on paper without involving a change in possession. Sugar, castor seed, paddy and raw cotton were amongst the 11 commodities on which these trades gained popularity. The extent of money involved in these trades ballooned as most of the times the positions were rolled over for another trade cycle and lenders collected the interest amount from each preceding trade.
What led to the crisis at NSEL?
While the NSEL’s financing product had gained popularity since 2010, it was in February 2012 that the government got wind of such trading activity and asked the FMC to look into the matter. The FMC found a number of irregularities, most importantly violations of the FCRA Act due to trades with settlement periods of more than 11 days and effective short-selling in the spot market. Based on this, the consumer affairs ministry issued a show-cause notice to NSEL in April 2012.
Eventually, in mid-July this year, the ministry asked NSEL to give an undertaking that no fresh contracts would be launched till further instructions and all existing contracts would be settled on the due dates of less than 11 settlement days. However, nearly a week after submitting the required undertaking on July 31, NSEL announced that trading in all contracts other than e-series contracts will be suspended. At the same time, delivery and settlement of the pending contracts were deferred by 15 days.
So, why did NSEL suspend all settlements?
NSEL cited “market disequilibrium” as a reason for postponing the settlement of R5,600 crore of outstanding contracts. It argued that abrupt changes in policy had created uncertainty and doubts about continuity of trading on the exchange resulting in a sudden withdrawal of participants from the market.
However, market observers say that the decision was taken after an increasing number of commodity producers that used the NSEL platform for working capital financing faced problems in adjusting to the changed settlement cycle. While investors were keen to exit such contracts, some of these members refused to honour their settlement dues.
At the time of suspension, NSEL said that it had access to stocks of commodities worth R6,200 crore over and above its settlement guarantee fund (SGF)—a contingency fund created from members’ initial margins that should help it arrest liquidity concerns.
What was NSEL’s proposed settlement solution?
Since it decided to suspended all settlements for a period of 15 days on July 31, 2013, NSEL proposed two settlement plans for the outstanding dues.
After day-long discussions with