ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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NSEL Debacle

Functioning in a regulatory vacuum, the National Spot Exchange went ahead and permitted trading in forward contracts and overlooked the need for physical backing of stock as required in spot trade. The result was a ticking time-bomb. Close to Rs 6,000 crore invested by 13,000 investors found its way to a small group of borrowers, most of whom have since defaulted.

The opinions expressed here are of the author and not of any organisation(s) the author is/was affiliated to.

We have another scam that goes by the name of the National Spot Exchange Ltd (NSEL) crisis. The NSEL which claims to be a national level, electronic and transparent spot market, started live trading in October 2008. It is promoted by Financial Technologies India Ltd (FTIL) and National Agricultural Cooperative Marketing Federation of India (NAFED).

The NSEL provides a platform for auction and trading of various commodities including agricultural products, grain, bullion, metal and energy. As the name suggests, the NSEL is a “spot” exchange, meaning it can offer trading for delivery of physical stock of commodities within a short period allowed for settlement. The exchange also created electronic versions of gold, silver and other precious metals, which became investment instruments. Investors were attracted to the NSEL as they were shown high returns (15% to 20%) in the market. The members/brokers of the exchange assured investors that these investments were risk free as there was a collateral stock of commodities in warehouses across India. The funds invested were then channelled by the brokers to borrowers and owners of businesses who spent these funds in their own operations.

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