The current problem at the National Spot Exchange Limited (NSEL) is one of a liquidity mismatch and not a solvency crisis, feels Deena Mehta of Asit C Mehta Investment Intermediaries.
Following a change in rule by the Department of Consumer Affairs, NSEL stopped trading in all contracts, other than the e-Series contracts.
"National Spot Exchange (NSEL) has suspended trading of contracts, other than e-Series contracts till further notice. It has also decided to merge the delivery and settlement of all pending contracts and deferred the same for a period of 15 days. Consequently, the positions outstanding in the contracts will be settled by way of delivery and payment after expiry of 15 days," the NSEL said in a release late Wednesday evening.
This has sparked concerns of defaults among traders, as some players may not be in a position to raise cash quickly enough to settle their trades.
NSEL chief executive Anjani Sinha told CNBC-TV18 that his bourse has enough physical stock to cover all trades, even if some members defaulted.
“From the numbers it appears that the position is comfortable. Only issue is that the stocks may have to be liquidated or sometime needs to be given to the financers to pay,” said Deena Mehta.
“That is why exchange has asked for a 15 day time and they hope to either collect the money or they will sell the stocks. Even if they sell the stocks there is sufficient cushion available to absorb the loss. So now it is a question of liquidity,” she said.
Below is the verbatim transcript of the interview
Q: Can you just summarise for us if a great deal of brokers are impacted probably because they are not getting payment from National Spot Exchange (NSEL)?
A: Please first understand was has happened. There was a Badla like situation which was happening in the spot exchange; that means people who had agricultural goods they used to get finance through the spot exchange mechanism.
Around Rs 5,000-6,000 crore of finance has gone to these people. Last few days there have been certain circulars which have been issued by the spot exchange, by Forward Markets Commission (FMC) in particular saying that these kind of contracts are not really legal contracts.
These are 30-day forward and maximum allowed is a 1-day forward contract and not 30-day. So exchange came back saying that we will go for a 10-day forward contract where as per the FMC guidelines you can give delivery after 10 days. This whole thing created a confusion in minds of the investors.
So the contracts which should get rolled over, they stopped getting rolled over and the producers who took the finance had to give the money instantly because their rollovers were not happening. So they are not able to arrange cash so quickly, as a result of which when people started releasing the Badla the money was not forthcoming.
Lot of brokers went and met the exchange today and what has been given to understand is that there is about Rs 1,200 crore of extra stocks which is there over and above the financial commitments which are there and plus there is a Rs 900 crore margin.
So from the numbers it appears that the position is comfortable. Only issue is that the stocks may have to be liquidated or sometime needs to be given to the financers to pay. That is why exchange has asked for a 15 day time and they hope to either collect the money or they will sell the stocks. Even if they sell the stocks there is sufficient cushion available to absorb the loss. So now it is a question of liquidity.
Q: What we were given to understand is that the outstanding position on NSEL is between Rs 5,000-6,000 crore. You were telling me that there is Rs 1,200 crore of extra stock. Are you saying that for that Rs 5,000-6,000 crore they are backed by warehouse receipts and actual goods and they have extra Rs 1,200 crore of stocks with them?
A: Exactly. The exchange has said that they have got goods in excess of the outstanding commitment.
Q: If the collateral is more than what the outstanding positions are, should there be a financing problem or will the financing problem get over quickly, will the exchange be able to make good payments?
A: Yes from the numbers which have been told definitely it is only time which is required to liquidate the stock and get the money. So there appears to be a liquidity issue more than capital returning issue.
As things stand I think they need to arrange for liquidity and 15 days time should be sufficient give or take a few days but majority of the money I think should start coming within 15 days time from the numbers which have been quoted by the exchange.
Q: So are you saying that because it is difficult to liquidate those warehouse receipts which were given as collateral, people could be selling stocks now to arrange for some immediate cash?
A: Correct. So people who have taken finance they have to convert these stocks into liquid and return it to the financers. Now this is going on from almost three years so the money has been remaining in the system. Now that the financers are withdrawing all of a sudden, it would take some time for the people, the stockiest who have given goods to liquidate and give the money or arrange finance elsewhere. So as of now it appears to be more of a liquidity issue.
Q: Is that satisfactory that 15 days is the outer limit and they will try to ensure their members give you the money earlier?
A: Yes, it is a good statement which has come because there has been lot of confusion prevailing since morning, a lot of clients are calling up. So, I think people should be patient and this problem should be resolved as quickly as possible.
Q: Do you think there could be a problem of liquidation of physical stocks?
A: India’s agricultural market is huge, we have got so many agricultural produce marketing committees (APMCs) and crores of rupees worth of trades are happening. So, I do not see a major problem in liquidation of these stocks and what would be required to be liquidated will be a smaller fraction. The entire stock need not be liquidated because the brokers themselves will liquidate and they will give money to the exchange. So, exchange forcefully as he said that auctions will happen in the end, they will give week to 10 days time for people to come and pay. I don't see so much stock getting liquidated.
Q: Do you think therefore this problem will blow over?
A: The way the stocks of Motilal Oswal Financial Services and others are going down, it is quite funny because they have put their client’s money and they are not going to lose the money that the share prices are going down. People have not understood the context that these are the people who have financed the market, they have to receive the money and give it to their clients, they have not defaulted. So, why should their share prices go down.
Q: Do you see any regulatory issue in this entire saga of NSEL?
A: Yes, definitely. There is regulatory issue because landing in such a situation shows that the exchange and regulators are not seeing eye to eye otherwise why should this confusion happen. This is something which has been going on for two-three years and today the regulator says this is not how it should be happening because we have given the permission only for one day and the company is doing it for 34 days. So, there appears a mismatch in what the regulator expects and what is happening.
Q: Is it true that larger brokerages have largely wound down their exposures and it is a large number of smaller brokerages that are exposed to you?
A: No, everybody has been reducing their exposure and it is not the brokers who are reducing, the clients have been saying that there is confusion and that they don't want to be part of it. So, it has a lot to do with the clients wanting to withdraw money and I don't think many brokers have actively said that they shouldn’t square off even after the 10-day circular which came saying that it can be squared off for 10 days. However, clients have been feeling uneasy because of the confusion which prevails and we are not able to give a straight answer to our customers to what is right and what is wrong.
Q: In the next 15 days, once all the inventory has been liquidated and people have been paid back, then do you see NSEL functioning in the same way as it was, what changes do you expect?
A: NSEL has got two products, one is the Demat product where one can buy gold, silver. The other product is finance business which was going on which has been under cloud. So, for that business I think the exchange must take specific written permission from FMC and then only launch further contract. Once they get a written permission from FMC, then I think people will come back because funding of agricultural commodities conceptually it is a very good idea. So, people would come back given proper regulatory framework for doing it.