What happened on the NSEL (National Spot Exchange Ltd) recently is system failure or is it a scam. Lets try to analyse the case as you know National Spot Exchange suspended trading in most of its contracts and deferred payouts to its members, triggering fears of a default.At the onset it looks like the liquidity issue.
NSEL launched contracts with more than 11 days tenure, while spot exchanges are not allowed to offer such contracts. The exchange also reportedly allowed members to do short selling, which is not permitted on spot exchanges, where delivery of the commodity traded is mandatory.
Short selling is trading strategy where investors sell without owning an underlying asset. The above was not approved by the government and then the government on 12 July directed the exchange not to launch any more such contracts and also asked it to settle all existing contracts on the due date. On 31 July, NSEL stopped trading in all contracts, barring e-Series, and also deferred payments to members, triggering fears of a default. The fear has not receded yet despite the exchange’s the best of the efforts to allay it.
so what was NSEL doing, gettig in to it NSEL a Subsidiary of Financial Technologies. MCX is also a Subsidiary of Financial Technologies. The Shady Promoters devised a scheme where one could take positions in NSEL Violating the Rules of the Government of India and SELL the same on MCX Ltd.
Now where is the Regulator ???
Guess what The spot commodity exchange is not regulated by FMC or the Central government. It is a state subject. But still it was the department of consumer affairs of the central government which acted on NSEL.
The story of commodity futures trading is also no different. If as capital market regulator Sebi is bad, FMC is worse. However, the case of FMC is different. It doesn’t have powers to act. Amendment of Forwards Contracts (Regulation) Act, 1952, which will give more autonomy to FMC, is hanging fire for the last many years.
Because of all these reasons, trading in commodity futures is just a game of speculation in India. There is no serious hedging taking place, which is the objective of allowing futures. Price rigging is the order of the day.
In the past there are a lot of cases happened of Price rigging the most famous was In 2012 guar contracts had witnessed extreme price volatility despite the regulator increasing the margin amount several times .
Nobody has called it a scam yet. But it has the potential to snowball into one.