NATIONAL SPOT EXCHANGE LIMITED- CRISIS
Commodity Market
• It’s a commodity exchange that is regulated by the state to allow sellers and buyers to trade in specified commodities like grains, oils, metals and livestock.
• The exchanges enable traders to formalize written standard contracts in a manner that the buyer need not inspect a specimen of the commodity before making a purchase.
• It is not as popular as the stock market, yet commodities market provides opportunities of making profit for its investors.
2 types of transaction generally used in commodity market:
• Spot transaction:refers to the transaction that takes place on the spot, meaning prices are negotiated and money paid for commodity without delay.
• Futures contract: A purchaser makes payment from the seller as per price agreed on the date of the contract to offer goods at a specified date in future. Futures contracts enable trades to secure low prices for ensured delivery of necessary items, thus circumventing crop failures or any connected problems.
Example:I buy future contract for oil on August 2013 to be delivered on 30th Oct, 2013. This contract ensures that any variation in the cost of the oil, shortage of supply, etc; will not cause any hindrance to the delivery of oil on 30th Oct 2013.
Difference between Stock market and Commodity Market
Stock Market Commodity Market
Deals in owningshares of a company. Deals in actual items or contracts to provide or receive a shipment
Share of the stock represents an actual percentage of ownership in the company. It is essentially a paper. Future market contracts are paper like stocks but they do not provide ownership in way.
Spot transactions deals with commodities which are food grains, pigs, cows etc.
Regulatory body isSecurities and Exchange Board of India (SEBI) Regulatory body is Forward Markets Commission (FMC)
National Spot Exchange (NSEL)
• It’s a Commodities exchange in India. Started its operation in 2008
• It’s a joint venture of Financial Technologies (India) Ltd. (FTIL) and National Agricultural Cooperative Marketing Federation of India (NAFED).
• Regulated by Forward Market Commission (FMC)
• Mission: is to develop a common Indian market by setting up a nation-wide electronic spot market and providing state of the art trading, delivery, and settlement facilities in various commodities including agricultural commodities.
• Process followed: Sellers and producers can dump their produce in any of the company warehouses and buyers can bid for a commodity, settle and take delivery on the same day
Forward Markets Commission (FMC)
• It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act, 1952.
• A regulatory authority which was overseen by the Ministry of Consumer Affairs, Food and Public Distribution, Govt. of India. From September 2013, it comes under the Ministry of Finance.
• The Commission allows commodity trading in 22 exchanges in India, of which six are national.
E-series contracts
• It’s a unique market segment, which functions like the cash segment in equities, but offers commodities in the de-mat form in smaller denominations.
• NSEL offers e-series contracts in gold, silver, copper, zinc, lead, nickel and platinum.
What led to the crisis in NSEL?
• Having failed to attract customers and market participants, the NSEL started exploiting the rules and regulations by offering new products.
• Ponzi scheme:
Spot exchange was quietly converted into futures trading platform without having to abide by the rules and regulations of futures market.
From spot settlement, the company started offering settlement period of 10 days that could be rolled over to anywhere between 25 to 45 days.
Offer of such products brought more punters, speculators and brokerage houses to the exchange.
• It was promoted to the investment community with a promised “risk free” return of 15 per cent to 18 per cent.
• Investors who had no idea of commodities trading started to venture into this high risk business. That a low margin was required made it even more appealing.
• High net worth individuals borrowed money from their brokers at 11 per cent and started to trade with a guaranteed expected return of 15 per cent.
• NSEL was able to achieve a turnover of more than Rs 600 crore last fiscal.
• Despite warnings of irregularities and suspicion at the exchange, Government did not take action.
• In February 2012, it designated the FMC to look into the operations at NSEL. The FMC found glaring violations that was reported back to the Ministry.
• After many communication exchanges between the government and NSEL for over a year,in Julythis year, the Government asked NSEL not issue any new contract and settle all existing contracts by their due dates. This order crashed the ponzi scheme and led to the current payment crisis
CRISIS
• NSEL suspended trading of all contracts, other than e-Series and deferred the settlement, sparking fears of cash crunch and default of payment in the Financial Technologies.
• The exchange has blamed the government for the structural changes it has instructed a few weeks back for creating market disequilibrium.
• NSEL was required to deliver commodity physically; instead the exchange facilitated use of electronic warehouse receipts, enabling investors to avail of the arbitrage, without taking physical possession of goods.
• The flaws in contracts and insufficient underlying stocks to cover liabilities led to the financial crisis.
• After few days NSEL suspended the trading of E-series leading to the complete shutdown of the exchange.
Investigation:
• Government has entrusted the FMC to probe the matter.
• SEBI has launched its own investigation of the brokers involved with NSEL and the listed parent company of NSEL - Financial Technologies Limited.
• The Income Tax department has launched an investigation on companies registered with NSEL and have conducted raids on some of them.
• The Prime Minister’s Office is planning to set up a special team headed by the Economic Affairs Secretary to look into the issue.
• The Finance Ministry is taking over regulation of commodity futures markets from the Consumers Affairs Ministry. A notification to bring commodity markets regulator FMC under the ambit of the Finance Ministry was issued by the Government.
Outcome:
• Government has banned trading in e-series contracts at the NSEL as it wants the exchange to first settle about Rs 5,600 crore due to investors
• The commodities which are lying in warehouses under the control of NSEL are being auctioned. Pay-out is being made of these proceeds. Auction of other stocks are in process.
• NSEL announced a seven-month plan to settle dues.
• NSEL is actively pursuing recovery of outstanding dues from the members with pay-in obligation.
• NSEL has appointed Grant Thornton as forensic auditors and, additionally, internal investigation has also been initiated against the management team of the exchange
by Divya V Prabhu
Reference:
http://budgeting.thenest.com/stock-market-vs-commodity-market-23770.html
http://latestaccounting.com/money/difference-between-stock-market-and-commodity-market/
http://www.deccanherald.com/content/353427/spot-exchange-loot-revives-memories.html
http://www.fmc.gov.in/index1.aspx?lid=22&langid=2&linkid=15
http://economictimes.indiatimes.com/news/economy/policy/now-finance-ministry-to-oversee-forward-markets-commission/articleshow/22441777.cms
Commodity Market
• It’s a commodity exchange that is regulated by the state to allow sellers and buyers to trade in specified commodities like grains, oils, metals and livestock.
• The exchanges enable traders to formalize written standard contracts in a manner that the buyer need not inspect a specimen of the commodity before making a purchase.
• It is not as popular as the stock market, yet commodities market provides opportunities of making profit for its investors.
2 types of transaction generally used in commodity market:
• Spot transaction:refers to the transaction that takes place on the spot, meaning prices are negotiated and money paid for commodity without delay.
• Futures contract: A purchaser makes payment from the seller as per price agreed on the date of the contract to offer goods at a specified date in future. Futures contracts enable trades to secure low prices for ensured delivery of necessary items, thus circumventing crop failures or any connected problems.
Example:I buy future contract for oil on August 2013 to be delivered on 30th Oct, 2013. This contract ensures that any variation in the cost of the oil, shortage of supply, etc; will not cause any hindrance to the delivery of oil on 30th Oct 2013.
Difference between Stock market and Commodity Market
Stock Market Commodity Market
Deals in owningshares of a company. Deals in actual items or contracts to provide or receive a shipment
Share of the stock represents an actual percentage of ownership in the company. It is essentially a paper. Future market contracts are paper like stocks but they do not provide ownership in way.
Spot transactions deals with commodities which are food grains, pigs, cows etc.
Regulatory body isSecurities and Exchange Board of India (SEBI) Regulatory body is Forward Markets Commission (FMC)
National Spot Exchange (NSEL)
• It’s a Commodities exchange in India. Started its operation in 2008
• It’s a joint venture of Financial Technologies (India) Ltd. (FTIL) and National Agricultural Cooperative Marketing Federation of India (NAFED).
• Regulated by Forward Market Commission (FMC)
• Mission: is to develop a common Indian market by setting up a nation-wide electronic spot market and providing state of the art trading, delivery, and settlement facilities in various commodities including agricultural commodities.
• Process followed: Sellers and producers can dump their produce in any of the company warehouses and buyers can bid for a commodity, settle and take delivery on the same day
Forward Markets Commission (FMC)
• It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act, 1952.
• A regulatory authority which was overseen by the Ministry of Consumer Affairs, Food and Public Distribution, Govt. of India. From September 2013, it comes under the Ministry of Finance.
• The Commission allows commodity trading in 22 exchanges in India, of which six are national.
E-series contracts
• It’s a unique market segment, which functions like the cash segment in equities, but offers commodities in the de-mat form in smaller denominations.
• NSEL offers e-series contracts in gold, silver, copper, zinc, lead, nickel and platinum.
What led to the crisis in NSEL?
• Having failed to attract customers and market participants, the NSEL started exploiting the rules and regulations by offering new products.
• Ponzi scheme:
Spot exchange was quietly converted into futures trading platform without having to abide by the rules and regulations of futures market.
From spot settlement, the company started offering settlement period of 10 days that could be rolled over to anywhere between 25 to 45 days.
Offer of such products brought more punters, speculators and brokerage houses to the exchange.
• It was promoted to the investment community with a promised “risk free” return of 15 per cent to 18 per cent.
• Investors who had no idea of commodities trading started to venture into this high risk business. That a low margin was required made it even more appealing.
• High net worth individuals borrowed money from their brokers at 11 per cent and started to trade with a guaranteed expected return of 15 per cent.
• NSEL was able to achieve a turnover of more than Rs 600 crore last fiscal.
• Despite warnings of irregularities and suspicion at the exchange, Government did not take action.
• In February 2012, it designated the FMC to look into the operations at NSEL. The FMC found glaring violations that was reported back to the Ministry.
• After many communication exchanges between the government and NSEL for over a year,in Julythis year, the Government asked NSEL not issue any new contract and settle all existing contracts by their due dates. This order crashed the ponzi scheme and led to the current payment crisis
CRISIS
• NSEL suspended trading of all contracts, other than e-Series and deferred the settlement, sparking fears of cash crunch and default of payment in the Financial Technologies.
• The exchange has blamed the government for the structural changes it has instructed a few weeks back for creating market disequilibrium.
• NSEL was required to deliver commodity physically; instead the exchange facilitated use of electronic warehouse receipts, enabling investors to avail of the arbitrage, without taking physical possession of goods.
• The flaws in contracts and insufficient underlying stocks to cover liabilities led to the financial crisis.
• After few days NSEL suspended the trading of E-series leading to the complete shutdown of the exchange.
Investigation:
• Government has entrusted the FMC to probe the matter.
• SEBI has launched its own investigation of the brokers involved with NSEL and the listed parent company of NSEL - Financial Technologies Limited.
• The Income Tax department has launched an investigation on companies registered with NSEL and have conducted raids on some of them.
• The Prime Minister’s Office is planning to set up a special team headed by the Economic Affairs Secretary to look into the issue.
• The Finance Ministry is taking over regulation of commodity futures markets from the Consumers Affairs Ministry. A notification to bring commodity markets regulator FMC under the ambit of the Finance Ministry was issued by the Government.
Outcome:
• Government has banned trading in e-series contracts at the NSEL as it wants the exchange to first settle about Rs 5,600 crore due to investors
• The commodities which are lying in warehouses under the control of NSEL are being auctioned. Pay-out is being made of these proceeds. Auction of other stocks are in process.
• NSEL announced a seven-month plan to settle dues.
• NSEL is actively pursuing recovery of outstanding dues from the members with pay-in obligation.
• NSEL has appointed Grant Thornton as forensic auditors and, additionally, internal investigation has also been initiated against the management team of the exchange
by Divya V Prabhu
Reference:
http://budgeting.thenest.com/stock-market-vs-commodity-market-23770.html
http://latestaccounting.com/money/difference-between-stock-market-and-commodity-market/
http://www.deccanherald.com/content/353427/spot-exchange-loot-revives-memories.html
http://www.fmc.gov.in/index1.aspx?lid=22&langid=2&linkid=15
http://economictimes.indiatimes.com/news/economy/policy/now-finance-ministry-to-oversee-forward-markets-commission/articleshow/22441777.cms
No comments:
Post a Comment