With trading in derivatives contracts of steel, diamonds, rubber and paddy stalled completely for the last three weeks, the Indian Commodity Exchange (ICEX) is incurring revenue losses. However, sources within the bourse informed that the probe under way could be wound up by month-end (July) and thereafter the ICEX board would take a decision as to how to take things forward.
The board-level audit, where the auditors have been approved by the Securities & Exchange Board of India (Sebi), is under way into an alleged misuse of the Liquidity Enhancement Scheme (LES), a market-making instrument introduced by the bourse in October last year to increase liquidity in derivatives of steel, paddy, diamond and rubber.
“The audit is still under way. Officials are not sure how long trading will have to be kept suspended. They are expecting the audit to take time till the month-end at least,” a source informed SteelMint. All the four commodities are impacted.
LES is more
In steel, it is only long products, which are traded on the exchange and ICEX generally does an average volume of 10,000 tonnes (t) per day whose value is INR 25-30 crore (per day).
With no volumes in these commodities, a source said, revenues for the bourse are being impacted but declined to say by how much, adding that such scenarios have previously evolved in several other exchanges too in the past.
The source informed that LES, which had been introduced in October, 2019, for steel, allows an entry and exit option to the various participants. “In a liquidity-driven market, people want to track the trend and also want to know how to exit their positions. So LES, in line with Sebi guidelines, allows for entry and exit of participants. Generally, in contracts like these, people take positions, but when the volumes are lower, they are not able to exit easily. The job of the LES is to ensure they get that exit option at the prevailing price,” the source explained.
“LES, however, does not ensure any profit (or loss),” clarified the source.
Whistle-blower
The audit is being jointly conducted by ICEX and Sebi and all the standard operating procedures (SOPs) are being observed, it is learnt. The audit has been initiated on the basis of anonymous email complaints received by the public interest directors of the ICEX board and Sebi in March-April, this year. A source insisted that the nature of the complaint was that of a whistle-blower. In such cases, SOPs are followed, where Sebi asks the exchange/organisation to conduct an audit where the latter can select the auditor (in this case, Chokshi & Chokshi), but it has to be approved by the former.
The investigation, according to reports, will look into the misuse of LES, whether board members were in sync with the key management personnel (KMP), trading data from September 2020 onwards in contracts like steel, paddy, etc, compliance issues and conflict of interest of KMP, among others.
Until the audit report comes in, the bourse will not be able to operationalise the LES, the source said.
The complaints alleged that certain key management personnel of ICEX, in collusion with the market makers, misappropriated funds allotted for LES.
As per a media report, ICEX CEO Sanjit Prasad has been asked to proceed on leave by the board till the audit report is released.
~ Madhumita Mookerji
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