Forensic audit of liquidity enhancement scheme. Will ICEX come out unscathed?

Trading volume on the Indian Commodity Exchange (ICEX) has plunged to a new low with no trade logged for almost six days each in August and September. The exchange, which was once acclaimed globally for its diamond futures contract, registered a turnover of just ₹3,000 on September 21.

Mulling on what went wrong with the exchange,

BusinessLine reached out to people in know of developments and found that trading volumes thinned following the stop of the liquidity enhancement scheme — an arrangement permitted by SEBI wherein an exchange incentivises participants to trade and boost volumes on the platform — in April 2020. Exchanges are allowed to introduce an LES up to 25 per cent of their audited networth on the last day of the previous financial year to incentivise brokers to provide liquidity by giving a two-way quote. Since most of the contracts traded on the ICEX were unique, SEBI had approved LES in steel, paddy, diamond and rubber futures contracts.

 

Allegations made

The LES was introduced in ICEX in October 2019. This saw turnover in October shoot to ₹3,362 crore from ₹1,761 crore logged in the previous month. The turnover increased further to ₹4,589 crore in January 2020 and was hovering above ₹3,000 crore in March.

The ICEX had to stop the LES after SEBI and two public interest directors on the board of the exchange received anonymous email complaints on misappropriation of LES funds. The allegation was that the key management personnel of ICEX were in collusion with the market makers and siphoned off funds allotted for LES.

In April, thus, the LES was suspended and the board of ICEX in consultation with SEBI appointed Chokshi & Chokshi LLP to undertake forensic audit on execution of the LES. The audit firm was also mandated to examine the trading data of the four commodities in which the LES was introduced for compliance issues and conflict of interest of key management personal. The audit report has now been submitted before the board, said sources close to the development, without commenting on the forensic audit findings and the corrective measures taken.

The exchange did not respond to an email sent by BusinessLine .

The key shareholders of the exchange include Anil Dhirubhai Ambani Group-owned Reliance Exchange Next, Bajaj Holdings and Investments, Central Warehousing Corporation, Gujarat Agro Industries Corporation, Gujarat State Agriculture Marketing Board, Indiabulls Home Loans, IDFC First Bank, MMTC, Indian Potash, Krishak Bharati Cooperative, Nafed and Punjab National Bank.

The five-member board of ICEX comprises three public interest directors — including one from SEBI — one shareholder director and Sanjit Prasad, Managing Director and CEO of the exchange.