Lexengine: NSEL Scam: SEBI, MCX-SX and CBI enquiry.

Difference between Spot market and future market.

Also called the cash market or the physical market, the spot market is where assets are sold for cash and delivered immediately. The two day settlement process is due to the fact that the bank requires two business days notice to process payments due to time zones and currency cut-off times[1].

Contracts sold on this market, which is also known as the “cash market” or “physical market,” are also effective immediately. Purchases are settled in cash at the current prices set by the market, as opposed to the price at the time of delivery. An example of a spot commodity that is regularly sold is crude oil; it is sold at the current prices, and physically delivered later.

Futures rates and contracts are a little different. A futures contract between two parties sets the price now, but the whole transaction doesn’t have to be settled immediately. The two parties can agree to settle at a future date more than a day or two down the line. When the agreed upon time is reached the transaction will be paid for and the commodity, currency or security delivered.

Difference between spot market and forward market.

Futures and forwards are financial contracts which are very similar in nature but there exist a few important differences:

Futures contracts are highly standardized whereas the terms of each forward contract can be privately negotiated.
Futures are traded on an exchange whereas forwards are traded over-the-counter.
There is chance of counterparty risk in forward contracts. In any agreement between two parties, there is always a risk that one side will break a promise on the terms of the agreement. Participants may be unwilling or unable to follow through the transaction at the time of settlement. This risk is known as counterparty risk. Since, in a futures contract, the exchange clearing house itself acts as the counterparty to both parties in the contract,this risk is avoidable.
Forward contracts, on the other hand, do not have such mechanisms in place. Since forwards are only settled at the time of delivery, the profit or loss on a forward contract is only realized at the time of settlement, so the credit exposure can keep increasing. Hence, a loss resulting from a default is much greater for participants in a forward contract.

Wrongdoings at NSEL.

(National Spot Exchange Ltd). The Jignesh Shah-led NSEL is a company promoted by the Financial Technologies India Ltd and the NAFED. It commenced its operation in 2008. The scam came to picture in July, 2013 as a result of huge defaults in payments to investors.

It was offering 25-34-day contracts for commodity trading while a maximum of 11 days are allowed
Warehouse receipts of commodity stocks were being issued without warehouses actually having stocks
Independent investigations have shown benami investors and owners of warehouses
NSEL has to pay back Rs 5,600 crore of 13,000 investors’ money, has already defaulted twice
Jignesh Shah may face the brunt and be held responsible. But can’t discount his high contacts for now.

Actions taken by regulators.

Exchange owner Financial Technologies (FTIL) was deemed not fit by regulators in December, 2013 to run India's biggest commodities bourse and ordered to sell most of its holding. Forward Markets Commission (FMC), which oversees commodities markets, removed its "fit and proper" designation for both FTIL and its chief executive Jignesh Shah - a status needed to operate an exchange in India. The loss of the designation meant neither FTIL nor Shah can run Multi Commodity Exchange of India (MCX), India's biggest commodity bourse which has an average daily turnover of about Rs 240 billion, or about 77 per cent of the country's exchange commodities volumes. Scam led to adverse impact on the reputation of the MCX, which was founded by Shah.

After NSEL crisis broke out, which also raised concerns over corporate governance, SEBI nominated new public interest directors on MCX-SX board while some quit from the bourse's board.

On 19^th March, 2014, Sebi directed Jignesh Shah-led Financial Technologies India to sell its shares in MCX-SX and other exchanges within 90 days on the ground that it did not meet the 'fit and proper' criteria required for a shareholder of an exchange.

The basis for Sebi's ruling was an earlier order by commodity market regulator Forward Markets Commission (FMC), declaring FTIL not 'fit and proper' to hold more than 2% in commodity exchange MCX, because of its actions in managing troubled commodity spot exchange NSEL, which is facing a Rs.5,500-crore payment crisis. FTIL is the promoter of MCX and holds a 26% stake in it.

Capital markets regulator Sebi directed Jignesh Shah-led Financial Technologies India to sell its shares in MCX-SX and other exchanges within 90 days on the ground that it did not meet the 'fit and proper' criteria required for a shareholder of an exchange.

's ruling is an earlier order by commodity market regulator Forward Markets Commission (FMC), declaring FTIL not 'fit and proper' to hold more than 2% in commodity exchange MCX, because o ..

Capital markets regulator Sebi on Wednesday directed Jignesh Shah-led Financial Technologies IndiaBSE 0.43 % to sell its shares in MCX-SX and other exchanges within 90 days on the ground that it did not meet the 'fit and proper' criteria required for a shareholder of an exchange.

The basis for Sebi's ruling is an earlier order by commodity market regulator Forward Markets Commission (FMC), declaring FTIL not 'fit and proper' to hold more than 2% in commodity exchange MCX, because ..

Controversy over license to MCX-SX:

Recently, CBI registered a preliminary enquiry against former Sebi chief C.B. Bhave, its former whole-time member K.M. Abraham, Multi Commodity Exchange of India Ltd (MCX) and Financial Technologies India Ltd (FTIL) in connection with the grant of a licence to MCX Stock Exchange (MCX-SX), which first started operations in 2008 with its currency derivatives segment[2].

[1] In instances where urgent payments/receipts are to be processed, one-day value or even same-day value rates of exchange may be provided depending on currency cut-off times. It is also commonly known as ‘Spot Cover’.

[2] In 2012, MCX-SX started an equity trading platform as well after SEBI granted license for it.