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NSEL Tells MoneyLife How They Wanted Us To Think It Works


NSEL had supposedly given an interview to Moneylife where they explain their operations. Now it appears some of this are a little awry. Here’s my take on some.

Moneylife: The trend in prices on the NSEL seem to indicate an arbitrage between T+2 and T+25, directly linked to cost of money and geared to yield a return of around 14%. In fact, leading PMS companies have openly told us that this is a way of earning risk-free money with a yield of around 14%. Is this true?

NSEL: In physical trade, a trader or stockiest buys from mandi on cash payment and supplies to a mill, getting his payment from the mill after 15-25 days (varies from commodity to commodity and place to place). If the supplier insists for cash payment, the mill applies a CD (cash discount of 2%).  Hence, the interest rate prevalent in physical trade of commodity varies from 24% to 30% per annum. Compared to that, on NSEL, the cost of money involved in procurement has come down to 15%, which is beneficial to the processor. On the other hand, traders get a comfort of risk free environment, because of risk management and clearing house services provided by the NSEL.

Yellow colour is marked by me.

This makes no sense. The reasons mills will want a credit period is after they get the goods. If they get the goods 25 days later, and have to pay 25 days later then it is equivalent to paying up right now, really.

In the original case, the trader gives a mill his stock now and gets money after 25 days. This gives the mill the time to process the stock, and perhaps set up a sale as well, and it helps their working capital. If you don’t give them stock, it doesn’t do a darn thing for them other than locking the price now, which they can just as well do in a forward market!

A regular deliver-now, get-paid-later is pretty much standard for industry; if I write an article today, I’ll get paid for it a month later. One part of the “delivery” is done, and the other part will take some time. This is how you would technically do a ‘spot’ transaction, but our Forward Contracts Act specifically states that you can drag this for a max of 11 days, otherwise it’s a Forward Contract. NSEL cannot execute a forward contract because it is not a recognized forward contract exchange (MCX is, for example). So T+25 was never “spot” – it was a forward contract right from the beginning.

How does this address the point that this is being sold by PMS companies to people who didn’t even get the stock from mandis? They were random HNIs who would buy and sell from a terminal in their city. The stock would stay in the same warehouse, with an ownership receipt changing hands. This was, it seems, rolled over, month after month, and even if the stock backing this up had rotted completely, there would still be an economic model in continuing to trade. Until of course, the government decreed that this was an illegal forward contract.

Also, so much for this “risk free” environment, huh?

Moneylife: Why the trading volumes for the T+2 contract and the T+25 contract are identical in many cases?

NSEL: In T+2 contracts, farmers, producers and traders sell commodities for delivery on T+2 days and they get payment on T+2 days. The actual users, processors and exporters, buy commodities in T+25 contracts, make payment on T+25th day and get delivery. An investor buys the commodity in T+2 contract and sells the same in T+25 contract. As a result, trading volume for T+2 and T+25 is identical.

In the context of all the recent data, does anyone buy this logic anymore? The actual users would pay 15% p.a. more to both get delivery 25 days later and pay 25 days later? Isn’t there one farmer who’s thinking – hey, let me wait 25 days and I’ll get more money (15% p.a. more!). Isn’t there some producer, somewhere, who wants his goods now?

I wouldn’t put that as a rational chance. In that 5,600 crores, wouldn’t there be at least a few processors and farmers who would skew the equation? We aren’t that homogenous a country, yet.

Moneylife: How is the price of a product, even if it opens at high and closes on low, the same or almost the same?

NSEL: In the spot market for agricultural commodities, prices do not keep on changing, because there is no speculative element.

The reason is that once a farmer, producer and trader has sold the commodity, he has no intention to buy it back but in delivering it and receiving his money. Similarly, once an actual user, exporter and processor has bought the commodity, he does not intend it sell it back, because he needs the commodity for processing or export. In brief, spot market of agricultural commodities do not function like a typical financial market, rather they function as electronic agricultural produce market committee (APMC), where flow of a commodity in a single day is from farmers to trader to end user and not vice versa.

Yellow is marked by me.

Look the only reason these “producers” have said they can’t pay back immediately is because “they have built these positions over three years and it is difficult to unwind”.

How did they build these positions over three years? They should, according to their responses, have simply paid up after 25 days for each contract and taken delivery no? Oh wait, we all have “stupid” written on our foreheads.

I have no sympathy for this exchange collapsing. It should have been gone earlier, for sure, and we need to nail the people who were responsible for the illegal actions that have taken place. I’m sure that they have well-wishers who are too embarrassed to fight for them, but at some point, wrong is just wrong.


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