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NATIONAL SPOT EXCHANGE LIMITED (NSEL) SCAM by- Gaurav Bansal and Dr. Jyoti Yadav

  • Category
    Ethics
  • Published
    3rd Jan, 2019

In 2013, a fraud was unearthed at the National Spot Exchange Limited (NSEL) in electronic spot exchange activities which was an integrated trading platform for agriculture products.

There was a deviations and depletion of funds in Settlement Guarantee Fund (SGF) managed by the exchange and stood at only Rs.8.46 million at the time of the fraud and the exchange had an outstanding settlement to the tune of 56000 million.

Issue

Context

In 2013, a fraud was unearthed at the National Spot Exchange Limited (NSEL) in electronic spot exchange activities which was an integrated trading platform for agriculture products.

There was a deviations and depletion of funds in Settlement Guarantee Fund (SGF) managed by the exchange and stood at only Rs.8.46 million at the time of the fraud and the exchange had an outstanding settlement to the tune of 56000 million.

Also, a faulty trading practice with different settlement periods (T+2, T+25, & T+36) of spot contracts led to deferred settlements and enabled the brokers to generate ghost receipts from warehouses without any underlying stock of the farm produce. 

About

ISSUES INVOLVED:

The scam brought the loopholes in the regulations governing Electronic Spot Exchanges (ESEs) into the limelight. The investors were exploited by in the name of running an ESE and the Effective Price Discovery Mechanism (EPDM) in the agricultural commodities market was misused for ulterior motives. The scam also led to discourse on corporate governance issues at NSEL, the role and responsibilities of the regulatory bodies and the government in prevention of such scams and protection of investors.

Background

NSEL’s operations were mainly intended to help the agricultural participants in the country to overcome the challenges they faced due to scattered agricultural markets across different states and their respective regulations, and help them to sell and purchase agriculture products at efficient prices through EPDM.

Following the challenge to provide a nationwide integrated platform, government allowed private players to provide the facilities of an Electronic Spot Exchange (ESE). Three players were granted permission: FTIL, NCDEX, and NMCE; FTIL and NCDEX provided electronic spot trading services.

HOW THE EXCHANGE WORKED:

NSEL provided a trading platform to the farmers to sell/purchase their produce. After harvesting the crops, the farmer was to approach a designated warehouse of NSEL where the quality of the harvest would be tested and a receipt would be generated acknowledging the storage of the harvest at the warehouse. Using the receipt, the farmer would trade their produce on the exchange platform.

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