Exchange Failure Prompts Commodity Bourse Audit: Corporate India

Exchange Failure Prompts Commodity Bourse Audit: Corporate India

India’s commodities futures market regulator has sought an audit of the Multi Commodity Exchange of India Ltd. after a related spot bourse failed in August. The Forward Markets Commission wants to examine large expenditures by the MCX and related-party transactions, Ramesh Abhishek, chairman of the regulator said in an interview. The MCX has set up a panel to run the bourse after the government in July ordered the National Spot Exchange Ltd., founded by MCX Vice Chairman Jignesh Shah, to halt trading.Volume at MCX, India’s biggest platform for commodities which counts NYSE Euronext and Fidelity International Ltd. as investors, is set to plummet to a five-year low this month as authorities widen their probe of the NSEL. The regulator has asked MCX’s largest investor, which is backed by Shah, to prove that it is qualified to operate the bourse. It also tightened rules for selecting directors for all futures exchanges.

“There have been complaints and concerns that a lot of money was frittered away on donations,” Abhishek said in an interview in his Mumbai office. “All these things are being audited now.”

MCX is in the process of hiring an external auditor, Suman Das Sarma, a spokesman for the exchange, said in an e-mail. The bourse isn’t aware of the regulator’s concern about “wasting money on donations,” he said.

MCX’s Chief Executive Officer Shreekant Javalgekar, its chairman, and three directors quit over the past month after the regulator tightened rules. Investors have been calling for the resignation of MCX founder and vice chairman Shah.

Trading Suspended

The turmoil at MCX, which controls about 90 percent of the country’s $2.8 trillion commodities futures market, began with the government seeking details on NSEL’s settlement cycle on July 14, and deepened with the suspension of most contracts on the NSEL on July 31. The bourse was banned from introducing new obligations without prior approval on Aug. 6.

MCX’s shares plummeted 41 percent in August, after falling 17 percent in July. The stock’s 30-day volatility is at 60, compared with 20 for the 50-stock CNX Nifty index. The shares jumped 2.5 percent to 468 rupees in Mumbai yesterday. Financial Technologies (India) Ltd. (FTECH), which owns 26 percent of MCX, has sunk 68 percent since July 31.

The regulator Oct. 5 questioned Financial Technologies’ ability to manage MCX. According to the FMC, a person shall be deemed “fit and proper” to run a bourse if the person has a general reputation and record of fairness, integrity and is not involved in any action of fraud and dishonesty. MCX has until the end of today to reply to the notice, Abhishek said.

‘Pushed to Wall’

The exchange appointed Pravir Vohra and G. Ananth Raman as independent directors to the board on Oct. 23, and named Parveen Kumar Singhal, a deputy managing director, as the chief executive until a managing director is named.

“If the regulator thinks that Jignesh Shah is not fit and proper, he won’t put up a fight; he has been pushed to the wall,” Gnanasekar Thiagarajan, a director at Commtrendz Risk Management Services Pvt., said by telephone. “The MCX is an institution now. Even if it changes hands, it will be taken over by professionals.”

The number of contracts traded on the MCX fell 31 percent in September from July, with volume so far this month totaling 10.5 million contracts, the least since December 2008, MCX data show. Volumes on the rival National Commodity & Derivatives Exchange Ltd. have declined 6.3 percent since July.

“Volumes have been falling because of the higher margins imposed in August and declining investor confidence after what happened at NSEL,” Aurobinda Prasad, head of research at Karvy Comtrade Ltd., said from Hyderabad. “The government will first have to sort out the NSEL story.”

CEO Arrested

The NSEL provided an electronic platform for farmers and traders to buy and sell about 53 commodities on an immediate delivery basis. The bourse broke rules by allowing settlement longer than 11 days and permitting sale of goods traders didn’t keep in its warehouses, according to the regulator.

NSEL’s former Chief Executive Officer Anjani Sinha was arrested on Oct. 17 after an investors’ group complained the executives diverted funds and failed to settle about 56 billion rupees ($912 million) in dues to investors.

NSEL was not a spot bourse as trades were being settled after 35 days, Himanshu Roy, joint commissioner of police in Mumbai, told reporters on Oct. 25. “It’s not even an exchange; It’s more like a finance scheme where people invest, square up and the money keeps rolling.”

Dilip Tambe, a spokesman for NSEL, declined to comment for the report.

Empty Warehouses

A Bloomberg TV India report broadcast on Aug. 14 showed a warehouse owner in New Delhi say that they had no inventories of sugar even as NSEL data showed a stockpiles of more than 100,000 tons. Another storage facility, which according to NSEL data held 9,632 metric tons of steel coils, was found to have been shut for two years, according to the report.

The FMC is working with exchanges to strengthen rules and revive investor confidence, Abhishek said. The regulator is asking futures bourses to audit their warehouses and margin systems, he said.

“We have asked warehouses to register with the Warehousing Development and Regulatory Authority by the end of the year,” Abhishek said.

To contact the reporters on this story: Swansy Afonso in Mumbai at; Rajhkumar K Shaaw in Mumbai at

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 (, 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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