The findings of the PricewaterhouseCoopers (PwC) special audit into commodity exchange MCX are disturbing, not just for what they say about the dealings of MCX with Financial Technologies (FTIL) which owns 26% of it, but for what they say about how India’s commodity regulator supervised the business. Many of the issues raised—such as MCX not benchmarking costs while paying FTIL R649 crore over the years—are of relevance to MCX’s shareholders and the Department of Company Affairs. For the record, Jignesh Shah, MCX’s ex-vice chairman and FTIL’s chairman, has rubbished the PwC audit.
But, as the Grant Thornton forensic report on National Spot Exchange Ltd—FTIL owns 99% of NSEL—pointed out some months ago, the Forward Markets Commission (FMC) had virtually no control over the exchanges it was supposed to regulate. NSEL, for instance, was financing members who were trading on it, using the settlement guarantee fund for its own business and running a manual system that allowed it to change transaction details later. Much the same, PwC found, applied to MCX. The surveillance, PwC says, was conducted manually—while that may have been okay when volumes were small, this seemed an invitation to manipulation when volumes rose from R1.6 lakh crore in FY05 to R156 lakh crore in FY12. PwC says the surveillance seemed to have been designed in such a way that anomalies below a certain level would go undetected; critical management alerts were not enabled; the management may have been aware of trading positions taken by related parties; and there was evidence of synchronous trading taking place. PwC’s review found, for instance, 15,131 trades of R1,856 crore where the same party placed buy and sell orders within 60 seconds of each another, with no change in the net position—in other words, the trades were clearly directed at just driving volumes up and prices in a certain direction. The list of such misdemeanors is a long one, even members whom the regulator had barred from trading were allowed to do so.
Given how well-regulated commodity markets are so critical for the agri-trade, as well as for farmers—put and call options will derisk the business substantially—it is to be hoped that the FMC, now under the finance ministry, finally gets its act together. The next forensic, in fact, should be of FMC’s functioning.