Aug 02, 2013, 09.48 AM | Source: CNBC-TV18
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.
Deena Mehta (more)
MD, Asit C. Mehta | Capital Expertise: Equity - Fundamental
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.