Indian brokers said a lack of oversight allowed the nation’s biggest spot commodity exchange to stretch settlement dates, prompting a government clampdown that triggered a 65 percent tumble in its parent’s shares.

Bourse Crash Seen Triggered by Regulator Vacuum: Corporate India

Indian brokers said a lack of oversight allowed the nation’s biggest spot commodity exchange to stretch settlement dates, prompting a government clampdown that triggered a 65 percent tumble in its parent’s shares.

The National Spot Exchange Ltd. this week suspended some contracts after the government on July 14 asked the bourse not to start new obligations until further notice. The exchange permited investors to close trades in 36 days. A settlement longer than 11 days allowed the bourse to act similar to a forward market, according to Harish Galipelli, head of commodities and currencies at JRG Wealth Management Pvt.“In the last one year the debate is on about who should govern the spot market,” Galipelli said in an interview from the southern city of Hyderabad. “There was some kind of leeway in the regulation. The argument NSEL was following was that the contract takes place now and delivery takes place after 20 days.”

Regulators globally are expanding scrutiny of markets from power to metals after banks rigged the London interbank offered rate, a benchmark for $300 trillion of global interest-rate contracts. The suspension of the contracts by the Indian bourse followed two weeks of communication between the NSEL and authorities, and prompted the government to ask the futures market regulator to oversee a settlement between the brokers and the exchange.

“Trading will resume when the government clarifies or issues new guidelines,” Anjani Sinha, chief executive officer of the exchange, which transacted 185 billion rupees ($3 billion) of business in June, said in an interview yesterday. “Because of the ambiguity in the regulatory framework the government said that let us decide the new rules first.”

Shares Plunge

Shares of parent Financial Technologies (India) Ltd. (FTECH), an operator of exchanges, plunged 65 percent to 191.65 rupees in Mumbai yesterday. The move by the NSEL doesn’t “entail any financial liability” on the Blackstone Group LP-backed Financial Technologies, founder Jignesh Shah said in a statement yesterday.

Financial Technologies’ profit fell 14 percent to 2.27 billion rupees in the year ended March 31. NSEL accounted for 56 percent of the exchange operator’s net income, according to exchange filings.

Financial Technologies also owns 26 percent of Multi Commodity Exchange of India Ltd., the nation’s biggest commodity futures bourse. Shares of the company, that also counts NYSE Euronext as an investor, plunged by the 20 percent limit to 510.55 rupees yesterday.

Seek Information

“The government is seized of the matter in all its seriousness,” Food Minister K.V. Thomas said in a statement yesterday. The Forward Markets Commission, the regulator, will “seek information from the NSEL regarding the rationale” to suspend contracts, he said.

The exchange on July 23 cut settlement days to 11 before suspending the contracts on July 31.

“The suspension should have been informed by the exchange to the members much in advance,” said Hyderabad-based Aurobinda Prasad, head of research at Karvy Comtrade Ltd., who questioned the formation of NSEL, which isn’t regulated. “NSEL has said by Friday they will come out with a settlement price calendar and things should be fine. Investors will be a little concerned now.”

NSEL provides an electronic platform for farmers and traders to trade commodities with compulsory delivery. The obligations are single-day trading contracts resulting in compulsory delivery. The exchange trades in 41 agri-commodities, three precious metals, eight metals, one energy and 7 electronically-traded contracts, according to NSEL’s website.

Financing Activities

The reduction in carryover days to 11 days meant “there weren’t any takers for the financing activities,” which led to the suspension of contracts, said Deena Mehta, managing director of Asit C. Mehta Investment Interrmediates Ltd., which funded investors trading on the NSEL. “Enough time was not provided to unwind.”

NSEL accounts for more than 98 percent of the country’s electronic spot market in commodities, according to its website. Physical raw-material bourses operate separately from futures exchanges in India.

The U.S. Federal Reserve last month said that it’s reviewing a decade-old ruling that lets banks deal in physical assets like metal and oil. The International Organization of Securities Commissions, a Madrid-based group representing regulators from more than 100 countries, set tougher guidelines July 17 for publishing benchmarks for everything from raw materials to equities.

Passing the Buck

In India, the stock market regulator tightened disclosure norms for hedge funds last month, while the Forward Markets Commission in 2012 clamped down on excessive speculation in the futures market. Ramesh Abhishek, FMC chairman, didn’t answer three calls and a text message seeking comment on regulation for the spot exchange.

Government departments are passing the “buck to the FMC and the FMC once again passes the buck to the government of India saying that we are not the regulator,” Kirit Somaiya of Investors’ Grievance Forum, which represents retail investors, said in an interview to Bloomberg TV India. “Who is going to investigate and act?”

To contact the reporters on this story: Rajhkumar K Shaaw in Mumbai at rshaaw@bloomberg.net; Swansy Afonso in Mumbai at safonso2@bloomberg.net; Prabhudatta Mishra in New Delhi at pmishra8@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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