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NSEL Crash & Food Inflation: WAKE-UP CALL FOR GOVERNMENT, By Shivaji Sarkar, 9 August, 2013 Print E-mail

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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