India’s largest spot commodity exchange was shut down as regulators investigate possible trading violations

August 6, 2013, 2:19 p.m. ET

India Halts Spot-Metals Trade

Commodities Exchange Shut Down in Trading-Violations Probe

DEBIPRASAD NAYAK And BIMAN MUKHERJI

MUMBAI—India’s largest spot commodity exchange was shut down on Tuesday as regulators investigate possible trading violations. The government banned trading in all contracts operated by the National Spot Exchange, including gold, silver and base metals, Ramesh Abhishek, chairman of the Forward Markets Commission, told The Wall Street Journal. Mr. Abhishek didn’t say how long the suspension would remain in place. Tuesday’s ban was the final blow for the National Spot Exchange, which was forced to suspend trading in sugar, rice and other commodities last week after regulators alleged that the exchange allowed trades to be settled more than a month after they were made. Under India’s regulations, spot exchanges must settle trades within 11 days.The suspension of precious-metals trading on the National Spot Exchange had no effect on global gold prices, because the exchange’s $25 million daily bullion volume represents just a fraction of the gold traded in India.

Regulators are also investigating whether commodities were being traded on the exchange without the actual delivery of goods, Mr. Abhishek said.

As a spot market, the National Spot Exchange is supposed to facilitate the physical exchange of commodities, with buyers and sellers striking deals on goods deposited at warehouses.

In a statement Tuesday, the National Spot Exchange said it hadn’t received the government order on the metals-trading ban but it would suspend trading in all contracts as a precautionary measure.

Although the Forward Markets Commission oversees commodities trading in India, it suffers from a lack of staffing and must get permission for punitive action from the consumer-affairs ministry, which issued the ban on the National Spot Exchange.

The absence of any strong regulator directly responsible for overseeing spot exchanges led to the current situation, said Sudeep Bandopadhyay, managing director of Destimoney, a financial-services company.

“Probably something like this was required to wake up authorities and bring in proper regulation and ensure smooth functioning of the market.”

In New Delhi, K.V. Thomas, the minister of Consumer Affairs, Food and Public Distribution, said the government would look into the matter and take steps to strengthen the rules.

With the halt in trading, the National Spot Exchange is also facing a payment crisis.

The exchange has to facilitate payments of more than 55 billion rupees ($904 million) owed by buyers to sellers for the suspended contracts, Chief Executive Anjani Sinha said Thursday.

That amount is set to rise now that it has stopped bullion trading as well.

The exchange said Sunday that it has proposed to the regulator and its clients to settle most of the outstanding amount of the suspended contracts within the next five months.

Vice Chairman Jignesh Shah said the exchange would disclose details of the plan by Aug. 14.