In the wake of legal tangles and the subsequent observations of one of its directors, the FMC has temporarily halted all activities on the exchange.

In a letter to the exchange secretary, dated January 14, 1999, the FMC director DS Kolamkar, categorically noted about the directors' involvement in two hedge contracts prior to the February 1999 delivery contract that led to the problems on the exchange leading to its temporary closure.

Said Kolamkar: "The last two contracts that matured in August 1998 and November 1998 have led to disputes regarding the quality and availability of goods against the PDOs (pucca delivery orders) issued bythe sellers. The survey mechanism has failed to provide relief/satisfaction to the concerned buyers. Unfortunately, in at least some of these disputed cases, the directors of the exchange are involved directly or indirectly."

The FMC director has also stated that sellers are issuing PDOs of sick and closed mills and the contracts are kept outstanding till the due date.

"Many of the past contracts have not been traded in an orderly manner and have experienced difficulties and irregularities particularly during the delivery period. Out of the 10 past contract months, there have been disputes in five contract months. It is seen that while the contracts are kept outstanding till about the date when the delivery period commence, deliveries are offered and PDOs issued, disputes have risen about the availability and quality of the goods being offered under the PDOs. The FMC has also received complaints regarding the PDOs of sick and closed mills being offered by the sellers," Kolamkar alleged.

Kolamkar'sfindings have also revealed delays in actions taken against the erring members. The letter states: "Commission has also received complaints alleging procrastination on the part of the exchange in resolving dispute and wrongful withholding of the margins."

Kolamkar also stated that the "exchange has not only not been able to take adequate preventive measures but has also not able to address the above problem in a proactive manner".

He went on to state that despite identifying the problems, the exchange did not take any action but requested FMC to take charge.

"When such irregularities have been noticed by the exchange, the exchange has hesitated in initiating actions against the erring members and have instead passed on the task of initiating unpleasant action to the Commission," Kolamkar noted.

Citing long term interests of the trade, the exchange has taken soft steps against some gross violations.

"In some cases where the violation and irregularities were evident, the exchange has taken verylenient view and has waived the prescribed penalties and punishment on the plea of `long term interest of the trade'. These actions by the exchange have resulted in setting wrong precedent and sending wrong signals to the operators", the FMC director stated.

The commission is yet to allow the hessian exchange to start forward and futures trading in the jute goods for the May hedge. "In fact, when we asked for the formal permission of the FMC in January for the May hedge, the commission passed this letter on to us and we are yet to give a reply to it," a board member of the exchange told The Financial Express.

Summarising all the events, Kolamkar states: "The rise in the number of disputes and court cases also raises doubts about the efficacy and credibility of dispute resolution mechanism available with the exchange."