Economic Highlights
New Delhi, 9 August 2013
NSEL Crash & Food Inflation
WAKE-UP CALL FOR GOVERNMENT
By Shivaji Sarkar
It’s now in the open. India’s food
inflation is partially explained by the crash of the National Spot Exchange Ltd
(NSEL) and how food and other commodity prices are jacked up on “artificial
paper sales” without giving or taking delivery. For the present, the players
have their notional investment of Rs 5500 crore stuck.
The impact goes beyond -- on to the
actual consumers. The NSEL holds commodity stocks of Rs 6209 crore. But it has
a fall-out on the entire market movement and price trends, which may not have a
direct link with Multi-Commodity Exchange or NSEL.
UN bodies have been crying hoarse
over betting in food grains and other food items, which is what the NSEL seems
to facilitate. Even the Food and Agricultural Organisation (FAO) is alarmed at the
unusual rise of food prices in India
The NSEL is a commodity exchange and
is a joint venture of Financial Technologies (India) Ltd (FTIL) and National
Agricultural Cooperative Marketing Federation of India (NAFED). It started with
cotton bales, imported gold and silver and went on to add almost every farm
produce and food grain. In 2012, the Food Corporation of India, the Government’s
food procurer and hoarder also joined it for trading in wheat.
The regulator SEBI has begun a probe
into the major crash in the share prices of MCX and its promoter FTIL. On
August 2, the latter’s stocks fell by 60 per cent in one day and MCX by 20 per
cent – a trend that was noticeable, according to SEBI for quite some time with
unusual volumes.
The entire issue is being downplayed
to the extent that it appears to be a matter only of the 800 players – members
of FTIL. It is not and has a deeper impact. Even its normal transactions need to
be closely scanned. Does it benefit the farmer? Possibly not, because most of
them do not directly deal in NSEL. Rather it is the middle man’s paradise, who
gains enormous profits without even giving the delivery of the commodity.
In short, they rake in profits as
they hoard on to the commodity or only transact in “notional stocks”. In the
process, it not only creates bubbles of enormous risks in the financial market
but also goes on to jacking up food prices across the board.
The functioning of FTIL needs a
detailed probe over the nexus of unscrupulous players, whose moves have
skyrocketed prices, inflation, possibly led to the rupee crash, added to government
expenses and fiscal deficit and may be much more. Should a nation of 125 crore
people be put to ransom by a few hundred profiteers?
Till now several government agencies FCI, NAFED, PEC, STC, MMTC, Hafed have
used the NSEL auction platform for carrying out auction for rice, Basmati paddy,
wheat, paddy, bajra and sugar. The forward auction process begins with the
seller’s quoting the floor price and the selling quantity. The buyers have to
bid their price and quantity electronically through the member of NSEL. At the
end of the auction session, the Exchange confirms the trade to the successful
bidder. Within seven days from the date of auction, the buyer can lift the
commodity by making the full payment. The NSEL charges the transaction fee Rs
10 per lakh and delivery charges of Rs 90 per lakh of turnover to the buyer and
seller members.
In the financial
year 2012-13, NSEL contributed 36 per cent to FTIL total revenue of Rs 740
crore compared with a share of 11.5 per cent in 2011. Nearly half of the
group's earnings before interest, tax, depreciation and amortisation and 56 per
cent of net profit in 12-13 were accounted for by NSEL's activities. This
underscores the fact that in a short period of time, by convoluting the market
operation NSEL's significance for FTIL increased rapidly.
NSEL's business
model focusing on spot commodities trading was also more lucrative. It
delivered margin of 71.6 per cent compared with the consolidated margin of 54
per cent in 2012-13.
The commodities
transacted are supposed to be delivered within two days to a week at the most.
But the rules were tweaked and players were allowed to hold on to the
deliveries for 25 days! In between through new paper transactions, the actual
deliveries could be further delayed. It is said that there were many “insider”
trading. It means there is trading only on paper. It jacks up prices for the
actual buyer/trader and consequently increases food prices across the board.
The FAO is alarmed since 2008, when
cereal prices started globally increasing beyond the normal spectrum. In 2011, in a report it says that the trend
continues. Its cereals price index for 2011 was 246.8 against 237.8 in 2008. “The price increase of 2008 was not a mere
spike, it is rather persisting”, it notes and considers India to be a
major player in many ways.
A major problem is the law. The
Forward Contract Regulation Act 1952 is supposed to regulate this trade. In
reality, it is beyond any regulation. The Forward Market Commission in April
2013 submitted a report saying that some of the norms were being violated and
also eluded to short selling. A notice was issued to NSEL in May 2012 but the Consumer
Affairs Ministry did not take a call for the past over a year.
The Ministry is supposed to keep a
close watch, but sadly it doesn’t. It need not act for safety of the investor
alone. The contours of the forward trade in commodities are much bigger and as
the FAO says it involves food security. The Ministry’s job is important because
forward trading, as the FAO says, does neither ensure a fair price to the
farmer, nor to the consumer.
These raise a moot question. Should
we really allow forward trading in food items? The London Metal Exchange
controls global trading in metals and decides the price to be sold even in copper
producing nations of Africa. In India, it is
just the beginning.
Over the past few years, the country
is witnessing losing control in many trading and retailing activities. If it
allows the NSEL to function the way it is, then it wouldn’t be long when perhaps
a foreign trader (may be from an enemy country) takes over its shares, controls
it and causes severe problems not only that of food security but also national
security.
The NSEL crash is a wake-up call.
The nation needs to deal with it not only as a mere failure of a financial tool
but an important safety measure of a deep political nature. It calls for a
thorough review of the entire food production, marketing and other related
spectrum. Let there be no further delay. --- INFA
(Copyright,
India News and Feature Alliance)
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