Amid arrests of National Spot Exchange Ltd (NSEL) officials and unraveling of the fraud, the commoditymarket regulator is preparing to widen its probe. 

Forward Markets Commission (FMC), the regulatory authority, has decided to order a special audit of Multi Commodity Exchange(MCX), the listed commodity futures bourse and cash cow of Jignesh Shah's empire. The audit will focus on a detailed examination of trades on MCX by related parties, particularly by the FT group entity Indian Bullion Markets Association (IBMA), a source with direct knowledge of the decision told ET. 

The scope of the proposed independent inspection may be extended to cover whether margin money brokers have to chip in for leveraged trades were lowered or waived to benefit some of them. The Rs 5,400-crore scam at the FT-owned National Spot Exchange Ltd, which is not regulated by FMC, has also turned the glare on commodity futures exchanges that are under the commission's direct supervision. 

It's believed that FMC is taking a closer look to find out if sharp and often fraudulent transactions at NSEL had influenced trading volumes on MCX. Based on market intelligence and complaints from the trading community, the regulator, it's learnt, is finalising a set of new rules on expenditures and disclosures for all commodity futures bourses. Money spent by futures exchanges on publicity, donations and sponsorship of events have to be disclosed and expenditures of more than Rs 25 lakh will have to ratified by the board and, in case of urgency, by the audit committee. 

"This could well be an attempt to discourage an exchange to pay off brokers and other influential authorities using a circuitous route like donations or sponsorships. Such pay offs to brokers indirectly increases their leverage. Since an exchange cannot officially lower the margin amount, which is fixed by the regulator, these can be ways to compensate them," said a senior official with a market intermediary. Under the new rules that are expected to be announced soon, all related party dealings will have to be reported to the board of the exchange. The board will also have to be kept informed on risk management practices, margins, Settlement Guarantee Fund, audits of warehouses where commodities are stocked, defaults, violations and show-cause notices. 

"It's unclear whether FMC, like Sebi, will also have a greater say on issues like salary hikes and bonuses," said another person familiar with the proposals. In the web of transactions that surfaced in the course of the NSEL scam, transactions by IBMA startled the regulator. IBMA is a subsidiary of NSEL which in turn is a subsidiary of FT. FMC has come down heavily on FT for allowing it to trade on MCX. This is also one of the key points FMC has raised in its "fit and proper" show-cause notice to MCX's present and past directors, including Jignesh Shah, Shreekant Javalgekar and Joseph Massey. IBMA traded on MCX as a client through Karvy Comtrade and one Sarita Prem Singhal. 

This was, FMC pointed out in its show-cause notice, in contravention of commodity futures market norms which provide that "the exchange shall have a demutualised structure — the shareholders ...shall not have any trading interest as either as a trading member or as a client of the exchange". 

The principle behind this stipulation is that it reduces potential for conflict of interest and ensures good governance. "The trading of IBMA on MCX is in gross violation of the government's directives," notes FMC in its show-cause notice, which further observes, "The resolutions for IBMA to trade as a client on MCX (August 3, 2009 and February 22, 2010) were approved in the meeting of the board of directors of IBMA where Dewang Neralla (founder director FT) and Shreekant Javalgekar were present. Neralla along with Jignesh Shah and La Fin are promoters of FT which is the ultimate holding company of IBMA. 

FT is also the promoter of MCX. Therefore, approving trade by IBMA in MCX clearly indicates that FT was aware of conflict of interest and has violated government directives in this regard." Incidentally, around three years ago, the anchor investor of rival bourse NCDEX— Jaypee Capital — was pulled up by FMC for conducting trades on the exchange. MCX, FMC says, has itself acknowledged the lapses in surveillance at the exchange, which failed to detect such a trading pattern (that relates to IBMA's trades on MCX). 

The commodity market regulator also found that large sums of money were taken from borrowers on NSEL for its group company (IBMA) and a related company where the wife of Anjani Sinha (MD of NSEL) was managing director, thereby exposing the nexus between the borrowers on NSEL and the board and management of the spot exchange. (Economic Times)