As expected, the 24 ‘processor’ members of the National Spot Exchange Ltd (NSEL) haven’t managed to pay up even the first instalment of their roughly Rs 5,600 crore outstanding to ‘investors’. Given that the total dues are to be settled over 31 weeks and that NSEL could arrange only about half of the Rs 174 crore that was due to come from processors on Tuesday, one thing stands confirmed: The physical stock of commodities that the investors had lent money against is largely non-existent. The processors neither have the money nor the stock that can be sold towards discharge of investor claims. This ought to have been clear even from the very profile of the processors — a list made up mainly of obscure names with supposed holdings of several thousand tonnes of sugar, castorseed or raw wool stocks in warehouses ‘accredited’ by NSEL.

The crisis at NSEL is almost entirely a result of ‘short sales’, trade in commodities that were not owned. Investors financed the sale of these non-existent commodities in a roundabout manner, through a buy back arrangement after 25-35 days at higher prices. The price difference made for ‘assured’ returns, ranging from an annualised 13 to 15 per cent, to investors. While the arrangement suited both investors and processors, the anomaly lay in the legally unsustainable creation of forward trades in a spot exchange market. Further, the offer of ‘assured’ returns through trades on NSEL points towards price manipulation as opposed to a transparent process of discovery that exchanges are meant to facilitate. In short, this is a gigantic scam. The promoters and the board of NSEL cannot absolve themselves by the mere removal of the CEO and management team of the exchange. It is difficult to imagine that the former were entirely oblivious of what was happening at the bourse.

While all those involved in the scam must be investigated, the greatest blame for the entire mess should be apportioned to the Government. As early as March 2012, the Forward Markets Commission (FMC) had identified brazen violations, including short sales and forward transactions at the NSEL. What prevented the Government from acting on its findings then? Why did it take the Department of Consumer Affairs as long as July 12 this year to bar NSEL from launching any new contracts and settle all existing ones on their due dates? And why has the exchange now been given 31 weeks to complete all settlements, which is doubtful given the inability of processor-members to pay even the first instalment? Clearly, the sacking of a CEO or executives is not enough. More heads — including any top brass — may well need to roll after a thorough investigation.

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