New Delhi: India’s six national and 18 regional commodity futures exchanges are a crowd and not just pose a regulatory challenge but also raise the prospect of some going bust, although they boast of unprecedented growth.
The total turnover of all these exchanges was a record Rs174 trillion in 2011, up 66% from a year ago, data from industry lobby group Assocham shows, but underneath the surface is a story of stiff competition, undercutting of fees, absence of actual users and the spectre of taxation and curbs.
“It is getting crowded,” said Dilip Bhatia, chief executive officer of Ace Derivatives and Commodity Exchange Ltd, a one-year-old exchange that claims to have got the niche of the oil seeds complex trading. “Exchanges being a long-term business, we realize consolidation may happen at some point.”
Bhatia said typically the exchange’s fee of Rs100 per Rs1 crore of transaction was being undercut by the bourses, with some even going down to Rs50.
The increase in the number of commodity exchanges means every exchange has to not just vie for business, but also lay out infrastructure such as warehouses in duplicate, and scout for manpower, said M.K. Ananda Kumar, corporate services chief of National Commodity and Derivative Exchange Ltd (NCDEX).
Both Bhatia and Kumar spoke on the sidelines of Assocham’s conference on commodity futures, where regulators and policymakers rubbed shoulders with market participants and exchange heads.
India’s commodity futures markets were reopened in 2003 after being banned in the 1970s over fears of hoarding after a war, but in their modern form they are still seen by policymakers as manipulators and have been prone to attracting curbs and taxes.
Multi Commodity Exchange of India Ltd (MCX), NCDEX and Ahmedabad-based National Multi-commodity Exchange of India Ltd (NMCE) were the early entrants.
ICICI Bank Ltd, Life Insurance Corp. of India, National Bank for Agriculture and Rural Development and National Stock Exchange of India Ltd are the promoter shareholders of NCDEX.
They were joined by Kotak Mahindra Group’s Ace and MMTC Ltd, plus Indiabulls Financial Services Ltd-promoted Indian Commodity Exchange Ltd (ICEX).
Universal Commodity Exchange, a joint initiative by IFFCO and IDBI Bank Ltd, among others, is the newest exchange to start operations.
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“I am surprised there are so many,” said Jamal Mecklai of Mecklai Financial, who in a project for the Forward Markets Commission (FMC) had recommended the formation of two-three commodity exchanges. “If all of them are making money, what’s the harm? But they do need to be tightly regulated.”
The US has eight commodity exchanges, most of them specializing in specific commodities, but in Asia, China has only three, while Dubai and Singapore have two each.
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Volumes vs quality
Policymakers stressed on the need for quality and governance and said illegal trading is already taking place.
“FMC has very limited resources. They have to be strengthened to curb irregular and illegal trading which has been taking place,” said Rajiv Agarwal, secretary, department of consumer affairs.
On an aggregate, there are 1.4 million participants now, compared with 8,000 at the start, data from FMC shows. There have been instances of kerb and illegal trading, which the regulator has acted upon with help from the police.
With big-ticket reforms coming, the onus is all the more on the regulator to shape up as that would draw many more companies and much more liquidity.
A standing committee of Parliament has given its recommendations to the Forward Contracts (Regulation) Amendment Bill and companies in the market are hopeful it will be taken up in the next session of Parliament.
The amendment would give more powers to FMC and pave the way for options trading and index futures. Other reforms on the anvil are permission for banks and financial institutions to participate on the commodity exchanges.
Brokers said most of the liquidity on the exchanges was coming from retail investors and stock brokers seeking to diversify client portfolios. Growth from big companies such as oil firms remained slow and actual users and producers such as farmers were still in small numbers.
“Big companies such as oil firms need more liquidity and need contracts with long-term duration such as six months to one year,” said one broker working for an Indian brokerage.
The exchanges would need to add value and think innovatively to attract members, the broker said, requesting anonymity.
Graphic by Yogesh Kumar/Mint.
ruchira.s@livemint.com