Spot Fixing: What Happened and What's Next?

A very interesting trend seems to be emerging in India recently. A new buzzword called Spot - fixing has been coined and has already been used in more than a couple of contexts. Spot fixing is already in the headlines of all the newspapers lately (for all the 'right' reasons). The latest entry to the growing list of spot fixing is the National Spot Exchange limited (NSEL) which is currently under the scanner.

Here's what happened

On 6th August, 2013 the Government of India suspended the trading in e-series contracts of National Spot Exchange Limited (NSEL). This means that NSEL's operations will stop from 7th August, 2013, as due to the violation of rules, the government earlier suspended trade in all other contracts of NSEL.

Under the e-series contracts, retail investors can buy and sell commodities in demat form. This is an exclusive market segment which offers commodities in the demat form in smaller denominations.

The main reason for the crisis was that NSEL offered a pair of contracts, one where settlement happens in two days and a second where the settlement is postponed by 25-50 days. This allowed speculators to make financial returns without actually taking physical possession of commodities.

And the issue is...

The biggest trouble which NSEL is facing is; it has to settle about Rs 5,600 crore as dues to investors in the next 15 days and earlier they said that they have reserves of approximately 800 crore but now they are saying that they have reserves of approx. Rs 60 crore only. Although, the exchange says it has stocks to auction in case of default but the process can be time-consuming because in that case, the government may interfere to supervise the entire procedure of settlement. Moreover auctioning of stocks to settle the dues may not be that good an idea for NSEL because those people who will participate in the process may bid significantly lower prices for the same commodities in an attempt to take undue advantage.

Therefore, the exchange may prefer to keep auction as their last option.

The 'Remedy'

Investors who have put in 10 lakh or less will be given priority by the NSEL while making payouts according to a directive from the commodities market regulator.

The Government is said to be arranging new regulations to govern spot exchanges to plug the ambiguities. Until then NSEL will not be allowed to launch any new contract. The structure of the now suspended contracts could change based on the new regulation.

Moreover, the government should strengthen the regulators and introduce some strict rules so that they can scrutinize the spot exchanges regularly and prevent events like this happening in future.

Data Source: Financial Express (7th August, 2013 issue)

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