MCX/NSEL issues: Initiated all action, says FMC

Responding to BusinessLine ’s editorial Putting MCX back on track (May 24), VC Chaturvedi, Director, Forward Markets Commission, writes that the FMC had taken the initiative of conducting a forensic audit in the affairs of NSEL (National Spot Exchange Ltd) and on receipt of its report had initiated action against Financial Technologies (India) Ltd and others on their Fit and Proper status in MCX.

This matter was finally adjudicated by FMC in December 2013 in which FTIL and three other persons were declared not Fit and Proper to be the shareholders/directors in a regulated Commodity Exchange.

FTIL and three other persons had filed a writ petition in the Bombay High Court and the High Court refused to give any interim relief to the petitioners vide their order dated 28th February, 2014.

On 21.03.2014, FMC directed MCX to ensure divestment of FTIL’s stake in MCX by 30.04.2014. Since that did not happen, the Commission has taken a number of actions against MCX, which is a regulated entity under FCRA.

It may be appreciated that FMC can only force its regulated entity MCX to enforce the Commission’s orders. If the regulatory framework of a Commodity Futures Market were as strong as in many other jurisdictions, it would have been possible for the Commission to enforce the implementation of Fit and Proper order much earlier.

It is known that amendment of FCRA needs to be done to strengthen the regulatory framework in this market.

Since the breaking out of NSEL’s scam the Commission and the Government have been considering revising the shareholding norms in Commodity Exchanges to align with those in the Securities Market. This has been discussed in media reports also several times in the last few months.

On getting the approval of the Government of India on 02.05.2014, the Commission issued revised shareholding norms on 06.05.2014. It may be appreciated that the policy changes cannot wait while FTIL goes through its process of divestment in MCX.

As a matter of fact, it is preferred that FTIL’s divestment is done as per the revised norms to take away the predominant role played by the private entities in Commodity Exchanges as Anchor Investors.

It may be noted that as MCX is a listed company and its shares are freely traded in the stock exchange, it is possible for a shareholder to sell its shares on that platform also in a relatively short time.

The fall in the trading volume in the Commodity Futures Markets during the current year as compared to the previous year may be due to various factors such as lower levels of price volatility due to fundamental factors of demand and supply and the imposition of the transaction tax. Hence, this cannot be addressed or restored by sorting out the issues relating to MCX.

The Commission has taken a series of reforms since the year 2012 to bring about convergence of spot and futures markets, prevent market manipulations, strengthen risk management systems and to protect consumers.

All these have created a strong base for development of commodity futures market in the right direction.