Jignesh Shah in Mumbai on Monday. (PTI)
Mumbai, Aug 5: Jignesh Shah, the innovative designer of new-age bourses, fumbled for answers at a press conference he hastily called this morning to explain the sticky situation that the National Spot Exchange Ltd (NSEL) had got into after the government ordered it recently to shut down a virtually unregulated forward trading mechanism that the exchange operated.
Shah said after confabulations with investors, an agreement had been reached to resolve the payment crisis within five months. But there was no certainty that the crisis would blow over for NSEL and in what form the bourse would function after a small section continued to resist the “universal solution” that has been worked out to resolve the problem.
NSEL had announced on Sunday that a phased payment schedule has been proposed to resolve the crisis. While there are eight members with outstandings of Rs 2,181 crore, who are willing to pay according to the scheduled due date or even earlier, around 13 processors (Rs 3,107 crore) have proposed to pay 5 per cent of their total dues every week. However, there are three processors with outstandings of over Rs 300 crore with whom negotiations are on.
Addressing a news conference here today, Shah said NSEL has formed an independent committee to oversee the settlement of trade amounting to Rs 5,500 crore. The members of the committee include former Company Law Board chairman Sharad Upasani, former Bombay High Court judge R.J. Kochar, former Sebi and LIC chairman G.N. Bajpai, and D. Sivanandan, former director-general of police in Maharashtra.
Shah added that the exchange would collate the payment plan from buyers and finalise the pay-in and pay-out after consultation with the FMC and then announce it to the market. Payment plans from all the members are expected to come by August 14.
He said action would be taken against those members not meeting their payment commitments. The entities or individuals who cannot meet the planned schedule will have to pay the outstanding sum plus 16 per cent interest.
“If any member does not co-operate, then we will have to report to the Forward Markets Commission (FMC), then strict action will be taken. All possible law enforcing measures will be taken on those who will not co-operate,’’ he said.
However, Shah could not come up with answers on queries like broker-wise exposure to the contracts and whether the exchange had adequate stocks in its warehouses to make up for any potential default by its members. Observers were also not satisfied on his response to the settlement guarantee fund at NSEL which had shrunk to Rs 60 crore from Rs 800 crore.
Troubles at the exchange began when the department of consumer affairs asked it to restrict contracts to a period of less than 11 days. It was observed in the exchange that there were contracts that exceeded 11 days and even stretched till 30 days.
The NSEL had introduced the forward trading mechanism in the guise of ready delivery contracts.
In a ready delivery contract, the supply of goods and the payment must be completed within 11 days from the date of the contract. Forward contracts are those where the supply of goods or payment or both take place after 11 days from the date of the contract. When there is no supply of goods, the contract is settled by payment of the cash difference based on the movement in prices.
Market circles said that these were essentially “paired contracts” where a processor or a miller after buying a produce from a farmer, entered into both sell and buy contracts with financial investors. This worked like a repurchase transaction where the warehouse receipt was first sold to the financial investor and later bought back. While the seller got finance from the arbitrager or the financial investor, the latter earned an interest in the process.