The Forward Markets Commission (FMC) issued a show cause notice on October 4 to Financial Technologies (FTIL) and Jignesh Shah, chairman & group CEO of FTIL, among others, questioning their ?fit & proper? status. If the status is withdrawn, FTIL would need to divest it’s 26% holding in commodity futures exchange MCX. In an interview with Ira Dugal and Ashish Rukhaiyar, FMC chairman Ramesh Abhishek explains the decision to issue the notice and the likely fallout of the R5,600 crore settlement crisis at the National Spot Exchange Limited.
FMC has issued a show-cause notice to the National Spot Exchange and its promoters questioning its fit & proper status. Is this FMC?s final step in some ways?
Actually, we had already given an indication in August when we wrote to the board of NSEL that if it did not meet its settlement obligations then the ?fit and proper? status will be at serious risk. So, we waited and saw the developments that happened in the last one and a half months. Now, we think, is the right time to issue a show-cause notice to them.
The former head of NSEL has stated that he is the one responsible for the settlement crisis and the board of directors and the promoters do not have any role in it. But FMC chose to issue the notice to FTIL along with three individuals?Jignesh Shah, Joseph Massey and Shreekant Javalgekar. Why?
We have received a lot of reports and information. We have the report of the forensic auditor. We also got a report from SGS. We have also reviewed the minutes of the meeting of the board of directors of NSEL, FTIL and IBMA (Indian Bullion Markets Association). Based on all this information, we thought that we must ask them to show cause whether they continue to be fit and proper to be a shareholder in our regulated exchange, MCX, and whether the three directors also continue to be fit and proper. They will have to reply. We will review the reply and then decide.
So, this would impact FTIL as a company and the three
individuals?
Correct. FTIL as a legal entity is the shareholder in MCX. They are the anchor investors. The notice has been issued to them in that capacity and the three directors have been issued notice in their personal capacity. To be a shareholder in any regulated exchange or to be a director on the board of any regulated exchange, you need to be a fit and proper person.
If the promoters fail to clear the ?fit & proper?test, what happens to the whole settlement process?
Everything has to be done as per the law. As per the by-laws of NSEL, the exchange is responsible for the settlement, but it is not able to do the same. There have been continuous defaults. So, people have to go to the court for legal recourse. If there is a criminal offence committed in the process, then the criminal investigation agencies will book the culprits. The litigation route has to be taken for recovery of money and also for the punishment for any criminal offence committed. There is no law that authorises us to recover the money and pay the investors.
The forensic report prepared by Grant Thornton was never made public. Does it give any incremental evidence about the absence of stocks?
The forensic audit report has disclosed a number of facts about how NSEL was functioning for the last few years. We have drawn many conclusions based on the report, including ones related to the responsibilities of the board of directors of NSEL. So, the report has been helpful. It has drawn our attention to a number of things about various acts of omission and commission at NSEL.
Did it indicate anything related to the settlement guarantee fund (SGF)? A petition in the Mumbai High Court has linked SGF to the e-series contracts of NSEL.
The forensic audit report says that by the end of June, the exchange had roughly around R800 crore. They are yet to give us a report on how this fund was utilised from July 1 onwards. We are still waiting for the report. At this point of time, we do not know if it was used (for e-series). There is only one settlement guarantee fund for the whole exchange. There is no separate fund for different types of contracts. But you use the SGF only when there is a default. No one has claimed so far that there was a default in the trading of e-series. There has to be a default before you dip into the SGF. NSEL had got an audit done for e-series contracts. The issue is that we have been authorised by the government (notification dated August 6) to supervise the settlement of all outstanding one-day forward contracts. The exchange has told us that e-series contracts are settled contracts. So, there is no outstanding settlement (in e-series). Therefore, we do not need to review. But if the court gives such a direction, we will abide by it.
MCX was supposed to submit details of the new board composition to FMC. Has that been done?
MCX has requested the institutional shareholders to nominate their representatives. They have institutional shareholders like IFCI, Corporation Bank, Union Bank of India, HDFC Bank and Bank of Baroda. They are the top five and then there?s NABARD. But NABARD already has a representative. So, out of seven shareholder directors, one is NABARD designated and one will be FTIL designated. The remaining five will be from these institutional shareholders. They are also supposed to appoint three independent directors with our approval. They are still working out the names after which a full re-constitution of the board of MCX will take place.
Based on this episode, would the FMC like to come out with regulations for spot exchanges?
The law has to authorise us to do anything. Regulations for spot exchanges have been under consideration for some years now. In 2011, we had proposed a draft law to the Department of Consumer Affairs. Even WDRA (Warehousing Development and Regulatory Authority) had proposed some draft regulations which, among other things, would have regulated spot exchanges also. The Ministry of Agriculture had also floated a note. So, there have been three proposals on the table for regulation of spot exchanges. But now it seems that any contract that results in delivery through a document of title becomes a forward contract. In that case, may be, we should be able to do this kind of trading on the regulated exchanges itself.
So are you saying that most of this business should be transferred out of spot exchanges on to the commodity futures exchanges?
Trading in any forward contract can be done on the regulated exchange. You can have a spot segment in the futures exchange like you have in a stock exchange. Actually, NCDEX is already contemplating making its spot exchange a part of its main exchange. It is a 100% subsidiary and the standalone spot activity is a loss-making activity. The regulated exchange can offer trading in any type of forward contracts with the approval of the commission. They first need to get rid of the exemption under Section 27 (of FCRA) because one of the conditions of the exemption for NCDEX Spot Exchange was that they will maintain arm?s length distance from NCDEX. If you are a recognised entity under Section 6 and Section 14B of FCRA, then you can offer trading in forward contracts of all types subject to regulation of FMC.
