Speaking in detail for the first time since the crisis flared up in August, the minister, however, rejected a comparison between the NSEL crisis and the Satyam scam, saying the spot exchange violated rules from the beginning and investors parked money with open eyes.
People seem to have given money to NSEL promoters with open eyes that it was not a regulated entity, that it was violating conditions from day one. Yet, they were giving money to NSEL. Many of them made money in initial stages and some of them have lost money now, he said.
The Mayaram panel, which submitted a report this week on the R5,600-crore settlement crisis at NSEL, has recommended that the CBI, FMC (Forward Markets Commission) and MCA (ministry of corporate affairs) take appropriate action, Chidambaram said. They have listed out the irregularities. These authorities are looking into the matter. They will take action, the minister added.
Although the panel has ruled out any systemic risk from the NSEL mess, the minister said he has asked regulators of the capital market and the commodity futures market to keep a careful watch.
Stressing there was no comparison with Satyam, Chidambaram said: NSEL is a company, not a recognised association under the FMC Act. It did not have any business but it got an exemption even before it started business. The exemption was subject to conditions. On Day One, condition one was violated, condition two was violated... Yet, it carried on the business. Since it was not a regulated entity, there was no scope for the regulator to ask questions, he said. Investors gave money to NSEL with open eyes that NSEL is not a regulated entity and was violating the conditions.
In June 2007, the government had exempted all forward contracts of one-day duration from the ambit of the Forward Contracts Regulation Act (FCRA), subject to certain conditions, which effectively moved a spot commodity exchange out of FMC's purview. However, the first condition was that the exchange won't allow short-selling by members and the second condition was that all outstanding positions at the end of the day shall result in delivery.
Trouble started last year when the FMC, after being empowered by the consumer affairs ministry to seek information from spot exchanges, discovered that NSEL permitted trading without verifying whether sellers had stocks, in effect allowing short-selling by members.
Short-selling refers to the selling of commodities without underlying assets, in the hope of buying them at a lower price before the delivery date. The futures market regulator had also discovered that the contracts traded on the exchange for which the settlement period exceeded 11 days were non-transferable, specific-delivery contracts, which was in violation of the FCRA as well as conditions for the exemption given.
Chidambaram said action will be taken by different authorities. While FMC is examining the report to assess the appropriate action to be taken under the FCRA, the corporate affairs ministry is weighing the report in light of the provisions of the Companies Act the old as well as the new Act to the extent it has been notified after the Companies Bill was cleared last month. The CBI has received a complaint about violation of some sections of the Indian Penal Code and it will decide what further action should be taken, he said.
I cannot give a time limit of when each of these authorities will take action, but from what I gathered, each will take action as early as possible, he added.
The investors will go to court for sure. The government does not come into the picture at all.... The FMC report will be ready in a day or two, Chidambaram said.