Dejargoning -->> THE NSEL CRISIS -->> another instance of how the law lets the market crooks get away scot free !!

1 ) What is a spot exchange?

It is an electronic version of the age-old mandi, where buyers and sellers meet to exchange goods and money

2) How many spot exchanges are there in India?

NSEL; NCDEX Spot floated by the NSE group; and R-Next, floated by Reliance Capital, are the three main spot exchanges

+)What is the role of FMC ?

• Forwards Market Commission is the one which keeps an eye on the trading market and speculating market . 
• Now according to the provisons of the FCRA act the spot contacts have to be settled within 11 days(including the delivery and the cash settlement)

3) What  led to the NSEL crisis?

National Spot Exchange had several contracts where settlement was done beyond eleven days. In fact, some worked to a T+25 and T+35 day settlement cycle. (in short paisa bana rahe the !!)

• The Forward Market Commission also found that there was short selling in some of these contracts where an individual sold the contract without actually owning the underlying commodity.
• Settlement beyond 11 days and short trades were both not permitted by regulators on spot market transactions. 
• So the regulator sent a notice to NSEL few weeks ago, asking it to immediately bring down the settlement period in its contracts and move all of its existing contracts to ‘trade-for-trade’, meaning every trade has to be settled the same day and couldn’t be netted out. 
• The exchange immediately complied. 
• But as the news triggered panic among traders and many of them wanted to close out their positions immediately, the exchange had to defer settlements.
• Result -->> Payment Crisis ->> Rs 5600 crore

(this wl hlp u understand more properly )

4) What happens to the underlying commodity?

• The commodity is required to be delivered physically. 
• But the exchange facilitated use of electronic warehouse receipts, enabling investors to avail of the arbitrage, without taking physical possession of goods

5) Did NSEL try to stop this round tripping?

Not really. In fact, it made it easier in some contracts.

For example, the contract specifications said, “Storage charges are waived off for those members and their constituents who sell jeera on JEERUNJH25 out of the delivery receivable against the purchase position of JEERAUNJH2 contracts”

6) What did the government do?

On July 12, it asked NSEL to stop this and to wind up

7) BUT WHAT HAPPENED DUE TO THIS ?

• Government, noticing what was happening and thinking that mere speculation might harm the economy asked NSEL to stop launching new contracts. 
• Moreover, respecting to the directions NSEL agreed to suspend any furture contract and hence asked its members to settle all contacts within 11 days and to deal in trade to trade basis.. 
• In this case people who were earning by mere speculating ..lost their interest in spot trading(trade to trade basis).. 
• Well now the traders failed to honour the contract and demand settlement.
• So there was a payment crisis.

8) Why the sudden suspension?

• The directive was to close the contracts and settle these on July 31. 
• But NSEL cited “grave emergency” and market “disequilibrium”, deferring the settlement by another 15 days. 
• Later, it said it wanted another 5 months for this

9) Why is NSEL not settling?

• There is fear the underlying stock is insufficient to cover the liabilities. 
• While the exchange claimed it had stock worth Rs.6,200 crore, an independent analysis shows there may be shortfalls. 
• Business Standard visits to godowns didn’t show satisfactory results

10) Who are affected?

• All those who have exposure to the exchange---brokers, high net worth investors and companies, too. 
• Since many of these are also exposed to other market segments such as stocks and the banking system, there could be ripple effects.
• Big guns from stock markets have put their money in the NSEL .
• Hence there's a speculation that the crisis in NSEL might just spread to stock market.

11 ) Why did the stock of MCX fall? Do traders on this exchange too run a risk?

• There is no direct connection between MCX and NSEL, except that both share a promoter — Financial Technologies. 
• However, as MCX too operates in commodities trading, this event could lead to tighter regulatory scrutiny of the latter.

12) What is the  way  forward  for NSEL ?

• The Government is said to be readying new regulations to govern spot exchanges to plug these loopholes. 
• Until then NSEL will not be allowed to launch any new contract. 
• The structure of the now suspended contracts could change based on the new regulation. 
• Meanwhile, SEBI has sought details from various brokers on their exposure to contracts on NSEL.

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Many are of the view that SEBI is required to take a leadership now...so that such things dont happen and reiterate !!!!....as v know structure and powers of FMC is very weak....der is need to tinker over this !...things dont happen quick ..in India ...that is the problem !...v hv many Bills pending !

India (RBI) facing Trilemma -->> The Impossible Trinity --->> Economics Dose

What is impossible trinity?

Impossible trinity or trilemma in monetary policy means that a country cannot have a fixed exchange rate, free movement of capital and an independent monetary policy at the same time.

• As it happened in India, after lowering interest rates over the last one year, RBI went ahead to protect the rupee by sucking liquidity out of the system, which has resulted in higher cost of money and higher interest rates. 
• From a pure monetary policy standpoint, RBI had no intention of raising interest rates. 
• In fact there was a case to cut policy rates to support growth, but while targeting currency it lost a bit of control on the monetary policy,which resulted in higher interest rates.

Let’s understand this theoretically. 

• Suppose, a country that has a fixed exchange rate raises interest rates to curb in inflation. 
• Higher interest rates will attract foreign capital. 
• Since the country has a fixed exchange rate, the central bank will have to buy foreign exchange to maintain the peg  ( matlab ki 'Domestic currency' ki value 'Dollar' k maqable adjust karna) which will lead to injection of domestic currency in the market. 
• The rise in availability of money in the market will bring down its cost (read interest rate) and defeat the central bank’s idea of curbing inflation (isliye 'Onion' .etc  k bhaav asmaan chu rahe hai ) by raising interest rates. 
• This is why a lot of countries also have capital control in place which allows them to maintain stable currency and have more authority on the monetary policy.

Although the rupee is not pegged to any currency, India does not allow free movement on the capital account. 

Capital control in developing countries is put in place to preserve financial stability as large inflow and outflows in relatively smaller markets can lead to financial instability. 

The RBI is not defending the rupee by selling foreign currency in the market, but if it did, the impact on interest rate would have been the same. Selling foreign exchange would reduced the supply of rupee in the market which would have resulted in higher rates.

The story of a tribe named 'Chakma'

ORIGIN: The Chakma tribal community forms part of the great Tibeto-Burman language family.  In history, Chakma (Sakama in Myanmar) peoples are believed to be  working in Bagan Palace for Bagan King. Bagan King rule Sittagong Hill Tracts, Manipur and Assam. Chakma peoples are living in Rakhine, Sittagong Hill Tracts, Manipur and Assam. They are Tibet-Burma race. Chakma has it own written language and speaking language. Their language was tainted after Brtitish Colony took away from Burma in first Anglo-Burmese war in 1826. PARTITION OF INDIA: INJUSTICE DONE TO THE CHAKMAS During Partition (August 1947), India was divided on the religious line.  Muslim-majority areas went to form Pakistan.  Surprisingly, Chakma-dominated Chittagong Hill Tracts of present day Bangladesh formed part of Pakistan even though Muslims were only meager 2 %.  The Partition axed the Chakma life. It was the doom day. The Chakmas have been patriots.  They fought against the British, and did not allow the conquerors to conquer them.  Following the Partition, they were celebrating the Independence Day on 15 August 1947 by unfurling the Indian tricolour in Rangamati, the main town of CHT.  It was pity that they did not even know they were already Pakistanis, much against their own will. The Pakistani troops pull down the Indian flag. The Chakmas could not give a united stand against the injustice done. Indian government did not do much significant. It failed to recognize  the Chakmas’ contributions and sacrifices during the freedom movement. PERSECUTION UNDER PAKISTAN AND BANGLADESH RULE Given the communal division between India and Pakistan, that the Buddhist Chakmas would be persecuted in Muslim Pakistan was a foregone conclusion.  Chakmas were brutally killed, tortured, attacked and their women folk raped under the Pakistan rule.  In 1964, the Kaptai Dam reservoir was built that submerged around 44% of the CHT’s agricultural lands and made tens of thousand Chakmas homeless and foodless.  Those displaced were neither rehabilitated nor compensated nor treated well. Thousands became IDPs and refugees. In 1971, Bangladesh was liberated with India’s help.  But that did not bring any change in the policy of the Muslim government towards the Chakmas.  With active participation of the Bangladesh military, the Chakmas were attacked, massacred, kidnapped, and raped and their houses burned.  There was no reprieve. Life was no longer livable. Hundreds fled from their homes to escape from attempts at their lives.   FROM RULERS TO REFUGEES The Rulers have turned into Refugees, courtesy the brutal policies of the successive governments of Pakistan and Bangladesh.  In 1964, around 30,000 indigenous Chakmas displaced by the Kaptai Hydro-Electric dam in CHT of then East Pakistan migrated to India.  They were given settlement by the government of India in the North Eastern Frontier Agency (NEFA), the present Arunachal Pradesh, after consultation with the local tribal chiefs.  While being shifted to the NEFA, Government of India issued valid migration certificates to the migrants and assured them of citizenship rights in due course. “They came in a hopeless, pathetic condition, just with the clothes that they wore” recalls one senior Mizoram official, who was part of the Assam government team that received the Chakma in the Cachar and Lushai hills. PRESENT CRISIS ARUNACHAL PRADESH: There are presently about 65,000 Chakmas in Arunachal Pradesh.  All Arunachal Pradesh Students’ Union has been leading a hate-campaign against the Chakmas and inciting the otherwise sympathetic local population to drive the Chakmas away from the state.  Political parties exploit the Chakma issue for electoral gains.  They have been denied basic rights, including ration, education, employment and the right to live and peaceful life with dignity. On 9 January 1996, Supreme Court of India directed, inter alia, that the life and personal liberty of each and every Chakma residing within the State shall be protected and that, except in accordance with law the Chakmas shall not be evicted from their homes.  The Delhi High Court in its judgment of 28 September 2000 (CPR no. 886 of 2000) directed the authorities to enroll all eligible Chakma and Hajong voters into the electoral rolls. But the State Government and its agencies including the State Election Commission failed to do anything significant !!! MIZORAM: There are about 100,000 Chakmas in Mizoram.  They gained the Chakma Autonomous District Council (CADC) in 1972, which is still resented by the Mizo political leaders.  But the District Council covers only one-third of the Chakma population in the state.  The Chakmas living outside the District Council (including Sajek Valley area) are subject to regular harassment and discrimination by the State government in various forms.Life is no less painful in Sajek area of Mizoram.  The Chakmas have been living in acute poverty and without access to basic healthcare, education and infrastructure such as roads, electricity connectivity.    Most Chakma household is engaged in traditional Jhum cultivation.  Chakmas also call it “Duk Haam”, meaning “hard task”. As forest cover is diminished and production scanty, another name for life has become “struggle for survival”. Due to hate-campaign being carried out by powerful non-state actors such Young Mizo Association, rights of the Chakma people are under threat. Hundreds have already been deleted from voters list arbitrarily.  SITUATION OF CHAKMAS IN BANGLADESH The Chakmas have been reduced to minority in their own homeland due to illegal implantation of thousands of plains settlers i.e. Muslims.  Although a peace accord was signed between the Chakma rebels and the Government of Bangladesh in 1997, peace and development have been elusive in the Chittagong hills.  Besides persecution by the Bangladesh government, the Chakmas themselves are divided into two main groups and killing each other.

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Additional :: Not so imp ....still !

Companies Bill -->> provision for 'CLASS ACTION' -->> deciphered

The Companies Bill passed by Parliament last week has a provision for class action. 

Under this, shareholders and depositors of a company will now be able to claim damages if they suffer due to the management’s wrong and unlawful action, which is not in the interest of the stakeholders.

let us take a example to understand this !

What had happened in the Satyam Computers 

Services Ltd. cases ?

• In 2009, after Ramalinga Raju, founder of Satyam Computers Services Ltd, confessed that he mis-stated company accounts for years and the cash reserves shown in the books actually did not exist, the stock was in a freefall. 
• Satyam shareholders in the US filed a lawsuit against the company, claimed damages and got compensated. 
• However, the Indian shareholders had no such provision in the law and could not claim compensation even in a clear case of fraud. 
• But stakeholders in India will now have this option and will be able to hold the company and its officers accountable.

What’s proposed in the new Companies Bill to 

safegaurd the interests of stakeholders ?

• According to the new Companies Bill, if investors or depositors are of the view that the management or the company is conducting affairs that go against the interest of shareholders and depositors, they can collectively file an application before a tribunal. 
• As per the Bill, a National Company Law Tribunal and Appellate Tribunal will be set up to deal with such cases.
• The law also provides an option for shareholders and depositors to file an application and seek orders to restrain a company from moves such as acting against the memorandum of the company and to restrain it from acting against the resolutions passed by shareholders.
• Shareholders will be able to seek damages and compensation from the company and its directors for wrongdoing and unlawful acts. 
• Compensation can also be claimed from the auditors and the audit firm in case of mis-statement of facts or unlawful acts.

Conditions for appealing

Like in the Companies Act, 1956, there are conditions for appealing here too. An appeal can be filed against a company only if the appealing group constitutes at least 100 shareholders or holds a certain percentage of the company’s paid-up capital. Also, not more than one application will be admitted for the same cause.

What’s there for the defaulters ?

• If a company fails to obey the orders of the tribunal, a penalty would be imposed and the defaulting officer may also face imprisonment. 
• Interestingly, the Bill also states that if the complaint is found to be “frivolous or vexatious”, the applicant will be liable to pay the other party. 
• The idea is to ensure that only genuine applications are filed.
• The provision of class action is being seen as a major positive. 
• This will help investors by making companies and its officials more accountable.

Companies Law -->> CSR -->> Other provisions -->> A hope for improved transparency & governance ahead.

The Companies Bill passed by Parliament last week mandates that companies, subject to certain conditions, will now have to spend at  least 2% of their net profit on activities related to corporate social responsibility (CSR).

What is CSR ?

• The United Nations Industrial Development Organization defines CSR as “a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders”. 
• It further elaborates that it is a way through which a company attains a balance between economic, social and environmental objectives. 
• Simply put, CSR spending by a company is a way of giving back to the society in which it is doing business and making profits for its shareholders.

• In the new Companies Bill (schedule VII), the activities that will qualify as CSR will include initiatives in areas such as eradicating hunger and poverty, promotion of education, ensuring environmental sustainability, reducing child mortality and improving maternal health. 

• Contribution to the Prime Minister’s National Relief Fund and any other fund set up by the government of India will also qualify as CSR.

Which companies need to spend

• According to the Bill, every company with a net worth of Rs.500 crore or more, or with revenue of at least Rs.1,000 crore or a net profit of above Rs.5 crore will have to spend on CSR.

What does the Bill asks for ?

• The company will be required to constitute a committee for CSR with at least three directors, of which one or more would be independent directors. 
• The committee will be required to formulate a CSR policy. 
• The board will have to ensure that in any financial year, the company spends at least 2% of the average net profit made in the preceding three financial years on CSR. 
• In case the company fails to spend the amount on CSR, the board will have to explain the reasons along with other disclosures.

What will be the impact ?

• The spending on CSR is not any form of tax. 
• However, setting aside 2% of the net profit every year will reduce the shareholder’s earning by that percentage. 
• Although, there are a number of companies that are already spending on CSR activities in different areas, it can always be argued that CSR should not have been made mandatory and was better left to the discretion of the company. 
• But since it will soon be the law of the land, the positive aspect is that one can expect better outcomes when companies start spending directly in the social sector, year after year.

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Understanding the recent Company Bill passed 

by the Parliament !!!!