycle reduced, the exchange is facing liquidity issues, but we are confident it would manage to resolve the problem,” Motilal Oswal, CMD, Motilal Oswal Securities, said. Oswal confirmed his firm’s prosperity desk has a small exposure to NSEL trades even as he did not reveal the value.
Volumes on NSEL have dropped 60% since the government restrictions on July 12; Wednesday’s volumes were Rs 273 crore and the number of contracts traded were 12.3 lakh — just 7% of contracts prior to July 12.
Sebi took stock of the situation on Thursday. However, there seems to be no danger to settlements in the stock market, even though some stock market intermediaries have an exposure to commodities transactions.