NSEL fiasco points to wider regulatory mess

The NSEL fiasco is part of a wider problem: poor financial market regulations across capital market, insurance and banking. The government is apparently considering a new regulation for commodity markets. Why wasn’t this a given higher priority than arming a corrupt and inefficient SEBI bureaucracy with draconian powers?

A massive Silver Jubilee celebration has been followed by a quick ordinance, with minimal public discussion, to give the Securities and Exchange Board of India (SEBI) sweeping new powers. Of these, the only area where some action was urgently required is on the clarity to regulate collective investment schemes (CIS). The ordinance does that and much more. It allows SEBI to decide what is a CIS, especially if it is a money pool of Rs100 crore or more.

It is now empowered to call for information (retrospectively from March 1998) as well as search and seizure, criminal prosecution, attachment of assets and disgorgement of wrongful gains. The ordinance also validates SEBI’s ‘Consent Order’ regime, which is a matter of litigation.

Was the regulator really hobbled by an absence of these powers? Will its extensive new mandate benefit stakeholders or merely create a larger bureaucracy to harass legitimate businesses? Time will tell how SEBI wields its new powers, but a look at how it had acquitted itself so far, only causes concern and discomfort.

Stock market regulation, registration of intermediaries as well as the automation of trading with settlement guarantees was seen as such a big deal that every regulator after 1992, was modelled on SEBI. But wouldn’t you think that a government as beleaguered as the United Progressive Alliance (UPA-2) would call for clear, unambiguous assessment of SEBI’s achievements before rushing ahead with an ordinance that grants it sweeping powers?

In fact, the current action seems just over a year old—starting from the time Pranab Mukherjee went over to the Rashtrapati Bhavan. Until then, the thinking was different. In March 2011, the Financial Sector Legislative Reforms Commission (FSLRC) was set up to review legal and institutional structures of the financial sector. According to Wikipedia, this was because “piecemeal amendments have generated unintended outcomes including regulatory gaps, overlaps, inconsistencies and regulatory arbitrage.”

FSLRC submitted its report in March 2013 and one of its key recommendations was the setting up of a Unified Financial Authority (UFA). However, it turns out that FSLRC itself may have been an exercise in futility and a waste of taxpayers’ money. Each of its key members—YH Malegam (well-known chartered accountant and director on the Reserve Bank of India board for over 19 years), Kishori J Udeshi (ex-RBI deputy governor), PJ Nayak (ex-bureaucrat and former chief of Axis Bank and JR Varma (academic)—voiced formal dissent against its core recommendations. FSLRC itself made no attempt to engage with core stakeholders—the consumers of financial services—who have been getting a raw deal under every financial regulator. Consider these issues.

  After 25 years of its existence, the number of retail investors has shrunk from 20 million to 8 million (D Swarup Committee report) and this includes mutual fund investors;

  RBI has not been able to make any headway in reaching over 300 million unbanked Indians. In fact, it has to share the responsibility for viewing the microfinance sector through rose-tinted glasses even as their aggressive sales and usurious interest rates pushed people to suicide and bankruptcy, nearly killing this business segment.

  The creation of an insurance regulator only encouraged rampant mis-selling of equity-linked mutual fund products; the regulator did nothing, until three years ago. RBI and the Insurance Regulation and Development Authority (IRDA) are yet to initiate action against misleading advertisements and rampant mis-selling of insurance by banks. Result: India remains one of the most under-insured countries in the world.

   The pension regulator has made no headway because of its foolish decision not to compensate distributors, because the pension Bill has yet to be passed and there is no clarity on its regulatory powers.

The FSLRC report didn’t even touch on these issues. Since the government chose the ordinance route to make SEBI more powerful, one assumes that the FSLRC report has been dumped. Otherwise, the ordinance should have been preceded by a transparent assessment of whether SEBI was even using its existing powers of regulation and supervision effectively. In our experience, SEBI’s performance is especially lacking in the area of grievance redress and is the single biggest reason for retail investors’ exit.

Let’s turn to regulatory and statutory changes that were probably more urgent than the ordinance to empower SEBI. The consequence of regulatory confusion was evident in the blind panic in connection with the National Spot Exchange Ltd (NSEL), which was asked to suspend all its contracts (except e-contracts). NSEL must be hauled up for wrongdoing, if any, but nobody seems to realise that the buck, in this case, should stop right at the top—with the ministry of consumer affairs (M-Con), which allowed a commodity spot exchange to be set up with just a government notification.

The M-Con, with no experience of regulating a market (or consumer issues for that matter), triggered chaos with an order that virtually shut down an exchange overnight. This, after it sat on concerns about NSEL’s ready-forward trades (conducted openly and transparently by the bourse), for more than a year. When NSEL suspended all contracts other than e-series, and decided to merge settlements, it triggered a panic. The shares of Financial Technologies, NSEL’s promoter, crashed over 60% and those of the Multi Commodity Exchange (MCX) dropped 20%.

Will someone tell us who at M-Con took the decision to permit and regulate a spot exchange in commodities? Was there any attempt to create a framework or infrastructure to regulate the bourse? Why weren’t spot exchanges started under the Forward Markets Commission, which regulates commodity trading? According to media reports, the government is now considering a new regulation for commodity markets—if this is true, why wasn’t this a given higher priority than the SEBI ordinance?

Then there is the Companies Bill 2012, which has been cleared by the Lok Sabha seven months ago, but remains in suspended animation because the Rajya Sabha has yet to clear it. Has the government forgotten the Bill? Or is the young minister of corporate affairs (M-Corp), Sachin Pilot, unable to make his voice heard? Sources say that it is deliberately, and repeatedly, sidelined, but it is not clear why.

Could it be that SEBI is considered a better regulator because M-Corp failed to check the rampant fund-raising by Sahara, Saradha and a host of other collective investment and chain-money schemes? If yes, then there is still no clarity about whether the new SEBI ordinance will also cover chain marketing or multi-level marketing (MLM) companies (MMM, floated by a Russian citizen, QNet by a Malaysian, Pearls or PACL and hundreds of others), which fall between the Prize, Chits & Money Circulation Act, 1978 and the Companies Act.

As we said before, the SEBI ordinance is extensive in its scope but there is little clarity about what this means for ordinary people who are victims of various scams and mis-selling. The effectiveness of a statute depends on how well it is implemented.

Unfortunately, neither SEBI nor any of the other independent regulators modelled on it have really delivered. SEBI is seen as a slothful, non-transparent, arrogant and corrupt bureaucracy, packed with officials on deputation, looking for their next sinecure. Now, it will only be bigger and more powerful. Its senior appointees are on a career extension and have little interest in making a mark or fulfilling their primary mandate of protecting investors and developing markets. They rarely interact with public stakeholders, probably afraid of exposing their sketchy knowledge about markets, financial products and investors’ issues. They get away because there is almost no accountability to the finance ministry, parliament or the people. Very few MPs have either the domain knowledge or an interest in the slowly diminishing tribe of investors; they are more interested in companies and powerful market intermediaries which hardly makes for a healthy capital market.

Sucheta Dalal is the managing editor of Moneylife. She was awarded the Padma Shri in 2006 for her outstanding contribution to journalism. She can be reached at [email protected]

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    COMMENTS

    Mothit

    6 years ago

    Interesting, the promoter wanted to push MCX while the then Chairman of SEBI delayed/ rejected the proposal. When the new chairman took over he cleared the proposal immediately. Surprising this hasnt been stated anywhere. SEBI offlate has been in haste to clear many inane decisions. The standard of inspection is pathetic with CA firms from non MUmbai asked to conduct the review who lack understanding of security market. Sad....regulators like SEBI are sad.

    Mothit

    6 years ago

    Its interesting here, the erstwhile SEBI chairman had concerns on grating MCX license (right or wrong, he called it correct with respect to the promoters). The new SEBI chairman gifted away the license. Not one spoken about this. End of the day, the FM requires a lot of yes man as regulator.

    Vinay Shah

    6 years ago

    Whether it is SEBI or FMC, any regulatory body headed by a person whose only qualification to head the body is IAS, is bound to be slothful, corrupt, inefficient, draconian and vulnerable to regulatory capture. Revamping of selection committee for heads of regulatory bodies would go long way in improving our regulatory institutions. Just do not allow an IAS officer to head selection committee.

    arun adalja

    6 years ago

    sebi works as postoffice who takes the complaint and forward to the concern people and it gives nearly 25 to 30 days to resolve the complaint and if it is not resolved then again you have to send another reminder likewise investor is fed up he leaves it.exchanges always favour brokers and company and they are not bothered about retail investors.views are welcome.

    REPLY

    sathyacumaran

    In Reply to arun adalja 6 years ago

    sathya cumaran
    operational head india
    singapore media and channel group
    as rightly said the sebi works as postoffice infact as agent of stock broker infact its the officials of sebi and stock exchanges of india inform how to cheat the retail investors that is reason why indian stock market in an primitive stages and there are many lakhs of cases pending need justice everyhting is straight forward but one thing is missing that what is percentage that retail investors prepared to pay to sebi and stock exchange officials that amountof corruption infact if they say what amount they are getting as compensation even retail investors are prepared to pay because that had become the order of the day offlate after the advent of shri Manmohan singh become PM of india but that is not spelt out that is reason so govt officials corruption is part and parcel of their salary only few honest officer who are been charge sheeted with unnecessary enquiry and other torture is state of indian administration

    sathyacumaran

    6 years ago

    sathya cumaran
    9444021822
    as mentioned in my earlier comments we strongly say that sebi is most corrupt organisation in india because that had been patronised by Finance Minister Shri P.Chidambaram and Prime Minister shri Manmohan singh because they have thier share in this looting this would be used for coming 2014 election in the previous election of 2009 Chidamabram was lost and this was hushed by election officer the case is going on now also he planning similar way that is reason why this huge looting and there is no act or rules everything is fool the indian investors

    hasmukh

    6 years ago

    SEBI has failed miserably, because it has never protected Investors, which ought to be its main job. In fact, Investors have lost heavily during this period. e.g. earlier, there used to be the Controller of Capital Issues and people who invested then in public issues gained heavily, but lost in their investments in last few years, when SEBI rules.

    Prakash Jain

    6 years ago

    hope your voice will be heard and understood by those concerned.

    Ravindra

    6 years ago

    Sab Bhagwan bharose chal raha hai.

    Sunil

    6 years ago

    I just hope that somebody from the Finance Ministry has such a comprehensive view of the challenges and issues facing us investors. Like the Income Tax dept that keeps losing the files and papers of assesses when it is convenient to them, I am sure the Finance Ministry also loses all past records of things and does something stupid like now. Great Article as always .

    Vaibhav Dhoka

    6 years ago

    Ours is country flooded with regulation and poorest in execution.In fact after SEBI entering regulation field it became easy for fraudsters to take umbrage as SEBI ranked too high in corruption level.There is no accountability at SEBI. Complaints are resolved only officer gets his pie.

    Abhijit Gosavi

    6 years ago

    Wow, any surprise that the rupee is sliding so badly? It is a wonder that the economy survives at all with such messy financial management in such a critical area!!! The tragedy is there are numerous very intelligent people in the private sector with the expertise to turn things around, but I guess they are never invited.

    NSEL Proposes Settlement Options

    NSEL has proposed a partial payment option. It remains to be seen how the stakeholders view them

    The National Spot Exchange Ltd (NSEL), which is facing a payment crisis, today announced plans to implement the settlement of dues in accordance with exchange rules and bylaws. Mr. Anjani Sinha, MD & CEO of the exchange stated that following meetings with the members of the exchange, the buyers/ processors and also the Forward Markets Commission (FMC), the following options have been proposed and the final decision would be taken after due consultation with all stakeholders.

    Option 1:

    A.      There are 8 members/ processors, who are willing to pay as per the scheduled due date or even earlier. The total amount pertaining to such 8 members is Rs. 2181 crores.

     

    B.      There are 13 members/ processors, who have offered to pay 5 % of their total dues every week, if the same is agreed upon. Total amount comes to Rs. 3107 crores approximately. Name of such members are as follows:

     

    Sr No

    Name of Party

    1

    Jugger nautes Projects  Ltd

    2

    MSR Food Processing

    3

    PD Agro Processors  Pvt Ltd

    4

    Shree Radhe Trading Pvt. Ltd

    5

    Sankhya Investments

    6

    Spin cot Textiles Pvt Ltd

    7

    Swatik Overseas Corporation

    8

    Topworth Steels & Power Pvt Ltd

    9

    Vimladevi Agrotech Pvt Ltd

    10

    N K Corporation

    11

    NCS Sugar

    12

    METKORE ALLOYS & INDUSTRIES LTD

    13

    ARK Imports Pvt. Ltd.


    C.      There are 3 processors with whom negotiation is still going on. The amount pertaining to these parties comes to Rs. 311 crore.

     

    1

    NAMDHARI FOOD INTERNATIONAL PVT LTD

    2

    NAMDHARI RICE & GENERAL MILLS

    3

    LOTUS REFINERIES PVT LTD

     

    Option 2:

    The exchange is in possession of Post dated cheques (PDC) from various processors amounting to Rs.  4900 crs. against their settlement obligation and balance parties have confirmed payment regularly. While PDCs are a commitment, the payout process may not roll out smoothly in a month’s time. Hence, the market participants have proposed Option 1 as a safer alternative.

     

    FMC Officials have also asked for details of Members, Planters and other participants who are not cooperating with the Exchange in resolving the matter related to settlement cycle. The FMC along with other Government agencies would work together to ensure a safe and secure settlement of dues.
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    COMMENTS

    Nilesh KAMERKAR

    6 years ago

    1)Commodity exchanges provide a platform for speculating on commodity prices.

    2)Widespread speculation in commodities has fueled high inflation, which has been difficult to control.

    Then would it be wrong to conclude?
    That the common man is subjected to inflationary pressures because of these commodity exchanges, rather than benefit from the much talked about price discovery mechanism.

    REPLY

    Vinayak Bhimarao Mudholkar

    In Reply to Nilesh KAMERKAR 6 years ago

    Thank you for explanation!

    Vinayak Bhimarao Mudholkar

    In Reply to Nilesh KAMERKAR 6 years ago

    Dear Sir,
    As an ordinary investor I would like to ask whether the shaken confidence in commodity markets may lead to lower inflation ?(The commodity transaction tax may also be helpful to curb the speculation)

    Nilesh KAMERKAR

    In Reply to Vinayak Bhimarao Mudholkar 6 years ago

    Sounds logical, but I do not know sir.

    Weak FII inflows enough to weaken the rupee

    When foreign investors have been net sellers in a month, the rupee has depreciated 89% of the time. The rupee could be under pressure if India does not get strong capital inflows as in the past

    Foreign flows into the equity market have always been a determinant of the strength of the rupee in the recent few years. The movement in the rupee-dollar exchange rates has been largely dictated by foreign institutional investors (FIIs) as they pull out or flood the market. Moneylife research has shown that when foreign investors have been net sellers in a month, the rupee has depreciated 89% of the times. On taking weekly statistics, whenever FIIs have been net sellers over the week, the rupee has declined 76% of the time. In the month of July 2013, FIIs have pulled out nearly $3 billion, the rupee at Rs60 a US dollar is hovering near its all time low. If the trend continues with FIIs remaining net sellers, we could see the rupee decline further.
     

    FII flows have been extremely volatile and are one of the main reasons for the sharp movements in rupee. In June 2013, on fear of US Federal Reserve reducing quantitative easing (QE), FIIs pulled out over $7.5 billion. This massive outflow caused the rupee-dollar rates to plunge by over 6%, taking it to an all-time low of Rs61 against the US dollar. A similar trend was seen in April and May 2012 with the fear of the Greek exit from the Eurozone. FIIs pulled out over $690 million over the two months and the rupee depreciated by 8.93% to Rs55.73 from Rs51.16. Over the past three years, net monthly outflows of FIIs were few. However, in the months where the net investments by FIIs were negative, the rupee depreciated by an average of 3.72%.
     


    The reverse is true as well. Between the month July 2012 and September 2012, FIIs pumped in over $8 billion in the Indian market. The rupee jumped by nearly 7% to Rs52.70 from a low of Rs56.31. During the months December 2011 to February 2012, FIIs invested $13 billion, the rupee shot up by 6% to Rs49.07 from Rs52.17. Similar instances were seen in the months of September 2010 to October 2010 and March 2010 to April 2010.
     

    There are even instances when FIIs have invested when the rupee has declined. One such instance was seen in May 2013. While FIIs have made a net investment of $6 billion, the rupee has depreciated by nearly 4% to Rs56.50 from Rs54.29 in May 2013. The reason being, Gold imports in May was around 160 tonnes. The rise in imports and decreasing exports has made the US dollar stronger. While gold imports are expected to decline the volatility in the rupee would be determined by FII flows.
     

    FII inflows and outflows are often exogenously determined factors that the Indian government can have little control over, such as the policies of major central banks. When the rupee falls, foreign investors stand to lose from their Indian holdings, leading to a possible pullout from the market. A volatile currency also means that foreign investors need to pay more to hedge against a rising foreign exchange risk.
     

    A reversal of FII fund flows is needed. As seen in 2007-08, the rupee appreciation happened mainly due to FII inflows into the capital market in India. The government’s effort to encourage investment and instil confidence on long-term basis with FIIs has failed in the past. The government is pledging a slew of domestic policy reforms to shore up domestic and foreign investor sentiment. Would this pull in further inflows? If not, rupee is unlikely to gain strength.

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