White Paper 12 Dec 2014.docx

7/26/2019 White Paper 12 Dec 2014.docx

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How Financial Technologies, whichcreated an

extensive ecosystem of exchangeinstitutions theworld over, is demonised andsystematicallydemolished for payment defaults at oneof its subsidiaries

A Pretext For

PERE!"T#

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!ontentsWhy This Note? 08The Real Picture on the Background of the Crisis1. Financial Technologies 10Distinction of Pioneering and Path-Breaking Contribution to IndianFinancial MarketThe Pioneer 11The Path)*rea+ing !ontribution 1&The pin)$ Eects of the Financial Technologies -roup 1&.n Exchange #ndustry /%! from #ndia 1'0istinctions 1(


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Extensive Ecosystem 1%E2 !risis 1Rising to the !hallenge 13ub4ected to "nfair Treatment 132oo+ing .head 152. Our Priority 20

FTIL will stand by !"L# for "$%edited Reco&ery fro' the Defaulters# toResol&e the Crisis. Positive .ction from the F/! could have led to a Productive $utcome &(3. Principles and Practice 26(&erlooking Princi%les of Fairness to )n*ustly Punish the FinancialTechnologies +rou%#f it is a Private /ar+et Problem, 6hy Excessive Regulatory 7eal8 &3Regulation9 !an be it 0iscretionary or should it be /andatory8 &:"nfair !omparison with Earlier !rises ';Pu


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. /ature 6ay of olving the !risis 38. 'risis ,anage(ent 68FTIL "$tended ,ll !u%%ort to !"L to Resol&e the Crisis#mmediate Relief to Trading !lients 31Reconstitution of *oard and !hanges in /anagement of %E2 3&$ther Eorts towards Recovery 3&

!omplete !ooperation to #nvestigating .gencies 3(Periodic *rieAngs to -overnment and Regulatory .uthorities 3@Recovery Eorts and Pursuing 0efaulters 3@-. N#$% 'laries *8Clari/cations on the Co''ents of the Chair'an# FMC# on !"L%E2 Responses to peciAc !omments of the !hairman, F/! 3510. 'ontesta/le Proposals 8Merger of !"L with FTIL Pro%osed by FMC ot Consistent withCor%orate Laws6hy /erger hould %ot *e .llowed to Happen :@upersession of /anagement9 0epriving 0ue !redit :3NN$)$ -0!ontracts #n 0ispute9 ettlement 0efaults at %E2 9 6hat really happened8 5;6arehouse /anagement 51Fixing the 2iability 5&!omparison of %E2 crisis with .ctions ta+en by other Regulators in other !rises 5(!hronology 5:-uidelines for /embers for !onduct of *usiness 1;&Recovery Eorts by %E2 1;(2egal Eorts by %E2 1;.n "nhealthy /isinformation and /isunderstanding9 How %E2 !risiswas /isinterpreted and /isunderstood1&1

//reiations.P/! .gricultural Produce /ar+et !ommittee!.- !omptroller and .uditor -eneral of #ndia

!*# !entral *ureau of #nvestigation!02 !entral 0epository ervices C#ndiaD 2td!#*#2 !redit #nformation *ureau C#ndiaD 2imited0!. 0epartment of !onsumer .airsE!. Essential !ommodities .ctE0 Enforcement 0irectorateE$6 Economic $ences 6ingF.$ Food and .griculture $rgani


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authorities involved in resolution of the crisisB #t is also not an attempt to cover orcamouagethe real reasons behind the crisis or to escape from the obligationsB #t is 4ust to explain thewhole incident from the way FT#2 loo+s at it as a responsible corporateB FT#2 and its -roupcompanies, the *oards and the management of the -roup and its companies absolve anyresponsibility arising from this noteB

The note is a collective feeling of the thousands of sta+eholders and beneAciaries who are+een that the world be told the company side of the story, which the note would, hopefully,adeuately doBThe Financial Technologies -roup holds no grudge or complaint or resentment against anyauthority, government or any others who were involved in various aspects of investigationandAnding resolution to the crisisB3

The %E2)FT#2 merger, the -overnment contends,is essential in the Gpublic interestB *ut there is aserious aw to this reasoningB The concept of limitedliability is fundamental to euity investingB -oing by

it, FT#2, as the parent company for %E2, may deserveto lose its entire investment in its subsidiary becauseof the latterIs mismanagementB *ut to saddle it withthe liabilities of %E2 beyond this, is an in4ustice tothe ArmIs public shareholdersBThe indu Business Line# (ctober 01# 0234.nother great victory for the legal fraternity anda setbac+ for the resolution of the %E2 debaclewhere -overnment is now messing the process up

enormouslyBPatrick .oung# "$change In&est ewsletter# (ctober52# 0234# "dition 510A sample of comments from experts on the aw | short comings in the mergerproposal. The merger proposal is opposed by wide range of experts in India andabroad.:

#t is not to avoid responsibilityB #t is neither an eort to undermine the importance ofobligationsnor an argument to comment on the authorities for which we have greatest respect andextended best of our cooperation and compliance, from the beginning and will continue todo soBThe Financial Technologies -roup, is a large group that promoted nine multi)asset)classexchanges spread across .sia, .frica and the /iddle East, many of them in collaborationwithpedigree institutions and global and domestic investorsB /!J)J, the third national stoc+exchange and the Arst to be promoted by the private sector had ma4ority of theshareholdersrepresenting the government owned Anancial institutionsBimilar to any large Anancial group spread across dierent geographies and various mar+etsegments, FT#2 too faced problem with one of its subsidiaries, the %ational pot Exchange2td


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C%E2DB The causes behind the crisis and those who contributed to it are still underinvestigationBThe crisis is a result of a wide range of factorsB /embers K bro+ers who sold the contracts onthe pretext of a Axed income product despite repeated circulars by the exchange, to desistfromsuch practices as it carries the ris+ of value erosion in adverse conditions and the regulator

notanalysing the data provided to them every fortnight by the exchangeB The crisis emergedwhenthe government stopped in Luly &;1', with immediate eect, further issuance of newcontractsby %E2 that led to liuidity pressures and settlement problemBThis time, the very nature of crisis is entirely dierentB There is no systemic ris+, and it isabout1',;;; trading clients and &( defaulters who were caught up in the liuidity problemB %early:@percent of the settlement obligation is from seven defaulter members and about percentof1';;; trading clients currently account for 5 percent of the claimBThis crisis is uite manageableB %early Rs @,;;; crore of assets of the defaulters that havebeenfros management, that all was well and the minutes ofwhich were noted in the FT#2 *oard meetings with eect from /arch &;11 when %E2becamea material subsidiary of FT#2B #mmediately after the crisis, %E2 came out with an interimplan tocompensate the small trading clients, with exposure less than Rs 1; la+h, utilising thewithoutpre4udice loan of Rs 135 crore granted by FT#2 as a goodwill gestureB %E2 reconstituted the*oard and revamped the managementB #t extended complete support to investigatingagenciesB#t is FT#2 that suered the most from the crisisB #t has lost all its exchanges that itpassionatelybuilt and incubated over a long period, even before the investigations in the matter arecompleteB The promoters and management of FT#2 were declared not >Fit and Proper> thoughpioneering role was played by them in creating the state)of)the)art exchanges andecosystem

6hy This %ote8The Real Picture on the ac!ground of the"risis5

not seen even in the developed mar+etsB The punitive actions even extended to custodial


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interrogation though whatever is as+ed is being provided regularlyBThe silent and sincere eorts of the -roup in trying in every manner to resolve the crisis,withinthe four corners of the law, were overawed by the barrage of criticism, accusations,aspersions,all based on misinformation and misunderstanding that came from all over with no

responsibleauthority trying to explain the real situationBThat is why it is thought that the FT#2 side of the story needs to be told to the worldB For theaccident committed by defaulters at one of its subsidiaries, the entire -roup is paying thepriceBThe in4ustice that is being meted out to FT#2 is disproportionate in magnitudeB .dded to itareother painful measures such as the hurry to declare promoters not MAt and properI, theviliAcationcampaign, unveriAed rumours, which have pushed the -roup into a corner gasping for alittle4usticeBThe merger of %E2 with FT#2 which the -overnment has proposed in a draft plan, is acompletecontradiction to the democratic system and against the tenets of corporate lawB Thousandsof shareholders of FT#2 will be deprived to en4oy the beneAts of wealth creation and the verybusiness that stood against the global competition and sustained success will wither awayB.ny measures of supersession of the management will expose the company to a uagmireof confusion and indecision that will surely decimate the prospects for an otherwise robustcompany having a clear vision for growthB.s things stand today, assets close to the settlement in dispute are fro


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FinancialTechnologiesFTIL %ioneered 'ulti-asset-class trading technologies that enabled stock 'arketsinIndia s%read their reach and access across the country6 The e$changes andecosyste'that the +rou% created in the last one decade stand out as su%erior standards inthedesign and de&elo%'ent of /nancial 'arkets infrastructure that are not seene&en inso'e of the de&elo%ed 'arkets6

14istinction o" Pioneering andPath!rea7ing 'ontri/ution to+ndian Financial ,ar7etThe engagement of FT#2 in global and domestic exchange industries and ecosystemdevelopment prior to the crisis is very extensive and comprehensiveB11

For #ndia, the decade of the 155;s was a turning pointB . new wave of economicliberali


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#ndia is a large country with vast geographic proportions and has the potential to createmar+ets ofbig si


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vicinity of globally recogni


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communities #ncreased participation of thelocal talent and expertise -rowth of localentrepreneurship *eneAts owing into local

communities1'

n $:change+ndustry ,N' "ro( +ndiaFrom the success of /!J came out the international forays of the -roup in setting upexchanges in leading international Anancial centres covering important geographies of.frica, outh East .sia and the /iddle EastB 0ubai -old and !ommodities Exchange wasset up in a 4oint venture with the -overnment of "nited .rab EmiratesB #t is for the Arst timethat the -overnment of "nited .rab Emirates has entered into a 4oint venture with a privatesector institution outside the countryB 0-!J, as it is +nown, very soon emerged as a ma4ormulti)commodity exchange in the -ulf region, a position it en4oys even nowB Then followeda series of multi)asset)class exchanges in leading international Anancial centresB ingapore/ercantile Exchange within the regulatory 4urisdiction of /onetary .uthority of ingaporehas emerged as a well +nown exchange in outh East .siaB -lobal *oard of Trade, whichwas under the regulatory supervision of Financial ervices !ommission, /auritius, wasmeant to be the gateway for growth opportunities in the fast)growing .frica regionB $nthe eve of the launch of the -lobal *oard of Trade in /auritius, %avinchandra Ramgoolam-!Q, FR!P, Prime /inister of /auritius was very gracious in than+ing the FinancialTechnologies -roup for Gshowing conAdence in /auritius and adding an entirely newdimension to our Anancial system by bringing +nowledge, technologies, businesses and+now)how that are generally found in the big Anancial centres of the worldB To operatein /auritius might be a relatively small step for -*$T, but this was a big stride in oureconomyB -lobal *oard of Trade is now merged with *ourse .frica that the -roup hasset up in *otswana as a business strategy to focus on the entire .frica region, with itsheaduarters now located in /auritiusB *ahrain Financial Exchange under the regulatory4urisdiction of the !entral *an+ of *ahrain was envisaged for developing trading in various

su+u+)based and #slamic capital mar+et products that are assuming importance andprominencein a number of countriesB 6ithin a very short time the imprints of the Financial Technologies-roup spread far and across multiple geographies and multi)asset)classesBExchanges promoted by FT#2 are located in leading international Anancial centres, such as ingapore,/auritius, 0ubai, *otswana and *ahrain, in addition to /umbai and 0elhi, ma+ing it the Arst evermultinational company from emerging mar+ets to hold exchanges across ma4or geographic regionsB1(

*ac+ home, further innovations continuedB $ne of the ma4or problems aecting the #ndianindustry was electricityB #ndian Energy Exchange was set up to create mar+et)based solutionsforprice discovery and trading of electricityB

4istinctions /!J was ran+ed by the Futures #ndustry .ssociation as the 'rd biggest commodity

exchangein terms of number of contracts tradedB /!J is the Arst listed exchange in #ndia, whichreceived phenomenal success by mobili


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contracts traded by the 6orld Federation of Exchanges

#ndian Energy Exchange is the biggest energy exchange in #ndia in terms of electricityfuturestradedB The exchange was reported as leading to a second industrial revolution by a leadstory in Economic Times CLuly 5, &;11D

%*H! was the largest collateral and warehouse management company in the private

sector in#ndiaB #t rose to become the largest facilitator of ban+ credit against agricultural commoditiesthrough warehouse receipt base AnanceB

0ubai -old and !ommodities Exchange even now en4oys the distinction of a premierexchange in the entire -!! regionB

.tom had the distinction of being #ndiaIs leading digital transaction platform, whichreceivedthe #ndia /E #nnovation .ward for M.n #nnovative Payment olution for /EsI

.ll exchanges of the Financial Technologies -roup were widely held, consisting ofpedigreeinvestors from domestic and international mar+etsB The -roup exchanges had predominantshareholding of the public sector Anancial institutionsB For instance, ban+s and Anancialinstitutions held ::B: percent of the shareholding of /!J toc+ Exchange promoted by the-roupB The group had the beneAts of several visionaries, senior bureaucrats, independentprofessionals, academicians serving in the *oard with every institutions run by a team ofindependent professionals1@

/r Lignesh hah, promoter of FT#2 is the only .sian to be recogni


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'risis#t might be ironical, but it was not FT#2 that mooted the proposal of the spot exchangeB FT#2was only +een on developing exchange industry solutions and setting up multi)asset)classexchangesB The idea of %ational pot Exchange came in the context of the +een desire ofthe-overnment to create a nationwide common mar+et for agriculture in which mar+et

mechanismsfor price discovery and trade transparency were +ey elementsB The -overnment invitedvariousinstitutions for consultations on setting up of electronic spot exchange to which /!Jrespondedby submitting a proposalBThe -overnment gave the responsibility of regulation in respect of oversight, protection ofinvestor interests and provision of periodic information by exchanges on all ma4oroperationalaspects to the F/!B $n several platforms, /!J has been advocating early legislation to theamendment to the F!R. .ct to further widen the scope of the commodity derivativesmar+ets as alsosought a complete regulatory framewor+ for the spot exchanges by the Forward /ar+ets

!ommissionBThe crisis at %E2 arose when trading clients paired certain contracts to maximise returnB6henthe -overnment instructed %E2 to stop all contracts, immediately, mar+et intermediaries Ktrading clients were caught in a liuidity problem, disrupting the smooth settlementprogrammethat had been going on since the inception of the exchangeB13

)ising tothe 'hallengeFT#2, as also %E2, did everything on its part to resolve the crisisB #mmediately, as an interimmeasure, a without pre4udice loan of Rs 135 crore was given to %E2 to pay the smaller

tradingclients with exposure upto Rs 1; la+hB The %E2 *oard was reconstituted and themanagementrevampedB %E2 extended full cooperation to the investigating authorities, including E$6,!*#,E0 as also the !ommittees that the -overnment has set up to study the %E2 crisisB FT#2 hasbeen supporting %E2 through Anancial and human resource support to explore variousavenuesof crisis resolution that are legally possibleB #t has been supporting to ta+e what all measuresreuired legally to proceed against defaulters to recover the moneyBFT#2 did all what was expected from a responsible corporate when one of its subsidiariescame into aproblemB

#u/;ected to n"airTreat(ent1:

$n the other hand, the action that was ta+en against %E2 and FT#2 for its sincere eorts toAnda solution to the crisis, however, was most un4ust and unfairB 6hile leaving out all otherplayersresponsible for the crisis, F/! has focussed only on %E2 and FT#2, with actions that proveddetrimental to it and put at ris+ prospects and fortunes of thousands of investors, employees


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and other sta+eholdersB These actions, which were never heard or seen any time in the pastwhen a company was extending its fullest cooperation to resolve the crisis, includedcustodialinterrogation of the promoter and +ey governing and managerial personnel of theexchanges,declaring the promoter as not At and proper, threatening with the mergers and supersession

of management, which are not consistent with the corporate conduct of civil societies indemocraciesB#n the outrage that emerged after the crisis and the intense lobbying by certain sections ofbro+ers and trading clients, a few ma4or facts about %E2 are being completely side)steppedBThe contracts in dispute formed 4ust 13 percent of the total business of %E2 since inceptionBExcept the contracts that faced problem, the settlement of e)series contracts was conductedsmoothly and successfullyB 6hen the exchange was stopped by the -overnment to issuefurthercontracts and the operations were closed, the exchange had a total of (,;;; clients withoutstanding duesB !laims of '',;;; clients of e)eries contracts were settled successfullyB!lientswith exposure below Rs 1; la+h the number of which is 3,;;; received @; percent of theirclaimsBThe claims of the ;;; clients is under process of settlementB $f the Rs @5; crore ofsettlement,seven defaulters own upto :@ percent and six percent of the clients, which is euivalent to3:1clients, account for 5 percent of the claimB%E2 crisis has aected FT#2 in the worst possible mannerB The -roup lost exchanges,proAtablebusinesses, and growth opportunitiesB #ts ability to create world class institutions is severelyeroded and dentedBFT#2 is fully sei


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The focus should be on the recovery of dues rather than ta+ing vengeful measures that willdestroy the ecosystem of exchangesB%E2 should be allowed to ta+e every measure to resolve the crisis without undermining itspower and potential by hasty measures of merger with FT#2 or supersession of FT#2management,which can actually prove counter)productive in solving the problemB

FT#2 is committed to the growth of the #ndian Anancial mar+ets and will ma+e eorts toharnessevery prospect and potential available to itB FT#2 will endeavour to contribute to the successof/ade in #ndia story, which it has already began a decade bac+B&;

FT#2 by itself has not committed any breach of governance standards or mar+et abusesB #tis a well)run company with close to ;,;;; public shareholders, an accomplished *oard andadynamic management, that has steered this company from being a start)up in early &;;;stoone of the most respected and widely regarded technology solutions company thatpioneeredmulti)asset)class trading segments, which stood the tests of competition from global ma4orssuch as #*/B !ost)eective and eOcient technology solutions enabled #ndian Anancialmar+etsto expand the reach and access nationwide, beneAting millions, including Anancialinstitutions,intermediaries, investors and other sta+eholdersBince its inception, FT#2 has not received any complaint from exchanges or intermediaries,whichare its biggest clients and customersB Even competing institutions used to buy technologysolutions from FT#2, which is a testimony for its integrity and business ethicsB There wasneverany regulatory action of any sort though the exchange and ecosystem ventures of theFinancialTechnologies -roup were operating in several regulatory 4urisdictions in #ndia and abroadB

FT#2 never received any subsidy, land or Anancial or Ascal support from any state or !entralgovernmentB #t has contributed signiAcantly to tax generation in the form of corporateincometax, service tax, transaction tax, stamp duty and other levies and charges from variousinstitutionsfrom time to timeBFT#2 is a Arst)generation enterprise that created new standards and benchmar+s on potentialandpossibility of Anancial mar+ets developmentB

FT+% =ill stand /y N#$%> "or

$:pedited )ecoery "ro( the4e"aulters> to )esole the 'risis


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OurPriorityFTIL is co''itted to taking all the ste%s re7uired and e$tending co'%letecoo%erationfor an early resolution to the crisis through reco&ery of trading clients 'oneyfro' thedefaulters6 It has already %ro&ided ad-hoc relief to !"L to co'%ensate s'alltradingclients with e$%osure u%to Rs 32 lakh and is hel%ing the e$change with /nancial#infrastructure and %ersonnel su%%ort to s%eed u% the reco&ery %rocess fro' thedefaulters6

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0espite FT#2 being in the private sector, it has contributed signiAcantly to the growth ofpubliccapital mar+etsB FT#2 is the one that too+ #ndia to the global league tables in regard toexchangeoperations in ma4or segments such as commodities, currencies and energyB#t enabled several +ey and strategic sectors, wor+ing with a wide range of commodities to

hedge,manage ris+ and discover better prices from the point of view of production, procurement,salesand distributionB. nationwide study by a leading research institution, Tata #nstitute of ocial ciences, T#,described one of the Financial Technologies -roup !ompanies in one catchline9 G. /illionLobsand a /illion /ore $pportunitiesBThe Financial Technologies -roup has expanded its operations and sphere of inuence and inthis process conceived and created some of the best exchange and ecosystem ventures,whichstand out as a distinct achievement and accomplishment from any emerging mar+eteconomy in

the worldB.s it was expanding its sphere of inuence across various asset classes in new mar+etsegmentscoming up in dierent geographies across the world, it engaged in numerous businessesconnected with technology and exchange industry and in the process set up severalsubsidiaries,one of which was %ational pot Exchange 2imited C%E2DBThe genesis of %E2 came in the bac+ground of the desire of the public policy and the-overnment to create a common agricultural mar+et in which a platform for spot trading in


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agricultural commodities assumes signiAcanceB Reports of the -overnment have oftenmentionedthe need for such an institutional mechanism to provide transparent and mar+et)determinedprice discovery process to the producers of commoditiesB /!J, the agship commodityfuturesexchange of the Financial Technologies -roup, had several rounds of discussion with the

-overnment in ta+ing forward the spot exchange initiativeB #t is worthwhile to note that %E2was not set up by FT#2 but by /!J in &;;@B .s the current legislation was not conducive tocommence greenAeld spot trading and agriculture being a sub4ect governed by dierentstategovernments, a /odel .P/! .ct was promulgated by the "nion -overnment and wasadoptedby 1 state governmentsB ubseuently, an exemption was granted by the /inistry of!onsumer.airs, Food Public 0istribution, -overnment of #ndia, to %ational pot Exchange toconductnationwide trading in one)day forward contractsB This was not a privilege extended to 4ust%E2,as similar exemptions were granted to all the other exchanges running similar platformssuch as%!0EJ promoted %P$T and %/!E promoted %ational .P/!B6hile several agencies of regulation, government and investigation are currently involvedin examination and study of various issues leading to the payment crisis, the -overnmenthas suddenly come up with a proposal to merge %E2 with FT#2 in contravention of the longestablished conventions of corporate law and conductB ubseuently, newspaper reportshintedthat the -overnment is contemplating supersession of the management of FT#2, which isagain acontravention of the established norms of economic freedomB&&

The pertinent


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*ombay High !ourt to dispose of the conAscated assets of the defaulters and utili


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economy and AnanceB "nfortunately in the case of the Financial Technologies -roup, it wasnothing but viliAcation and witch)hunt from all sides, be it the government or the regulatororthe agencies that have pressed it into a corner disabling its power to recover and redressuic+lyBEven without assistance and support and despite being under constant and continuous

harassment, %E2 is determined to get itself out of the crisis and redress grievances of theclaimsof trading clientsB #t is extending cooperation and actively coordinating with the courts andotheragencies towards reali


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High !ourt !ommittee was constituted to loo+ into the entire process of recovery, the F/!has come out with yet another vindictive and damaging proposal of recommending the-overnment to merge %E2 with FT#2 and subseuently change FT#2>s management, whichisuite in contradiction to the established conventions of corporate law and could only provecounter)productive as other measures of the F/! have been since the beginning of the

crisisBThe recurring theme of F/! has been non)cooperation, destabili


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Practice8hile FTIL and !"L ha&e been %ursuing and ful/lling obligations# within thefra'eworka&ailable in the legal s%here# to ensure reco&ery and to attend to the interests ofthea9ected constituencies# the treat'ent that was 'eted out to the' by the &ariousauthorities has been %lain un*ust# in a great hurry# contra&ening and incontradiction of %rinci%lesof fairness that need to be a%%lied to a co'%any working towards crisisresolution6

3#f it is a Private /ar+et Problem 6hy Excessive Regulatory 7eal8Regulation9 !an it be 0iscretionary or should it be /andatory8"nfair !omparison with Earlier !risisPu


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to a complex situation arisingBThe %E2 crisis is not something that the world has not +nown in the past or that has neverta+en placeB The context of the crisis is also not something so unusualB The uestion thatonlycomes to mind, is how and why so much hurry on destroying a vast ecosystem, that hasgreat

potential to grow and contribute to #ndiaIs progress that was carefully built over long years,inthe name of solving a crisis 4ust to fulAll the demands of a few high networth trading clientswhothemselves are to be blamed, in the Arst place, for the crisis to happen8The way it was dealt with raises more uestions than answersB Here are a few that are uitepu @sa"eguarding inestorinterestA>@su/(itting in"or(ation on a "ortnightly /asisAB -lobally, these three words form thebul+ ofthe regulation in any mar+et but is rather strange why F/! chose not to fulAll thesefunctionsentrusted to itB


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F/!, in association with exchanges used to conduct surprise investigations and raids insomecentres to detect dabba tradingB #t is diOcult to understand why the F/! has not carriedout such investigations when members were pairing the contracts and mar+eting this as aninvestment productB&5

How F/! was entrusted with the responsibilityof regulation of the national spot exchangessuch as provision of oversight, safeguardinvestor interest and collection ofperiodic informationBHow the regulatory functionsentrusted to the F/! as thedesignated agency wereselectively ignored last twoyears prior to the crisis and onlypursued against %E2 and FinancialTechnologies after the crisis6hat is advised How it was ignoredF/! letter 0ated 1;th .ugust &;11To The /anaging 0irector, %ational pot Exchange stated9# am directed to enclose herewith a copy of the letter fromthe 0epartment of !onsumer .airs nominatng Forward/ar+et !ommission as the M0esigneted .gencyI for providingoversight over all the pot Exchanges, which have beengranted exemptions under ection &3 of the F!R.B The potExchanges may please note the content of the said letterfor further neccessary action at their endB #t may also bementioned that the Exchanges would be reuired to forwarda return on a fortnightly basis to the !ommissionB Thereporting format will be indicated to you shortlyBF/! instruction to the %E2about its nomination by the

-overnment as 0esignated.gency for oversight and in thisregard periodic submission ofinformationBThis letter shows that F/!is clearly in responsibility ofregulation of the national spotexchangesExcerpt from letter from /inistry !onsumer .airs, Foodand Public 0istribution to the F/! dated .ugust @, &;11'B #n order to safeguard the interest of the investor andto ensure that the conditions stipulated for grant ofexemption are complied with, the competent authority

has decided to nominate the Forward /ar+ets !ommissionas a 0esignated .gency for providing oversight over allthe pot Exchanges which are granted exemption undersection &3 of the Forward /ar+et !ontract Regulation .ct,15@&B(B #n view of the above F/! may ensure that theconditions stipulated for grant of exemptions are compliedwithB #n case, there is any breach of conditions sub4ect towhich exemption is granted, the F/! will be competent to


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ta+e action deemed necessary and AtBThe %otiAcation from the /inistryof !onsumer .airs, Food andPublic 0istribution, -overnmentof #ndia nominating the F/! as adesignated agency for regulation

of the %ational pot Exchangesincluding providing oversight,protection of investor interestsand periodic collection ofinformation was not implementedby F/! in a serious manner6hat is advised #t was only %E2 and FT#2 that weretargeted-a


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!lients did not +now the bac+ground of thestoc+s in which they were trading!lients are fully aware of the commodities inwhich they are trading2a+h of clients and investors . total of 1';;; trading clients/oney invested by clients have diminished or

evaporated with fall in the price of stoc+s!ollateral and assets close to the tune ofaected money of the clients Cabout Rs @5;crD is secured and now is with the E$6Exchanges in which the clients lost moneywere not involved in recovering money%E2, the exchange, and FT#2, its promoter, arestriving hard to recover the money lost by thetrading clients from the defaulters*oth these crises have contributed to hugesystemic ris+There is no systemic ris+B #n fact, the stoc+ andcommodities mar+ets after a year of the crisisare at an all time highHappened in the Anancial mar+ets where thevalue of the assets depleted and does notmatch with what the clients lostToo+ place in the real economy where thevalue of assets attached by the E$6 ascollateral matches with that of the claims#n the %02 #P$ problem, 1'B@: la+h retailinvestors were aected2ess than 1;;; clients account for nearly 3;percent of the claimB#n the case of atyam, the parent companyitself admitted to lapses and the *oard andthe /anagement were not in a position toconduct normal business and fulAl obligationsowing to the crisisThe parent company is not connected withthe crisis in any manner The *oard and the/anagement are in total control of the parentcompany business ensuring smooth conductof the business and fulAlling all obligationsBThus, there is a sea of dierence between the very nature, form and conseuences of boththesecrisesB #t is rather perplexing to see why the regulator has not made this dierence clear tothegeneral public while all sorts of speculations and wild rumours were going onB #s it not therole of the regulation to inform and educate the general public about the developments in

theAnancial mar+ets8 /oreover, some of the ad)hoc and harsh actions lent credence to thefren


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%otwithstanding where the issue stands, either in respect of public or private domain or whohasthe power to regulate, the 0epartment of !onsumer .airs, /inistry of !onsumer .airs,Foodand Public 0istribution, following the crisis, sent a letter to the Forward /ar+ets !ommissiondated .ugust , &;1', stating that the F/! is authori e:tensie inestigations are not directedto=ardsde"aulters> /ro7ers> =arehouses> inter(ediaries and clients inoled in the crisis.+" thecrisis is (ade out o" the participation o" all> then =hy punish(ent is directedagainst onlyFT+% and N#$%.

Huestiona/le pplication o"IFit and ProperI. cursory glance at the manner in which Fit and Proper guidelines are enforced by theForward/ar+ets !ommission on FT#2 shows several inconsistenciesB There was no prior consultationonthe sub4ect except sending a show cause to the promoters of FT#2 and some of itsmanagementpersonnel and ta+ing a uic+ action without giving the promoters a fair chance and suOcienttime tocross)examine the audit reports that led to the action, or put forth their point andperspectiveBThe following criteria determine Fit and Proper status and how FT#2 and its promoters meetthem9

Financial #tatus5FT#2 and its promoters are Anancially very soundB FT#2 has a strong balance sheet withrobustreserves and networthB

$ducational Hualications or $:perience5FT#2 is a pioneering company in designing state)of)the)art Anancial mar+et solutions andits promoters are not 4ust highly ualiAed but are considered as visionaries of creatingnew)generation mar+ets in #ndia and abroadB

/ility to carry on the regulated actiity co(petently> honestly and "airly5

The Financial Technologies -roup has multi)asset)class exchanges functioning ininternationalAnancial centres such as ingapore, /auritius, 0ubai, *ahrain and *otswanaB .fter elaborateduediligence and assessment of the promoters, the licence for these exchanges are issued bythemonetary authorities and regulators of security mar+ets of the respective 4urisdictionsB#nvestors'&


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in FT#2 have received excellent returns in terms of price appreciation and dividend declaredfor' continuous uartersB The Financial Technologies -roupIs exchanges in #ndia, such as /!Jand /!J)J, are sub4ected to annual statutory and regulatory audits, which found noproblemswith the regulatory and compliance standards at the exchangesB FT#2 or any of its group

companies do not have any claims pending with any of its ban+ers, lenders, customers,vendorsor employeesB The #P$ of /!J received phenomenal response of mobili


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/ercantile Exchange, /!J, #EJ and %ational *ul+ Handling !orporation, the sta+es of whichwerepic+ed up by pedigree institutions such as #ntercontinental Exchange, Qota+ *an+, T? ledgroupand private euity ArmsB ome other companies were closed downB Reduced business led toseveral 4ob cutsB''

$n the clients whose money is stuc+ with the defaulters, the exchange>s view has been thatthese are trading clients in commodities who are fully aware of the nature of the productthatthey traded and the counter parties with which they dealt in trading of the productB TheHonIbleHigh !ourt in its order dated .ugust &&, &;1(, opined the same regarding this constituencyB*ro+ers are the next group who +new the product very well, provided funding to their tradingclients, earned huge commissions from the trade, inspected warehouses on behalf of theclients and found these to be in order without bringing any shortcoming or deviance to theattention of the exchange administrationB #n the initial days of the crisis, the very bro+erswhoare now see+ing action against the promoters, have extolled %E2 contracts as aninnovativeand imaginative productB *oth the trading clients and bro+ers +new from the invoices andwarehousing receipt the counterparties Cwhich are now defaultersDB "nli+e the anonymoustrading that ta+es place in the stoc+ mar+ets, in %E2, in the contracts paired by the bro+ers,trade too+ place between two parties fully +nowing about each other, without direct contactB%E2 was submitting information on all the trading and the stoc+ position in each of thewarehouses across #ndia once in a fortnight to the F/!, which too did not raise any concernstothe %E2 and its *oardB The entire communication channel was between the /0 !E$ of%E2and F/! K 0!.BThe ma4or shortcoming of the handling of the crisis is that several measures have beenta+enand proposals made without proper examination and consideration of correct facts, issues in

dispute, manner in which sta+eholders have been aected, comments and actions onmattersthat are sub)4udice, and disregard for the need to conduct the investigations in a fair andtransparent mannerB Focus has only been on protecting the interests of 1',;;; tradingclientsbac+ed by 1(: bro+ers of which 4ust percent currently account for 5 percent of thesettlementin uestionB#t is high time that a more ob4ective and fair view on the %E2 crisis be appreciated andcommunicated by all the authorities concernedB

The ,oneyTrailExtensive investigations were carried out to ascertain whether any money or proceeds from%E2were diverted to FT#2 or any of its promotersB .fter extensive investigations by the-overnmentand the investigating authorities and a series of interrogations, over the last one year, byspeciali


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The uestion that arises is that when it is established and proven that neither %E2 nor FT#2nor its promoters are beneAciaries of anything that happened in the %E2 crisis, then whytheyshould be sub4ected to unwarranted pain and punishmentB'(

The trail clearly shows money owing into the account of the && defaulters and does notinvolvethe promoters or the management of FT#2B This ma+es the punitive actions ta+en againstFT#2and its promoters unfair and un4ustB.mount receivable from members as on .ugust '1, &;1' from the periodcommencing .ugust 1, &;1' as stated by harp Tannan .ssociates#.N ,e(/er Na(e (ount )eceia/leB)s. 'rore1 ..TH. /#%/ET #%0#. P?T 2T0 &'B:3& .RQ #/P$RT P?T 2T0 315B(&' *R#%0. !$//$0#TU 1(B;1( L"--ER%."T PR$LE!T 2T0 &15B&@ 2$#2 !$%T#%E%T.2 F$$0 2T0 '':B( 2$#2 HE.2TH F$$0 2T0 &:3B(:3 2$#2 $?ERE. F$$0 2T0 :@B15: 2$T" REF#%ER#E P?T 2T0 &@&B@5 /ETQ$RE .22$U #%0"TR#E 2T0 5:B;:1; /$H.% #%0#. P?T 2T0 @3@B;:11 /R F$$0 PR$!E#%- 5B;@1& % Q PR$TE#% 2T0 5(B:51' %./0H.R# F$$0 #%TER%.T#$%.2 P?T 2T0 @1B;31( %./0H.R# R#!E -E%ER.2 /#22 1;B(@1@ %! "-.R 2#/#TE0 @:B:@1 P 0 .-R$PR$!E$R P?T 2T0 '3B@@13 HREE R.0HEU TR.0#%- !$ '(B@51: P#% !$T TEJT#2E P?T 2T0 ':B&15 6.T#Q $?ERE. !$RP$R.T#$% 1;;B:'&; T.?#H# E%TERPR#E P?TB 2T0B '''B;1&1 ?#/2.0E?# .-R$TE!H 2#/#TE0 1(B;&

&& 6H#TE 6.TER F$$0 P?T 2T0 :(B:3&' U.TH"R# .$!#.TE (&(B(&( .%QHU. #%?ET/E%T B&5&@ T$P6$RTH TEE2 P$6ER P?TB 2T0B 1@5B(Total &&1.12

#hould a Pay(ent 'risis only %ead to'losing 4o=n o" the $:change?The need for common agricultural mar+ets in #ndia are espoused on various occasions byagricultural economists C0rB /BB waminathanD, the then Anance minister C/rB!hidambaramD andthe then Prime /inister C0rB /anmohan inghD as also by international organisations such astheFood and .griculture $rgani


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that the large scale payment defaults occurredB Typically, both the national spot exchangeswere oering a number of products and at %E2, the settlement of all the e)eries contracts,involving about '';;; investors were done in an orderly manner with payments madeaccordingto the scheduleB $nly contracts paired by the bro+ers faced problem, following theinstruction

of the government to %E2 to stop issuing further contracts with immediate eect, when thecounterparties suddenly began to free


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litigation, which will drag the crisis for a longtimeB et up fast trac+ !ourt to expediterecovery of dues from the defaulters andliuidate their assetsB .mend P/2. to enableproceeds of assets attached to go to thetrading clients rather than the -overnment'

oid ,easuresthat could /e 'ounterProductie#nstead of Anding a uic+ solution to the crisis by sale of assets fro


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The!eginningand the!usiness o"N#$%There is a %erce%tion created a'ong the %ublic that ational !%ot "$changeLi'itedwas created to get so'e 7uick bene/ts# which is far fro' the truth6 In its /&eyearsof functioning# it has been 'eeting all obligations6 The crisis would not ha&e beenof such %ro%ortion if the +o&ern'ent would not ha&e sto%%ed !"L fro' furtherissuance of contracts with i''ediate e9ect6

!#+N$## OJ$)J+$W/ore than Rs 3,3,;;; croreTOT% T)NOJ$) B20082013.bout &B&3 la+hTOT% T)4+N9 '%+$NT# Bnu(/er.bout (,;;;N,!$) OF T$),+N%#.bout @;;TOT% 'ONT)'T# Bnu(/erRs &,:;,1@ croreTOT% PK+N L PKOT


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@& Cof them about '( are agriDN,!$) OF 'O,,O4+T+$#.bout :;;N,!$) OF ,$,!$)#/ore than 1,;;; crore lotsTOT% JO%,$ Bnu(/er

1(3N,!$) OF 4$%+J$)K %O'T+ON#/ore than Rs &: crore#$)J+'$ T P+4 B20082013'5

There was a +een desire to create an #ndian common mar+et for all agricultural productsand to remove restrictions on internal trade in agricultural commoditiesB The 1;th Fiveyear plan C&;;&)&;;3D noted that GThere are a number of other statutory controls, eitherarisingfrom Essential !ommodities .ct, 15@@ or other statutes, which discourage the private sectorfrom ta+ing up various infrastructure venturesB The stoc+ and storage limits, restrictions oninter)state and inter)district movement of food grains, controls on blending and processing ofoilseeds, Prevention of Food .dulteration .ct CPF.D, 15@(, FP$, etcB are responsible for theslowgrowth of infrastructure and mar+eting developmentB This has adversely aected thepotential ofprivate sector initiatives and, conseuently, agricultural developmentB Therefore, stepswould beta+en for dispensing with ma4or control measures or reforming many of them, coupled withtheremoval of high Ascal leviesB #para $.%.%&'(B#n his budget speech C"nion *udget &;;(D /rB !hidambaram, the then "nion Finance/inister observed that G#ndia must become a single mar+et for all products, particularlyagricultural produceB The existing .cts governing agricultural produce mar+eting committeeshave outlived their utilityB The -overnment has circulated a model lawB o far, ten stateshaveinitiated legal or administrative action for Mdirect mar+etingI and Mcontract farmingI

arrangementsin line with the model lawB # urge all states to enact the model law at an early dateB0r /B B waminathan, noted economist observed that G6e must develop mechanismsfor giving the power of scale to small producers both in the production and post)harvestphases of farmingB The mismatch between production and post)harvest technologies shouldendB #)xcerpt from the inter*iew of +r. ,. -. -waminathan with atha /ishnu0 12eeded3 AnIndian"ommon ,ar!et40 in usiness 5orld #'% /une '66&(0rB /anmohan ingh, the then Prime /inister, inaugurating the .griculture ummit, &;;@,said, that the Gnew deal reuired reversing the declining trend in investment in agriculture,stepping up credit ow to farmers, increasing public investment in irrigation and wastelanddevelopment, increasing funds for research and development, creating a common singlemar+et

in the country, investing in rural healthcare, education, electriAcation, rural roads, futuresmar+ets,insurance against ris+ in farming and forging public)private partnershipsB He soughtsuggestionsfrom the summit on how a Anancial window could be created for long)term capital ows intoagricultureBEconomic urvey of #ndia has also highlighted several times the importance ofstrengthening of the agricultural mar+eting in which the role of the spot exchangesassumes signiAcanceB


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%E2 was thus established as an endeavour to fulAll the -overnment plans of creating anddeveloping a common mar+et for agricultural produce by providing a nationwide electronictrading platform with wide participation of a large number of sta+eholders in the agriculturalcommodity ecosystemB

F'T #C$$T(;!OWhat is a #pot $:change ? #n the .P/!, physical presence of buyers and sellers is compulsoryB ellers bring stoc+,auction is conducted, buyers ma+e payment and lift physical delivery pot Exchange provides anonymous trading between a large number of buyers and sellerslocated in dierent parts of the country, settled by tender of warehouse receipt, because abuyer not physically present at the location cannot ta+e physical delivery #t involves tender of document of title, which ma+es it a forward contract under proviso C1Dto ec & CiD #f it also provides intra)day trading facility, it becomes forward contract under proviso C&Dto ec & CiD

Hence, pot Exchanges are actually G0elivery based Forward Exchange, notwithstandingthey are +nown as Gpot ExchangeTer(inology used in #pot $:changes

What is For=ard 'ontract ? ec & Cf D9 a contract for delivery of goods, which is not a ready delivery contract) There is no tenure deAned for a forward contractB . forward contract can be for oneday or one year or any period for that matter ec & CiD9 ready delivery contract9 delivery and payment within 11 daysHowever if there is9) Proviso C1D 9 tender of document of title) Proviso C&D9 settlement by dierence) Proviso C'D 9 dispensing with delivery by any meansWthen it ceases to be a ready delivery contract and becomes a forward contract ipso facto

) #f a contract is a forward contract, then the period of 11 days is not applicable$cono(ic )ationaleProvides nationwide electronictrading platform for eOcientprice discovery!learing settlementof funds and stoc+sFacilitates electronicnationwide auction, includingforward and reverse auctionsin commoditiesFacilitates ris+ transfer!onnects electronicallybuyers and sellers from thestates it operates inExtends mar+eting support to smalland marginal farmers by giving themelectronic access to large numberof buyers spread across the countryresulting in higher price realisationP$TEJ!H.%-E


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(1

$:e(ptions#n exercise of the exemptions conferred by ection &3 of the Forward !ontracts CRegulationD.ct,15@&, the !entral -overnment exempted all forward contracts of one)day duration for thesale

and purchase of commodities traded to facilitate trading on the national spot exchangeswithcertain conditions laid down for the exemptionBuch exemption was given to %E2 on Lune @, &;;3, to %!0EJ promoted %P$T on Luly &',&;;: and to%ational .griculture Produce /ar+eting !ompany of #ndia 2td C%ational .P/!D on .ugust 11,&;1;B

'onditions "or e:e(ptions are5 %o short sale by members of the Exchange shall be allowed .ll outstanding positions of the trade at the end of the day shall result in delivery %ational pot Exchange 2tdB shall organi


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.airs, Food and Public 0istribution CLune @, &;;3D%!0EJ pot Exchange 2imitedW %ational .P/! Cyet tocommence operationsD%E2 has obtained licences from several state governmentsunder respective state .P/! .cts before dealing in agriculturalproduce with delivery centres in /aharashtra, Qarnata+a,

-u4arat, $rissa, Ra4asthan, and /adhya Pradesh/ulti !ommodity Exchange of #ndia 2td C/!JD+N'O)PO)T+ONNT)$ OF !#+N$##)$9%TO)K ,+N+#T)K4$#+9NT$4 9$N'K!#+# FO) T)4+N9 +NFO)W)4 'ONT)'T##+,+%) $NT+T+$#%+'$N'$# N#$% O!T+N$4P)O,OT$)

'orporate Oerie=('

.xis *an+ *an+ of #ndia H0F! *an+ #!#!# *an+ #ndus#nd *an+ Qota+ /ahindra *an+ tate *an+ of #ndia *ihar 0elhi -u4arat /adhya Pradesh /aharashtra $rissa

Ra4asthan-overnment agencies and Public Entitiesli+e F!#, %.FE0, //T!, T!, !otton!orporation of #ndia !entral 0epository ervices C#ndiaD 2td C!02D %ational ecurities 0epository 2td C%02D *# for !oee *oard of #ndia Haryana tate !ooperatives upply and/ar+eting Federation 2imited CH.FE0D %ational .gricultural !ooperative/ar+eting Federation of #ndia 2imitedC%.FE0D Tamil %adu !ooperative /ar+eting

Federation 2td -u4arat .gro #ndustries !orporation2imited /aharashtra tate .griculture /ar+eting*oards 6estern -hats .gro -rowers 2td *elarusian "niversal !ommodity ExchangeClargest commodity exchange in EastEurope regionD #2F


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-overnment of $rissa, .ndhra Pradesh, /aharashtra, -u4arat, Tamil %adu, /P,etcB'%$)+N9 !NE#W)$CO#$ %O'T+ON#W)$CO#$ %O'T+ON#

4$PO#+TO)+$#,os L ##O'+T+ON#

Net=or7 o" lliancesTypes o" 'ontractsTraded!ontrary to the general impression created in the public mind space that %E2 was createdandfunctioning solely on trader contracts, which led to the problem, %E2 has designednumeroustypes of contracts that were serving various constituents of the real economy in theagriculture sectorB

The contracts included5

Far(erMs contract5 $nly farmer is seller, smaller trading unit, price uotation without.P/!cess and prices are higher than /inimum upport PriceB /ar+et hours9 1; am to ( pm TradersM contract5 .P/! cess paid commodity, large trading unit, anybody can be buyerorseller, strict uality norms are imposed and settlement ad4ustment done if norms are notmetB/ar+et hours9 .gri)1; am to pm and %on .gri) 1; am to 11B'; pm((

uction 'ontract5Trading is done for the speciAc commodity related to certain brandandbidding is open for only a few hoursB For=ard uction5 -overnment contracts are underta+en with bodies li+e %.FE0, //T!

andF!# through Forward .uctionB eller deAned auction session )eerse uction5 H.FE0, %.FE0 used reverse auction mechanism for !otton and paddyprocurements e#eries 'ontract5 Product for the retail clientsB The commodity units bought is to beheld indemat accountB /ar+et Hours9 1;B'; am to 11B'; pm on wee+days Physical procurement business 2! business Coutside Trading PlatformD

,anage(ento" N#$%%E2 had a *oard of 0irectors consisting of six non)executive directors drawn from dierentexperiences in the agriculture economy and ecosystemB The day to day functioning of the

management of the exchange was carried out by the /anaging 0irector and !hief Executive$OcerB

Po=erso",4 L '$O.ll the 0epartmentalHeads reported to him.ll Anancial decisions related to the


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Exchange were made by him.ll replies K communicationwith Regulators was by him6as supposed to implementthe Rules and bye)laws.ll the operational ris+

management mattersfor clearing, settlementand deliveries wereframed by him.ll the contracts were issuedthrough !ircular by him.ll the employeeappointments were by him.ll the /embers wereinducted by him

.ll decisions were ta+en by the /0 !E$(@

Organisational 'hart%E2 had all ma4or departments, wor+ing independently, such as /embership, Tradingand urveillance, !learing and ettlement, 6arehousing, 0elivery, *usiness 0evelopmentand FinanceB .ll the departments were headed by 0epartmental Heads who in turn werereporting to the /0 !E$(

N#$%5 The !right #ide%ational pot Exchange 2imited C%E2D, which commenced live trading on $ctober 1@, &;;:,was the Arst commodity spot exchange of the countryB #t is currently facing a settlementcrisisBElectronic spot exchange is a new concept altogetherB There was no provision in tate .P/!.ct to allow spot exchanges to functionB #t too+ a lot of time to explain to state governmentshow %E2 would be beneAcial to the farmersB However, some states have still not amendedtheir .P/! .ctsBThis is the Arst electronic spot mar+et to obtain licence under .P/! .ct in /aharashtra,Qarnata+a, -u4arat, $rissa, Ra4asthan and /P and has carried out trades in all states byenabling farmers to sell their produce to bul+ consumersB.part from enabling farmers to sell their produce, it has also enabled governmentcompaniesli+e //T! and PE! 2imited to sell their imported pulses to bul+ buyersB The companies li+eHindustan 7inc were also able to sell ma4or part of their processed silver on %E2 platformusing a single windowB?arious trade matching solutions provided by %E2 that beneAted farmers, consumers, bul+buyers and government agencies are9 'ontinuous auction /y (atching orders on price ti(e priority5 %E2 hadsuccessfullyconducted trading, clearing and settlement operation in TN; trading cycle, thereby

enabling to pay to the farmers on the same day without charging for any servicerenderedB The -u4arat tate .griculture /ar+eting *oard has compared %E2 price datawith the mandi auction price on continuous basis and observed that %E2 prices arehigher than mandi auction price by at least 1B@ percent to &B@ percent on continuousbasisB For=ard auction (odel i(ple(ented "or F'+5 %E2 had implemented forward auctionmodel for sale of wheat under $/ by F!#B 0uring &;1;)11, F!# sold around 1B(: la+h mtof wheat through %E2 in 0elhi %!R regionB This was a pilot pro4ect carried out for F!#,in which %E2 provided %E2 services without charging any fee from F!#B *ased on %E2


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performance, now F!# is loo+ing at expanding electronic auction of wheat through %E2across the countryB For=ard auction (odel "or sale o" cotton /ales on /ehal" o" Na"ed5 %E2 hadimplemented a transparent electronic auction model for %afed for sale of cotton balesB%afed has used %E2 services and sold around :B3' la+h cotton bales worth around Rs:@; crore to ma4or exporters and spinning mills through %E2 platform within a span of

' months with a very minimal cost and it was a win)win situation for both %afed and thebuyers, who were ma4or exporters and spinning millsB(3

$lectronic auction "or ,,T'> P$'> N+N%> #T' and Na"ed5 %E2 has conductedelectronicauction of pulses through its platform on behalf of government agencies engaged inimport of pulsesB 0ue to transparent operational procedure, even the small trading clientsand mills were able to procure pulses through %E2 platform under the auction modelBimilarly, %E2 had implemented an auction model for sale of pig iron by %#%2 C%ilanchal#spat %igam 2imitedD through its platform, which enabled %#%2 to reach out to a largenumber of buyers across the countryB For=ard and )eerse auction (odel "or Ca"ed5 %E2 had implemented auctionsessions for Hafed, whereby they had used %E2 platform to sell paddy, ba4ara and otherfood grain itemsB They were able to reali


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Trade and payment guarantee 0irect lin+age with a large number of buyers spread across the country, not dependentupon the local traders only to buy their produce .ccess to pan)#ndia mar+et to sell their produce .lternative mar+eting channel so as to compare %E2 price with mandi auction and thento decide where to sellB This also leads to increase in bargaining power

Power to uote their own selling price, not dependent upon the buy price uoted by thebuyersB Hence, a farmer is not merely a spectator but also a contributor in price discoveryprocessB #n mandi auction system, only the buyers uote their buy price, while the farmerscannot uote their selling price #ncrease in holding capacity, because farmers could deposit their goods in %E2warehouse and obtain loan from a ban+ against pledge of warehouse receiptB Hence,there was no compulsion to sell immediately!enets to Traders5 !ommon national level transparent platform for buying and selling of commodities Procurement and disposal of huge uantity possible due to a large number of buyersconnected with the Exchange Expansion of trading activities to multiple commodities was available on the electronictrading platformB . trader present in a mandi could procure various commodities arrivingin the mandi and sell the same on %E2 platform, because buyers for various commoditiesare readily available!enets to 'orporates D processors D e:porters D i(porters5 !ustomi


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The 'auseo"the 'risisThe real cause of the crisis is a co'bination of aggressi&e strategies of brokers to

%aircontracts of !"L into structured %roducts with false assurance of /$ed returnsand atthe sa'e ti'e showing returns as business inco'e to o9set losses# whereas the"$changehas always been 'aintaining that e&ery contract traded on the "$change carriesrisk andclients need to be careful in assessing their a%%etite while choosing co'%le$

%roducts

&!)OE$)#/is)selling to trading clients for Axed returns!reated structured contracts through pairing of contracts6ere informed participants in the mar+etExecuted certain orders without client consent?isited warehouses numerous times, Anding everything in order0id not once raise or bring to the notice of %E2 *oard any irregularity

,ana ge(en tFunctional autonomy

Even in .ugust &;1' maintained that commodities existed in the warehouse%o red ag raised to the %E2 *oardole contact with F/! K -overnmentB %o F/! contact with *oard

'o(/ination o" #earch "orCigh


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Kield /y 'lients =ith ,issellingo"

Products /y ,ar7et+nter(ediariesTurnover of the contracts that bro+ers paired on%E2 platform accounted of only 13B@X of thetotal turnover on %E2 since inceptionBTotal Turnoer on N#$%

$ther 1*.&!ontracts:&B@X

82.&

@1N#$% 'ontractsThere is an impression created that %E2 has introduced the contracts that came intoproblem with a view to ma+e uic+ proAts, which is not the caseB . wide range of contractswere traded at %E2, including CaD Farmers contracts, CbD .uction !ontracts, CcD Forward.uction,CdD Reverse .uction, CeD e)eries contracts, Cf D Traders contracts, and also physicalprocurementbusiness and 2! businessB Traders used all these contracts as also paired some of these asanarbitrage strategy to maximi


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against advertising Axed or guaranteed return on %E2 platformB Typical to any mar+et, asthetrading clients were ma+ing good returns from pairing the contracts, bro+ers who mar+etedthese products were not enforcing this discipline and caution while ma+ing aggressive salesB*ro+ers were even extending Anancing to their trading clients who were interested in tradingof

the contracts through pairingBPriity o" the 'ontractPrivity of the contract is between the bro+ers who sold the product and their tradingclients who bought itB #t is the bro+ers who mar+eted and sold the product and identiAed thetrading clientsB The bro+ers are the ones who should have cautioned them on the ris+sassociatedwith the product, in which they failedB #t is the bro+ers who chose the commoditycounterpartieswhile entering into these contracts and who were expected to conduct due diligenceB$:planations and 'larications%E2 has provided explanation and clariAcation immediately to the regulatory authoritiesand the government on any issues raised by them on any aspect of the operations andbusinessBThe last of such explanation was provided in .ugust &;1&B There was no further intimationtillthe -overnment as+ed %E2, in Luly &;1', not to launch any fresh contractsB

F'T #C$$T@&

,issing #toc7s5 Co= it could hae Cappened?Throughout, the F/! maintained that the crisis emerged out of a warehousing problemB #nreality, the F/! was provided periodic CfortnightlyD information on the stoc+ of commoditiesheld in the warehouses by the executive management of %E2B The /0 !E$ hadrepeatedly assured that stoc+ position was comfortableB Even after the crisis, the /0

!E$ made public statements that the stoc+s in the warehouses were more than the valueof the settlementB *ro+ers of %E2 belonging to the public sector have conducted separateinspection of the warehouses, on select basis, through !.- approved auditors and found noshortages or lapse in the warehousesB %E2 statutory and internal audit reports periodicallybrought out also found no deviance or deAciency in this regardB 6hen all these measureshave never raised any red ag over the stoc+s in the warehouses, blaming the %E2 *oardand FT#2 for missing stoc+s and attributing motives is plain un4ust and unfairB Thus, theaction being initiated against the non)executive members of the %E2 *oard, FT#2 and thepromoters of FT#2 are harsh and not 4ustiAable in this contextBThere could be a possibility that once the -overnment caused sudden stoppage of business,some of the defaulted members with a view to protect their positions might have migratedthe stoc+s from the designated warehousesB This further accentuated the liuidity positionleading to default in the settlementB The possibility of ban+s cutting o their credit lines

without the stoc+s in place might also have induced them to shift the stoc+s out of thewarehousesB uch a scenario could be expected in any Anancial mar+ets business and not4ustin %E2B udden stoppage of business will create panic in the mar+et that will lead membersto try to get away from the responsibility and obligations, which happened in the case of%E2 alsoB

)ole o" $(ployeesThe %E2 business was spearheaded and conducted by the /0 !E$ who en4oyedcomplete


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autonomy and functional freedomB The role of the top management of %E2 and oOcialsentrusted with dierent functions and responsibilities is under investigation for any possiblelapses and deviances from established practices of ris+ management and due diligenceB6hile%E2 has already revamped the entire management team, it will comply with any actionsreuired to

be ta+en in case if any involvement of the sta in any action leading to the crisis isestablishedB@'

No )ed Flagsto The !oardince the commencement of trading in $ctober &;;:, %E2 *oard laid down systems,processand ris+ management framewor+ li+e margins, auction, etcB, by virtue of various circularsandinstructions under the Rules and bye)laws of %E2B .ll these instructions were legally bindingonthe mar+et participants and the oO cials of %E2 were to ensure that they were followedBThispractice is similar to ban+s where the *oard of 0irectors lay down the instructions and iftheseare not followed the relevant oO cials are held responsible and the directors are responsibleonlyif they were complicit in committing any irregularitiesB6hen so many agencies never raised any concerns on the stoc+s in the warehouses, puttingall the blame on the *oard, who was dependent on statements coming from any of theabovesources, is not fairB

'o(pliance )eportsand 'erti cationThe /0 !E$, %E2 submitted uarterly compliance reports to FT#2 *oard since /arch

&;11after %E2 became a material subsidiary of FT#2B The uarterly compliance report containsallaspects of management and operation of %E2B #n the said reports, he conA rmed about theexistence of commodities in the warehouses, ris+ management and other routine aspectsBTherewere no reasons for the *oard of FT#2 to suspect the submissions of the /0 !E$, %E2BHence,there was no reason for FT#2 *oard also to get alertedB

COW W#TC$ !O)4TO ENOW

WC$N?/0 of the exchange gave public statements that stoc+s inexcess of the settlement were available in warehousestatutory and internal auditors did not mention anyshortcomings in stoc+s in warehouses or operations of %E2.uditors approved by !.- veriA ed the stoc+s were in placeat warehouses and never raised any concern*ro+ers who personally visited the warehouses never madeany complaint of any shortage


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F/! which used to get fortnightly statements on the stoc+sin warehouses never pointed any deA ciency of any mannerThere was no concern expressed by any uarterB

!'4$FF!'4

$ COW W#tC$ !O)4 tOENOW WC$N?@(!ro7ersand Trading 'lients The *ro+ers sold the contracts to their trading clients as a structured product and that ishowthe popularity of the contracts increasedB The volumes in these types of contracts increasedonlyduring &;1&)1'B 0uring &;1&)1' the euity mar+ets were not doing well and many bro+ersand their trading clients started participating in the TN& and TN&@ contracts with a view toma+e arbitrage proAtsB .ll the bro+ers and their trading clients who traded on %E2 are experts and+nowledgeable

and participated in the contracts after duly assessing the ris+sB .ll the trading clients madeAnancial gains until Luly &;1' when the mar+et was halted due to government directionsB The contracts on %E2 were traded by large listed bro+erage housesB These bro+ers havelarge legal and compliance teams and are operating in euity and commodity futuresmar+ets as wellB These bro+ers have participated in %E2 only after exercising due diligenceB*ro+ers pushed client investment in a particular %E2 contract due to higher yield they couldget for the clients and higher bro+erage they could charge from their clientsB /any bro+erssold this product as a part of portfolio management and also made loans available whereclientIs paid only 1;)&; percent and the balance money was deployed as loan by the clientfrom the bro+ers, which earned the bro+ers additional return on money lentB The clients gotlured due to Axed cost of borrowing and a higher spread of returns against the commoditiesB Further, several bro+ers acted as !F agents for their trading clients and visitedwarehouses Cof

the defaulting membersD storing the commodities under intimation of %E2 for stoc+veriAcationand never complained to %E2 about missing or shortfall in commoditiesB The police found that in some instances the bro+ing houses used their clientsI accounts,without their CclientsID information and consent for doing purchasesB The bro+ers altered therules for their personal beneAtB Essentially, a distinct aspect came to the E$6Is notice during their investigation, whichwas also mentioned in their charge sheet ) that a big bro+ing Arm assured its tradingclients about the security of their invested money, besides the existence of stoc+s in thewarehousesB


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The defaulting members are operating entities and were having huge ban+ limits as wellBPrima facie it was impossible to detect that irregularities were being committed as thewarehouse inspections by mar+et players did not raise any alarmsB #t appears that many ofthese defaulters have ta+en double Anance against commodity stoc+s pledged to ban+s andsome have repaid the ban+s out of the funds received from trading at %E2B The defaultingmembers are willful defaultersB@@

Further, these defaulting sellers issued ?.T invoices in the name of the trading clients aslateas until Lune ';, &;1'B This implies that either those invoices were issued without actuallyhaving the goods and were thus false, or that the goods were subseuently removed bythem from the warehousesB Throughout the viliAcation campaign against the Financial Technologies -roup, theimpression that was created was that of innocent trading clients were duped by %E2 andthus needed to be helped with great urgencyB #t too+ more than a year till HonIble Lustice.bhay /B Thipsay L, in his $rder given on .ugust &&, &;1( on the !riminal *ail .pplication%oB 1&' of &;1(, Cin the High !ourt of 4udicature at *ombay Ccriminal appellate 4urisdictionDobserved as under$bservations made in the order given by Hon>ble Lustice .bhay / Thipsay LThere is great substance in the contentions advanced by the learned counsel forthe applicant that the bro+ers through whom the so called trade transactionswere entered into, do have their own legal team and a full +nowledge of howthe mar+et operatesB The legalities of the transactions were uite expected to be+nown to the bro+ers and the traders who do not hesitate to term themselvesas MinvestorsI, and they were expected to assess the legalities of the transactionsBThe bro+ers being uite experienced, and the investors being informed persons,it is apparent that the issue of illegality of the transactions raised by them isnot out of their concern to adhere to legalities, but in order to pro4ect theapplicant as the main oender, rather than the defaulting partiesYY Thoughthe case has been pro4ected as a Mscam of Rs @;; croreI, it needs to be +ept inmind that these amounts have not been received by %E2B .s already observed,it is diOcult to accept that the bro+ers andZor their clients for whom they werewor+ing were MdeceivedI by %E2 in as much as in all probability, the bro+ers and

the investors were well aware that they were not entering into a genuine saleand purchase contractB 6hen there is a clear and obvious possibility that thesepersons +new about the transactions, the MdeceptionI if any, caused to themcannot be said to have been caused by the nature of the transactions and, atthe most, they can be said to have been misled by a propoganda that MinvestingImoney in those transactions was safeB The money invested has not come to%E2, but has gone to the borrowers, iBeB, bogus sellersB #t is the borrowers whohave been beneAted by the transactions and the money of MinvestorsI has goneto themB The names of &@ dierent companies who are the defaulters have beenmentioned in the F#R itselfB Thus, though pro4ected a Mscam of Rs @;; croresI, theillgotten amount has not gone to the applicant, or for that matter, to %E2B #nfact, it is not the case of anyoneB@


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#hortco(ingso" the)egulatorThere is enough to substantiate that in the !"L crisis# regulatory shortco'ing isabound6:irtually e&ery as%ect of regulation such as o&ersight# in&estor interest#fortnightlyre%orting of critical data were entrusted to the designated agency# ie6# FMC6 Post-crisis#the regulator went into an o&erdri&e# *ust focusing on one institution lea&ingothersthat ha&e *eo%ardised s%eeding u% the reco&ery and an early resolution to thecrisis6

6Failures o" )egulatory gency@3

The then, !hairman, /!J, had repeatedly reuested the -overnment that the Forward/ar+ets!ommission be entrusted with the regulation of the national spot exchangesB .ll the

exchangespromoted by FT#2 are regulated and it was +een from the beginning that %E2 too beregulatedB#n accordance with the need to create a regulatory framewor+ for the functioning of thenational spot exchanges, the following measures were ta+en9#n any regulatory structure, the most critical aspects are G$versight, G#nvestor #nterestand Greporting, for all of which the F/! was nominated as the 0esignated .gencyB %E2wasproviding to the F/!, on a fortnightly basis, information on various aspects of the business


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that include CaD Price tatement, CbD ummary of Trade Participation, CcD Top Ten Participants,CdD /argin !ollection, and Price ?olatility, CeD toc+s in 6arehouses, and Cf D #nvestor-rievancesB.ll the communications from the Forward /ar+ets !ommission to %E2 was addressed tothe /anaging 0irector !E$, who was responding and providing clariAcations from timeto timeB Even the show cause issued to %E2 by 0!. on .pril &3, &;1& was addressed to the

/0 !E$ with no reference or copy to either the %E2 *oard or to FT#2B The replies to the showcause were provided by the /0 !E$, %E2, to the F/! on which there was no furtheractionor initiative, which made him to believe that the issues raised were explained to satisfactiontillthe -overnment ordered stoppage of fresh contracts on %E2 platform, on Luly 1&, &;1'B#mmediately after the crisis, 0epartment of !onsumer .airs wrote to the F/! in .ugust&;1' that Gsettlement of all outstanding one)day forward contracts at %E2 shall be doneunder the supervision of the Forward /ar+ets !ommission where it will be binding upon theexchange, any person or intermediary or warehouse connected with %E2B However, theF/!chose to put all pressure and focus only on %E2 and FT#2 by resorting to such extreme andunwarranted measures such as declaring the promoters not At and proper, coercing /!J toforceFT#2 to sell its sta+e failing which no fresh contracts will be issued to it and freuentlycomingout with statements not consistent with the care and concern that a regulatory authorityshouldexercise on issues which are still under investigation and sub)4udice and Anallyrecommendingmerger of %E2 with FT#2 and change of management of FT#2B. regulatory institution is expected to ma+e complete investigation and examination ofthe issue before coming up with any assertion and should cover all those related to theproblem to get a complete and comprehensive pictureB From the very Arst day F/! has 4usttargeted %E2 and FT#2 and began to ma+e statements that are contestable and initiatingactions that are not 4ustiAableB Through this, the regulatory authority tried to shift the lapseandnegligence on its part by ta+ing stern actions on the basis of unsubstantiated claims madebythe bro+ers and their trading clients who in the Arst place were the cause and contributors tothecrisisB Perhaps in no regulatory regime such un4ustiAed actions can be found even foracademicreference, 4ust targeting one company, which has fully committed to cooperate to resolvethecrisis and has been compliant with various measures prescribed since the crisis bro+eB

F'T #C$$T@:The ,ultiple o" udits......The audit reports based on which several actions were initiated against FT#2, its promotersand the management were full of disclaimers and deviation from the terms of referenceB=uite a few audit reports went beyond their brief to present certain aspects that createdundue concerns on various aspects of operations that led to unwarranted actions andpunishment on the promoters and management of FT#2Bubseuent to the crisis, a series of audit Arms were engaged to assess various aspects of


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the functioning of %E2 and to ascertain where the problem arose and escalatedB The list ofspecial forensic auditors engaged for various examinations and studies include9However, strangely, in the course of submission of the reports, some auditors began tochange the terms of reference on their own, alter some sections of the report, add newaspects which are not related to the audit exercise without explaining the purpose or thebac+ground for the sameB 6hile this has been the trend in general, %E2 K FT#2 was

restrictedfrom giving their point of view or cross)examining the auditorsB The audit exercises wasconducted after a long gap of the transactions ta+ing place and the concerned oOcialsdealing with various functions would be in a better position to explain the context,bac+ground, process and procedure for any particular activity and transaction commentedonby the auditorB6hereas the audit Arms were mandated to examine the transactional aspects of variousactivities, they over)extended their brief to prepare additional commentaries without priordiscussion and consent on aspects such as governance, internal functioning, monitoring,*oard committees, which are completely outside the purview of auditB #t is not to say thatthese aspects are not of importance surely they are of great importance to any corporateentity, but an auditor ta+ing the liberty of commenting on this without a proper study,mandate and consultation is purely trying to side)step the real issue and drive the discussioninto some vague aspect that lac+s clarityB@5

imilarly, the importance of disclaimers made by the auditors was not ta+en seriously by theauthorities when reviewing the reports and ta+ing actions based on these reportsB

9rant ThorntonThe limitations that -rant Thornton mentioned in its report include9 $ur Andings are based upon the information made available to us and we have notindependently veriAed or validated the informationB $ur wor+ did not constitute an audit under any accounting standards and the scope ofour wor+ was signiAcantly dierent from that of a statutory auditB Hence it cannot berelied upon to provide the same level of assurance as a statutory auditB 6or+ done by us was as considered necessary at that point of time to reect the scope of

wor+ and rigour reuiredB Restrictions include Gcomments in our reports are not intended,nor should they be interpreted to be legal advice or opinionB%E2 has given a detailed response to the audit report of -rant Thornton, which was neverconsidered, and the Exchange was not given an opportunity to cross)examineB

'ho7shi L 'ho7shiFor instance the disclaimers made by !ho+shi !ho+shi include statements such as9 This audit didnIt constitute an audit under any standards on audit issued by #!.#B Qey personnel Cespecially ex)employeesD have either resigned or been relieved from%E2 and #*/. or under the custody of investigating agencies or are not available fordiscussionsB Hence the relevant information could not be gathered from themB $ur scope of wor+ excludes cross examination by %E2 or any of its companies, aOliates,lawyers etcB #t further excludes representation before any courts and that we will not be aparty to any such legal proceedingsB

ubseuent to the completion of the engagement we will not be under any obligation toupdate our report for subseuent events or transactions, unless F/! separately engagesus to do so in writingThe restrictions include G$ur audit report is submitted to the F/! pursuant to ourappointment letter dated %ovember 15, &;1'B $ur report being conAdential cannot becirculated or published or uoted or referred to in whole or in part without our prior writtenconsentB 6e shall not be liable for any cause, damages, losses, liabilities and expensesincurred by any party as a result of distribution K circulation K reproduction of a report in allpartB


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and the /errations;

What is 9ood )egulation?How .ustralian ecurities and #nvestment !ommission describes its role and what is seen in#ndiain the recent periodB/aintain, facilitate and improve theperformance of the Anancial system andentities in it!ommodities mar+ets in #ndia werefunctioning for ten yearsB 6hile exchangeshave ta+en #ndia to global scale in trading,hardly any eorts are evident to facilitate themar+et to increase its scope and signiAcanceB.ll through the #ndian commodities derivativesmar+ets remained a single product mar+etCFuturesD, whereas the world has witnessedenormous growth and diversity in the productrange

Promote conAdent and informed participationby investors and consumers in the Anancialsystem. mature regulation involves proactive eortsof extensive interface and interaction withinvestors and consumers for every producttraded in the mar+et by giving periodicinformation, assessment and analysis, whichis totally absent in commodity derivativesmar+ets in #ndia.dminister the law eectively and withminimal procedural reuirements.dopt a pro)active approach in regulatory

mandates entrusted to it from the -overnmentfrom time to time and not being selectiveor evasive about what responsibility to beta+en and what to avoid that could lead to aregulatory biasEnforce and give eect to the law Enforcing law eectively involves orderlyand well)deAned processes that address theproblem without damaging the ecosystem andma+ing a comprehensive plan to deal with allthe concerned in a balanced and unbiasedmanner rather than solely targeting oneinstitution unfairly and excessivelyReceive, process and store, eOciently and

uic+ly, information that is given to usThere is hardly any scientiAc study andanalysis of various trends and developmentsin the mar+ets in regard to products, investors,emerging needs and reuirements andinstitutions, etcB/a+e information about companies and otherbodies available to the public as soon aspossible


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.ll action directed against one institution,leaving out others that have greatercontribution to the crisisB #nformation releasedto the public on a pic+ and choose approachrather than a comprehensive manner*ox1

4esignatedgencyPublic perception is made to believe that there is no speciAc regulatory authority for the spotexchanges and these exchanges functioned under regulatory vacuumB However, there was acleareort to entrust the F/! to loo+ after certain critical aspects of functioning that are clearlyin therealm of regulationBThe letter from the /inistry of !onsumer .airs, Food and Public 0istribution, dated .ugust@,&;11 addressed to the !hairman, Forward /ar+ets !ommission, has the sub4ect asGRegulationof %ational pot Exchanges in which it was directed that Gthe competent authority hasdecidedto nominate the Forward /ar+ets !ommission as a designated agency for providingGoversightover the spot exchanges, which are granted exemption under section &3 of the Forward/ar+et!ontract Regulation .ct 15@&BThe letter from the Forward /ar+ets !ommission dated .ugust 1;, &;11 addressed to the/anaging 0irector of the %ational pot Exchange under the sub4ect GRegulation of %ationalpotExchanges says, G# am directed to enclose herewith a copy of the letter from the0epartment of!onsumer .airs nominating the Forward /ar+ets !ommission as the G0esignated .gency

forGproviding oversight over all the spot exchanges, which have been grated exemptionsundersection &3 of the F!R.B The spot exchanges may please note the contents of the said letterforfurther necessary action at their endB #t may also be mentioned that the exchanges would bereuired to Gforward a return on a fortnightly basis to the !ommissionB#mportant words that run through both these communications are @)egulation o" National#pot $:changesA> @Oersight oer the spot e:changesA @sa"eguard the interest o"inestorsAand a return to /e su/(itted on a "ortnightly /asisA. 6hat more does the 0esignated.gencyreuire to assume regulation that it was entrusted to when all the letters in this regard end

witha common statement that GF/! will be competent to ta+e action as deemed necessary andAtB

Points o" 'ontactand 'o((unicationThe *oard of %E2 consisted of professionals with eminent expertise and experience in thearea


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of agriculture and related services, which laid the broad policy framewor+ for the functioningofthe exchange in accordance with the conditions of the exemptions granted by the-overnmentBThe management of the Exchange was entrusted with a professional team headed bythe /0 !E$ who steered the management of the Exchange since inceptionB #t was the

management that was in contact with the government K regulatory authorities K otherdevelopmentagencies of state and !entral -overnment in all aspects pertaining to various operations oftheExchangeB imilarly, all agencies in the realm of policy, regulation and monitoring were indirectcontact with the /0 !E$ in all aspects of functioning and management of the ExchangeB.t nopoint of time since inception, any of the agencies as described above have either written toor metor advised or instructed or uestioned the *oard of %E2 or the promoter of %E2 on anyaspect of thefunctioning of the ExchangeB&

)eporting to the For=ard ,ar7ets 'o((issionF/! was monitoring the operations of %E2 and raised many ueries from %ovember &;11B.llthe ueries and show cause notices were replied by the /0 !E$, %E2B The F/! had evenraised speciAc uestions about the availability of commodities in the warehouses, whichwereresponded to satisfactorily by the /0 !E$B Therefore, there was no reason for the *oard of%E2 to doubt that the operations were not being carried on properlyBPu/lic #tate(ents.ll through Luly and .ugust &;1', the /0 !E$ through public statements had assured thatstoc+s available in the warehouses eualled to settlement dues and could be sold and usedfor paying o the receiving bro+ers and their trading clientsB However, since /0 !E$ wasnot ta+ing action to liuidate the commodities and ma+e the payouts, the *oard ordered anindependent stoc+ veriAcation which resulted in Anding out the shortfall in the stoc+sB Howdidthe stoc+s go missing is a matter under investigation by the E$6B

The #ho= 'auseto N#$%The dispute began on February &&, &;1& with the F/! writing a letter to %E2 see+ingclariAcations on fulAllment of conditions stipulated under the notiAcation dated Lune @, &;;3governing the exemption given to %E2B$n .pril &3, &;1& the 0epartment of !onsumer .airs, issued sho= cause notice to %E2see+ing information in 1@ days on two speciAc issues %E2 was not preventing short selling %E2 was enabling trading in contracts beyond 11 days%E2 promptly replied to both these communications V on February &5, &;1& to the F/! and/ay &', &;1& to the 0epartment of !onsumer .airs ) 4ustifying the legal position of %E2onboth these mattersB Further on .ugust 11, &;1& %E2 provided a further follow up reply totheshow cause notice, explaining the 4ustiAcation of legal position of %E2B$n $ctober ', &;1& %E2 issued communication to all members with a copy of the sameposted on the company website giving details of the communication received from the F/!and the 0!. and the replies given to both these agencies with an advice that there was no


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further communication either from the F/! or 0!. on both these sub4ectsB Thus, all themar+etparticipants, ieB, the bro+ers, their trading clients and the defaulters were well aware of alltheissues raised by the F/! and the 0!. vis)a)vis %E2>s business model as early as $ctober&;1&,

ieB, nine months prior to the payment defaults occurring in Luly &;1'B'On #hort #elling On 'ontracts ,ore Than 11 4ayshort sale implies a trade to create a saleposition in a contract and to hold suchposition Cwithout giving delivery or suaringupD by carrying it forward or rolling it over,with the intention of ma+ing proAt out of aprice fall in the near futureB. member who deposits the goods in thewarehouse post)execution of sale orderand is able to tender his delivery within thestipulated time canIt be said to have doneshort saleBhort sale is only such outstanding saleposition, which is not settled by oeringdelivery as per the delivery schedule declaredby the ExchangeBThe purpose of the exemption order bythe 0!. was to allow intra)day trading on%E2B -oing by the logic that ownershipand possession of goods by a /embershould be ascertained before he executessale transactions, then none of the intra)daytrading involving netting or suaring)o willbe possibleB o the condition of Mshort saleI willcontradict and defeat the very intention whythe -a


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