Commodity exchange boards made more powerful

• Forward Markets Commission (FMC) is tightening corporate governance norms for commodity exchanges following NSEL scam. It has asked its boards to scrutinise all major business decisions, as also financial powers of CEOs and transactions involving promoters and top management personnel.
• The boards of the exchanges would also have to ensure that appropriate checks and balances are in place with regard to costs incurred for donations, publicity, media and public relations, legal and other professional charges, among others.
• In a directive issued to six national exchanges, including MCX, the FMC has stipulated the minimum requirement for sharing of information relating to functioning of the exchange with the board of directors.
• It also directed that the decisions relating to certain matters should be taken with the approval of the board of directors or the board committees.
• The regulator said that prior approval of the board would be required in matter related to expenditure items such as capital expenditure, agreement/contract giving rise to recurring obligation for a period of more than three years, and loan/advances/guarantee/financial commitments.
• A prior approval of the board is required for all financial transactions, loans, guarantees, deposits or financial commitment of any kind. Following the Rs.5,500-crore payment crisis at NSEL, the FMC has been taking several measures to ensure accountability and transparency in the commodity futures market.
• As per the new norms, the Board of exchange will execute, with the approval of the board, the liability insurance for directors to safeguard the professional liability of the board members arising from the performance of their duties for the exchange. The regulator has also directed the exchanges to constitute a committee of the board on risk management.

Related information:

NSEL Scam:

• The NSEL scam is a systematic and premeditated fraud perpetrated in the commodity market by National Spot Exchange Ltd based in Mumbai, India. NSEL is a company promoted by Financial Technologies India Ltd and NAFED
• NSEL scam is a 5600 Crore Rs (About US$ 0.9 Billion) fraud which came out in the public domain after the National Spot Exchange Ltd failed to pay out its investors in commodity pair contracts after 31 July 2013. It was subsequently found out that the most of underlying commodities never existed and buying and selling of commodities like Steel, Paddy, Sugar, Ferrochrome etc. was being conducted only on paper.

More about Forward Markets Commission (FMC):

• Forward Markets Commission (FMC) headquartered at Mumbai, is a regulatory authority which is overseen by the Ministry of Finance, Govt. of India. It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act, 1952.

1. to advise the Central Government in respect of recognition or withdrawal of recognition of any association and other matters arising out of the administration of the Act;
2. to keep forward markets under observation and take appropriate action in relation to them;
3. to collect and publish information regarding trading conditions in respect of goods to which any of the provisions of the Act is made applicable including information regarding supply, demand and prices and to submit to Central Government periodical reports on the operation of this Act and on the working of the forward markets relating to such goods;
4. to make recommendations to improve the organisation and working of forward markets;
5. to undertake inspection of the accounts of recognised associations and/or any members thereof;
6. to perform other duties prescribed by the Central Government.