Spot Exchange: Latest chapter in the NSEL saga

63 Moons plans apex court appeal against merger with National Spot Exchange

One event that had a lasting impact on the Indian commodity market in recent times was the closure of the NSEL (National Spot Exchange Limited) in 2013. The episode turned the spotlight on the lax manner in which commodity exchanges functioned, putting investor interests in jeopardy.

This case was again in the limelight last week, when the Bombay High Court dismissed the writ petition filed by 63 Moons Technology (formerly Financial Technologies India Ltd), the holding company of NSEL, challenging the merger of NSEL with 63 Moons Technologies. The merger was suggested as a solution to make good the ₹5,600-crore loss suffered by traders on NSEL in 2013.

Since the exchange did not have enough resources to enable repayment of amounts due to the traders, the Ministry of Corporate Affairs had given the order in February 2016 that NSEL be merged with 63 Moons Technologies, that was in the business of providing technology solutions to stock exchanges and was the parent of NSEL. It was felt that the resources of 63 Moons could be utilised to go after defaulters and make them pay back the amounts due. The Bombay High Court has, however, granted a 12-week stay on implementation of the merger, within which time 63 Moons plans to appeal to the Supreme Court against the merger.

A brief background

The National Spot Exchange began operations in 2008, to act as an electronic spot market for commodities. The NSEL operated in a regulatory vacuum for some time. In 2011 the FMC was designated as the agency to regulate spot exchanges. It found that the NSEL was trading in contracts of longer duration than allowed on spot exchanges, and the exchange was asked to cease trading in these contracts.

As a result, trading on NSEL was suspended, leading to one of the largest payment defaults in recent times.

Investigations revealed that the exchange was facilitating trading in forwards (when it was allowed to trade only spot contracts), devising paired contracts (that allowed investors to make fixed returns while providing financing to commodity traders), giving margin exemptions to repeated defaulters, not supervising its warehousing facilities and not maintaining a Settlement Guarantee Fund.

Evidence also pointed to the exchange being in collusion with principal traders, who had defaulted on their payments.

Who lost the money?

While it is apparent that the exchange is guilty on many counts, the hue and cry about the loss incurred by investors is a trifle overdone. Investors were sold paired derivative contracts on NSEL, with the lure of a fixed return.

Now, surely, someone who thinks that fixed returns can be earned from commodity trading is either extremely naïve or stupid.

Commodity prices can be as volatile as, if not more than, equity prices. Also, as FTIL’s shareholders made a lot of money when the stock price was rallying, they should now be open to bearing any loss post-merger. These arguments can be applied to the investors of NSEL too as trading in commodity derivatives on a nascent trading platform is far riskier.

Some takeaways from the scam for investors are — one, all investors, whether big or small, need to do proper due diligence before ploughing money into any product.

Two, if it involves dealing with unregulated exchanges, institutions or entities, or if the structure of the product does not seem right, it is best to say no.

Three, the product offered to NSEL’s investors allowed intermediaries to operate client accounts. It is best to exercise caution in such products as the end use of money goes out of your control.

While the greed of some of NSEL investors is partly responsible for their loss, there is no disputing that they need to be repaid the sums due to them.

Arguments against merger

Various government arms including the Economic Offences Wing, Mumbai and the Enforcement Directorate are trying to get the money back by attaching the properties and assets of those related to NSEL. Against this background, merger of NSEL with 63 Moons Technologies is not warranted.

Also, enforcing clause 396 to push the merger sets a bad precedent. In the past, this tool was used to protect the interests of both the entities being merged and it was done in larger public interest. The ‘public’ whose interest is being served here, is questionable. The merger also lifts the corporate veil that establishes a company as an entity separate from its shareholders.

Another reason why the merger is unnecessary is because the exchange is only a facilitator and can only reclaim money from the defaulting traders to pay those who have suffered a loss. So the funds of 63 Moons cannot be used to pay back the traders in NSEL; it can only be used to reclaim money from the defaulters.

The action will probably shift to the Supreme Court now, where the final chapter of this saga could be enacted.

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