Ten things you wanted to know about the NSEL crisis

The Rs 5500 crore (Rs 55 billion) payment crisis faced by the Financial Technologies controlled, National Spot Exchange Ltd has raised several questions. Business Standard brings you some frequently asked questions on the NSEL payment crisis.

What is a spot exchange?

It is an electronic version of the age-old mandi, where buyers and sellers meet to exchange goods and money.

How many spot exchanges are there in India?

NSEL; NCDEX Spot floated by the NSE group; and R-Next, floated by Reliance Capital, are the three main spot exchanges.

What led to the NSEL crisis?

NSEL offered a pair of contracts for which settlement was due in two days and a second for which settlement was due in 25-50 days. This allowed speculators to make financial returns without actually taking physical possession of commodities.

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What happens to the underlying commodity?

The commodity is required to be delivered physically.

But the exchange facilitated use of electronic warehouse receipts, enabling investors to avail of the arbitrage, without taking physical possession of goods.

Did NSEL try to stop this round tripping?

Not really. In fact, it made it easier in some contracts. For example, the contract specifications said, “Storage charges are waived off for those members and their constituents who sell jeera on JEERUNJH25 out of the delivery receivable against the purchase position of JEERAUNJH2 contracts”

What did the government do?

On July 12, it asked NSEL to stop this and to wind up.

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What was NSEL’s response?

It gave an undertaking saying it would do so, but asked for 15 days’ time.

Why the sudden suspension?

The directive was to close the contracts and settle these on July 31. But NSEL cited “grave emergency” and market “disequilibrium”, deferring the settlement by another 15 days. Later, it said it wanted another 5 months for this.

Why is NSEL not settling?

There is fear the underlying stock is insufficient to cover the liabilities. While the exchange claimed it had stock worth Rs 6,200 crore, an independent analysis shows there may be shortfalls. Business Standard visits to godowns didn’t show satisfactory results.

Who are affected?

All those who have exposure to the exchange---brokers, high net worth investors and companies, too. Since many of these are also exposed to other market segments such as stocks and the banking system, there could be ripple effects.