NSEL promoted forward contracts over spot trades

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SummaryThe NSEL, which is in the midst of a settlement crisis and a government probe, left no stone unturned to market products in a manner that would entice investors and traders to speculate for arbitrage returns instead of focusing on the underlying commodities

The NSEL, which is in the midst of a settlement crisis and a government probe, left no stone unturned to market products in a manner that would entice investors and traders to speculate for arbitrage returns instead of focusing on the underlying commodities.

A closer look at the contract specifications for many commodities reveals that the spot exchange was willing to waive off storage charges for entities that were willing to take positions of longer durations (T+25, T+30, etc) in commodities in which they already had a spot position (T+2).

The contract design for paddy, raw wool, maize, wool top, cumin seed, black pepper, chilli, soyabean DOC (de-oiled cake), mustard oil and cottonseed wash oil state that there would be no storage charges for those entities who sell commodities out of their purchase position.

“Storage charges are waived off for those members and their constituents, who sale paddy local on PY1010WG25 (T+25) out of the delivery receivable against the purchase position of PDY1010WG2 (T+2) contracts,” stated an NSEL circular related to paddy contracts. Most commodities with longer duration contracts (T+15 and higher) have this as a standard inclusion.

Even product notes and presentations by brokerages that aggressively sold NSEL’s pair trading scheme as an “NSEL investment product” or “NSEL arbitrage return opportunity” do not have a mention of the storage charges. Warehouse receipt charges and CNF billing charges formed a higher component of costs calculated on various trading examples besides VAT, service tax and stamp duty charges. One such product note by Ventura Securities shows warehouse receipt charges accounting for 0.05% of the cost of the traded quantity on both buy and sell side.

NSEL’s income from warehouse receipt charges surged to R113.8 crore in FY13 compared to R8.5 crore in FY12. However, income from warehouse usage or management activities either grew at a nominal pace or witnessed a fall. For instance, warehouse income grew three times to R7.9 crore in FY13 while delivery charges and procurement commission declined by 90% and 30% to R1.1 crore and R10.2 crore, respectively.

“During the year turnover of non e-series contracts had increased substantially. The turnover of agricultural goods had levy of warehouse receipt charges... Overall increase in turnover on the platform of the exchange had contributed to warehousing receipt charges,” said NSEL, trying to explain the surge in receipt charges.

The NSEL board has put the entire onus of the fiasco on the senior management, including former MD

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