There is an impression created that NSEL has introduced the contracts that came into problem
with a view to make quick profits, which is not the case. A wide range of contracts were traded
at NSEL, including
(a) Farmers contracts,
(b) Auction Contracts,
(c) Forward Auction,
(d) Reverse Auction,
(e) e-Series contracts,
(f ) Traders contracts, and also physical procurement business and LC business. Traders used all these contracts as also paired some of these as an arbitrage strategy
to maximize returns.
BUSINESS
It is also wrong to say that the entire business of NSEL was built on the contracts that came into
problem. During the period 2008-13 NSEL turnover was to the tune of Rs 7,67,000 crore with
volume being more than 1000 crore lots. During this period, it has carried out pay-in and payout
of Rs 2,80,156 crore. It had 147 delivery locations and paid service tax to the tune of Rs 28
crore. It has nationwide spread of 800 members, with 46000 terminals in which 52 commodities
were traded of which 34 were agricultural commodities. It is wrong to say the whole business of
NSEL revolved around the defaulted contract. Out of total 702 contracts launched only 29
(around 4%) contracts were unsettled due to the member defaults.
BUSINESS INCOME AND NOT INVESTMENT
Trading clients were booking income earned from NSEL products as business income which was
being offset with losses. This itself demonstrates that they took it as a business activity involving
buying and selling.
ORDERLY SETTLEMENT OF e-SERIES CONTRACTS
The settlement of the e-Series contracts in gold, silver and other commodities, which involved
approximately 33000 investors, were being conducted in an orderly manner.
CAUTION TO TRADING CLIENTS
NSEL has been giving the brokers with whom it had privity of contract sufficient caution against
advertising fixed or guaranteed return on NSEL platform. Typical to any market, as the trading
clients were making good returns from pairing the contracts, brokers who marketed these
products were not enforcing this discipline and caution while making aggressive sales. Brokers
were even extending financing to their trading clients who were interested in trading of the
contracts through pairing.
PRIVITY OF THE CONTRACT
Privity of the contract is between the brokers who sold the product and their trading clients who
bought it. It is the brokers who marketed and sold the product and identified the trading clients.
The brokers are the ones who should have cautioned them on the risks associated with the
product, in which they failed. It is the brokers who chose the commodity counterparties while
entering into these contracts and who were expected to conduct due diligence.
EXPLANATIONS AND CLARIFICATIONS
NSEL has provided explanation and clarification immediately to the regulatory authorities and
the government on any issues raised by them on any aspect of the operations and business. The
last of such explanation was provided in August 2012. No order was issued following the
submission of the detailed explanation to the show cause notice. Instead a letter from the DCA
in July 2013 to stop issuing fresh contracts unleashed and accentuated the problem.
with a view to make quick profits, which is not the case. A wide range of contracts were traded
at NSEL, including
(a) Farmers contracts,
(b) Auction Contracts,
(c) Forward Auction,
(d) Reverse Auction,
(e) e-Series contracts,
(f ) Traders contracts, and also physical procurement business and LC business. Traders used all these contracts as also paired some of these as an arbitrage strategy
to maximize returns.
BUSINESS
It is also wrong to say that the entire business of NSEL was built on the contracts that came into
problem. During the period 2008-13 NSEL turnover was to the tune of Rs 7,67,000 crore with
volume being more than 1000 crore lots. During this period, it has carried out pay-in and payout
of Rs 2,80,156 crore. It had 147 delivery locations and paid service tax to the tune of Rs 28
crore. It has nationwide spread of 800 members, with 46000 terminals in which 52 commodities
were traded of which 34 were agricultural commodities. It is wrong to say the whole business of
NSEL revolved around the defaulted contract. Out of total 702 contracts launched only 29
(around 4%) contracts were unsettled due to the member defaults.
BUSINESS INCOME AND NOT INVESTMENT
Trading clients were booking income earned from NSEL products as business income which was
being offset with losses. This itself demonstrates that they took it as a business activity involving
buying and selling.
ORDERLY SETTLEMENT OF e-SERIES CONTRACTS
The settlement of the e-Series contracts in gold, silver and other commodities, which involved
approximately 33000 investors, were being conducted in an orderly manner.
CAUTION TO TRADING CLIENTS
NSEL has been giving the brokers with whom it had privity of contract sufficient caution against
advertising fixed or guaranteed return on NSEL platform. Typical to any market, as the trading
clients were making good returns from pairing the contracts, brokers who marketed these
products were not enforcing this discipline and caution while making aggressive sales. Brokers
were even extending financing to their trading clients who were interested in trading of the
contracts through pairing.
PRIVITY OF THE CONTRACT
Privity of the contract is between the brokers who sold the product and their trading clients who
bought it. It is the brokers who marketed and sold the product and identified the trading clients.
The brokers are the ones who should have cautioned them on the risks associated with the
product, in which they failed. It is the brokers who chose the commodity counterparties while
entering into these contracts and who were expected to conduct due diligence.
EXPLANATIONS AND CLARIFICATIONS
NSEL has provided explanation and clarification immediately to the regulatory authorities and
the government on any issues raised by them on any aspect of the operations and business. The
last of such explanation was provided in August 2012. No order was issued following the
submission of the detailed explanation to the show cause notice. Instead a letter from the DCA
in July 2013 to stop issuing fresh contracts unleashed and accentuated the problem.
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