NSEL Payment Crisis Decoded

M_Id_411655_NSEL1) What is NSEL? National Spot Exchange limited has been in news recently for the Rs 5600 crore payment crisis. NSEL is a spot exchange which was established in the year 2005. It allows for trading in commodities also.

2) What led to the crisis? As per spot trading guidelines the contract has to be settled in 11 days (payment of money and delivery of the goods). But NSEL allowed contracts of settlement period above 11 days to be traded in the exchange. This led to forward trading in the guise of spot trading and encouraged speculation.

Also the spot trading requires delivery of goods within the settlement period. But NSEL allowed trading in contracts without any underlying physical stock backing them up. It encouraged short sale i.e. selling goods without actually possessing it physically.

On 12th July Government asked NSEL to comply with spot trading guidelines and suspend all illegal trading on the exchange.

NSEL complied. But the investors panicked. Some brokers wanted the exchange to pay back the money. Exchange could not meet their obligations. Hence the crisis

3) Why was NSEL unable to pay? NSEL had to pay back 5600 crore. It claimed that it has physical commodity to the tune of Rs 6200 crore.  An independent analysis showed there is a shortfall. 4) Who all are affected? All investors who have exposure to the exchange are affected. People who have invested their money in the newest stock exchange MCX-SX are also affected. That is because NSEL and MCX-SX have the same promoter Financial Technologies Limited.   The investigation in the scam is still in preliminary stage. But there is a possibility of large scale money laundering.  Let’s hope this crisis does not turn into another Sahara where investigators are still trying to fix culpability.

4) Who all are affected?

All investors who have exposure to the exchange are affected. People who have invested their money in the newest stock exchange MCX-SX are also affected. That is because NSEL and MCX-SX have the same promoter Financial Technologies Limited.   The investigation in the scam is still in preliminary stage. But there is a possibility of large scale money laundering.  Let’s hope this crisis does not turn into another Sahara where investigators are still trying to fix culpability.

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