'Strong warehouse watchdog key to avoid NSEL-like fiascos'

Rajnikant Patel, former MD & CEO, BSE believes the problems seen in the spot commodity exchange can cause a domino effect in the commodity futures segment.

"When there is financial exposure in one segment, which underlying is the same, then if it goes into future, yes, definitely there can be signs of weakness. Whether that will have real effect, in terms of the value and the volume, is an issue to be discussed and debated. But in terms of structure issue, yes, it can pass through," he told CNBC-TV18.
NSEL, promoted by Jignesh Shah-led Financial Technologies, is facing the problem of settling Rs 5,600 crore dues to 148 members/brokers, representing 13,000 investor clients, after it suspended trade on July 31 on the government direction.
Sources in Enforcement Directorate (ED) told CNBC-TV18 on Monday that the exchange's business model was illegal. The ED also alleged that warehouse receipts of the exchange are bogus.
According to Patel, the settlement guarantee fund is the weakest link. He says collateral issues come at the next stage when you are going into physical delivery. "We know future, except agriculture contracts, none of them are delivery settled. So that is where somebody’s exposure and blocking of money, none receipt of payout, could lead to weakness being translated into the settlement part of the futures exchange as well. We had to see this expiry after expiry to really see where people have taken the exposures," he explains. Also Read: Do not renew MCX-SX's license, say NSEL investors
Patel says there is an immediate need today of strengthening Warehousing Development & Regulatory Authority (WDRA).
He believes it is "another gap, which nobody has even thought about who controls and regulates vaults where precious metals like gold, bullion all other things are lying." Alternatively, he feels, the exchanges, which are having vault bullion contract, should keep their bullion or precious metal only in the vaults of the public sector banks.