NSEL case: SEBI cancels broking licence of MMTC

August 3, 2023
Posted by: OptimizeIAS Team
Category: DPN Topics

NSEL case: SEBI cancels broking licence of MMTC

Subject :Economy

Section: Capital Market

In News: Capital market regulator SEBI has cancelled the stock broking licence of State-owned MMTC as recommended by designated authority in the National Spot Exchange case.

Key Points:

SEBI has directed MMTC to cease all broking activity owing to involvement in the NSEL scam.
Metals and Minerals Trading Corporation (MMTC) of India, is one of the two highest earners of foreign exchange for India and India’s largest public sector trading body.
SEBI in 2020 in its enquiry report, found that MMTC as a stock broker of the NSEL had facilitated trading in ‘paired contracts’ on the exchange platform of NSEL, which was in violation of the applicable provisions of erstwhile Forward Contracts (Regulation) Act, 1952.
the stock broker failed to meet the “fit and proper” criteria mentioned in the intermediaries rules and accordingly Sebi has canceled the certificate of registration of the MMTC.
What are ‘paired contracts’ by NSEL?
- NSEL introduced the concept of “paired contracts” for trading, which allowed buying and selling of the same commodity through two different contracts at two different prices on the exchange platform, wherein the investors could buy a short duration contract and sell a long duration contract and vice-versa at the same time at a predetermined price.
- The transactions were structured in a manner that buyers of the short duration contract always ended up making profits.The scheme of “paired contracts” traded on the NSEL had caused huge losses to investors to the extent of Rs 5,500 crore.

National Spot Exchange case

NSEL was set up as a company incorporated under the Companies Act, 1956 in 2005. NSEL was incorporated by MCX and the nominees of FTIL. The shareholding of MCX and nominees were transferred and consolidated later in 2005 with FTIL.
Against the regulations, short-selling, too, was allowed in many cases. The then regulator Forward Market Commission (FMC), then intervened and asked NSEL to wind down existing contracts. This ended in payment default.
The crisis came to light when the physical commodities were short of the record. Warehouse Receipts were not backed by any physical commodity. When investors claimed commodities worth their money, the borrowers could not provide them, as goods were way short in warehouses. This is how the most controversial scam of the commodities market was born.