New rules for commodity exchanges pose new problems

New rules for commodity exchanges pose new problems
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First Published: Fri, Jun 13 2008. 12 22 AM IST
Updated: Fri, Jun 13 2008. 12 22 AM IST
New Delhi: New rules regarding the setting up of commodity exchanges that were announced last month will mean that the Indiabulls Financial Services Ltd-MMTC Ltd combine will have to resubmit its proposal to set up a commodity exchange. That’s because the rules cap the promoter’s share at 40% of the paid-up capital of the company.
And, because the government did not announce any rules on acquisition of existing commodity exchanges, Kotak Mahindra Bank Ltd, which had submitted an application to acquire the Ahmedabad Commodity Exchange, or ACE, will have to have to put its plans on hold.
Indiabulls was supposed to have a 74% stake in the exchange, according to its earlier submission. B.C. Khatua, chairman, Forward Markets Commission, or FMC, the commodities market regulator, said the company is being asked to reduce its stake to 40% in accordance with the new rules.
“Indiabulls will most sincerely comply with the guidelines and regulations set by the regulator,” said Gagan Banga, chief executive officer of Indiabulls Financial Services.
Executives at Kotak declined to comment on the issue.
In May, the government revised its rules regulating the setting up of commodity exchanges in a move to restrict this business to “serious investors”, according to Khatua.
It didn’t, however, announce any rules on the acquisition of existing exchanges.
“While we have announced fresh guidelines for setting up new exchanges, we are still working on new norms (on) acquiring existing stock exchanges...,” said Khatua.
The new guidelines also make it mandatory for the exchange to include a public sector entity and agricultural co-operatives or marketing federations, such as National Agricultural Cooperative Marketing Federation of India Ltd, among the promoters. Specifically, the norms stipulate that one or more promoters should be a government company with at least a 26% stake in the venture. And that at least 20% be held by institutional investors with at least half of this being owned by a co-operative or marketing federation that deals in agricultural produce.
“By having two self-regulatory organizations such as a public sector undertaking and an agri-produce co-operative, federation or marketing firm we have tried to give a public face to the commodity exchanges. At the same time, FMC does not want too many firms to be in the business which may result into wrong practices such as under cutting,” said Khatua.
Currently, there are 22 recognized commodity exchanges in the country, including national exchanges such as the Multi Commodity Exchange of India, or MCX, National Commodity and Derivatives Exchange Ltd, or NCDEX and National Multi-Commodity Exchange of India Ltd, or NMCE.
An executive at an existing commodity exchange questioned the wisdom of insisting on one of the partners being a government firm. He claimed MMTC had no expertise in the commodity trading business and alleged that the new norms favoured the IndiaBulls-MMTC combine. He also alleged that because MMTC trades in commodities, this exchange would not truly be “demutaulized”.
The norms say new exchanges will need to have a demutualized structure which means the exchange’s shareholders shall not have any trading interest, either as a member or a client. “That’s utter nonsense,” Khatua said. “We will not be asking Indiabulls to reduce its stake in such a case. Besides, if MMTC has to do futures tradi-ng, it has to go out (to other commodity exchanges) and do so.”
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First Published: Fri, Jun 13 2008. 12 22 AM IST