A communication trail between various financial sector regulators has shown that they were aware of the regulatory gaps at the National Spot Exchange Limited (NSEL) as early as 2011. However, the lack of clarity on whose jurisdiction the case fell, led to no action on the part of any of the regulators.
While the department of consumer affairs argued that the commodity market regulator Forward Markets Commission (FMC) had the powers to breach the gap, it delayed in implementation of its own decision by eight months till February 6, 2012 when it issued the notification.
The sub-committee of the Financial Stability and Development Council (FSDC), the inter-regulatory body chaired by the RBI Governor, had advised that FMC did not have the mandate to control the pace of growth at NSEL and other spot exchanges and that the regulatory framework for NSEL would have to be addressed urgently.
The communication between FSDC, FMC and the consumer affairs ministry between June and August 2011 shows that although the issue did come up, there was no regulatory action.
The opinion of the FSDC was communicated by then economic affairs secretary R Gopalan to Rajiv Agarwal, the secretary for consumer affairs.
Sebi is not claiming regulatory jurisdiction over spot delivery contracts in commodities. However, it appears that the regulation of spot commodity trades does not even come under the purview of FMC, which covers only forward contracts, Gopalan wrote.
Agarwal wrote back supported by an observation from the FMC, saying the FSDC view was not correct. It may be added that Inter-State trade and commerce is covered in the entry 42 of the Union List. He also said that all outstanding positions have to be squared off at the end of the day, his letter dated August 8, 2011 noted.
While the consumer affairs ministry was arguing with FSDC over jurisdiction, the FMC was given the role of only a designated agency to call for information on seven issues including ensuring that the spot exchanges complied with a ban on short selling.
Investments of around 13,000 investors are stuck with NSEL for settlement for almost 10 months now after NSEL suspended trading in all contracts on July 31, 2013.
This followed the consumer affairs ministry of directive not to issue fresh contracts that cross the 11-day timeline. These contracts were in violation of the norms.