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New commodity exchange set to increase competition, pare costs

New commodity exchange set to increase competition, pare costs
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First Published: Wed, Aug 05 2009. 09 40 PM IST

Greater efficiency: Traders at the Multi Commodity Exchange of India, which was started in 2003 along with the National Commodities and Derivatives Exchange. Icex will be the fourth national commodity
Greater efficiency: Traders at the Multi Commodity Exchange of India, which was started in 2003 along with the National Commodities and Derivatives Exchange. Icex will be the fourth national commodity
Updated: Wed, Aug 05 2009. 09 40 PM IST
Kochi: The commodity futures market in India, which saw trading worth Rs52 trillion in 2008-09, will have a new entrant in September—Indian Commodity Exchange (Icex), the country’s fourth national commodity exchange.
It has got all regulatory clearances and already started mock trading, said Ajit Mittal, chief executive of the new exchange, floated by Indiabulls Financial Services Ltd and state-run metals and minerals trader MMTC Ltd.
Greater efficiency: Traders at the Multi Commodity Exchange of India, which was started in 2003 along with the National Commodities and Derivatives Exchange. Icex will be the fourth national commodity bourse. Amit Bhargava / Bloomberg
The arrival of a new national exchange, after a gap of around six years, is expected to intensify competition, bring down transaction costs and improve efficiency of the other bourses.
National Commodities and Derivatives Exchange Ltd (NCDEX) and Multi Commodity Exchange Ltd (MCX) started trading in 2003 and National Multi Commodity Exchange Ltd (NMCE) started operations earlier in 1999.
Besides, there are 18 regional exchanges, including the India Pepper and Spice Trade Association-run oldest pepper exchange in Kochi and the Sangli Turmeric Commodity Exchange in Maharashtra.
Unlike national exchanges that offer platforms for trading many commodities, the regional exchanges deal in a single commodity.
In the spot market, run by various trade and farmer organizations as also by the national exchanges, commodities are bought and sold for cash and delivered immediately. But in futures market, traders enter into contracts to buy or sell a commodity for a specified price at a future date.
The commodity futures market has grown manifold in the past five years.
“The growing interest in futures market is an indication of space for more players,” said B.C. Khatua, chairman of regulator Forward Markets Commission (FMC).
In the fiscal ended 31 March, there was 29% growth over the preceding fiscal and the trading volume was Rs52.49 trillion. In the first three months of the current fiscal, the growth in trading volume has not been much though, rising from Rs15.15 trillion to Rs15.64 trillion.
While farm commodities’ trade rose to Rs2.25 trillion in this period from Rs1.57 trillion, the bullion trade grew 25% to Rs6.68 trillion.
The growth has been achieved with minimal innovations in terms of product diversification such as options, index trading, weather derivatives, etc., Khatua said.
Banks and financial institutions cannot participate in commodity trade. Once restrictions on the entry of these financial intermediaries, including mutual funds and foreign institutional investors, are lifted, the market will become broader and deeper.
In order to do so, the government has been planning amendments to the Forwards Commission Regulation Act of 1952.
After Icex, there will be yet another national commodity exchange. FMC has given in-principle approval to Kotak Mahindra Bank Ltd to pick a substantial stake in the Ahmedabad Commodity Exchange, a regional exchange which will be converted into a national bourse.
ICEX will offer an integrated commodities platform with equal emphasis on agriculture and non-agriculture commodities, said Mittal.
It has a diversified ownership with Indiabulls Financial Services and MMTC holding 40% and 26%, respectively, and fertilizer firm Indian Potash Ltd and banks such as HDFC Bank Ltd and Yes Bank Ltd as other partners.
Meanwhile, PTI reported on Wednesday that FMC has rejected a 10% stake purchase in Icex by United Stock Exchange of India. This was confirmed by Khatua, the news agency reported.
Icex will, therefore, now have to look for another entity to offload 10% equity in the bourse to meet FMC norms.
NMCE has Reliance Money Ltd, Central Warehousing Corp., National Agricultural Cooperative Marketing Federation of India and Gujarat Agro-Industries Corp. Ltd as stakeholders.
Life Insurance Corp. of India Ltd, National Bank for Agriculture and Rural Development and National Stock Exchange of India Ltd hold stakes in Ncdex, while Financial Technologies Ltd, Fidelity International and a group of banks and financial institutions are the stakeholders of MCX, the market leader.
“We have advantages of being a late mover, so we don’t have to climb a steep learning curve. We are currently collating and analysing the extensive market feedback, which would be a vital input for our contracts selection and design,” Mittal said.
To begin with, the exchange will offer trade in gold and silver from the bullion basket and crude and natural gas from the energy sector. Its product basket will also include the base metals and a couple of spices, oil seeds and cash crops.
The exchange hopes to leverage on domain expertise that MMTC has with its countrywide infrastructure, particularly in bullion, to connect the physical and futures markets. “We are fairly optimistic about our delivery capacities, thanks to MMTC. Large-scale warehousing and proper delivery mechanism will work towards growth,” Mittal said.
Sector watchers say the new exchange can give competition to MCX that currently dominates the bullion trade and enjoys at least 85% share in the overall market.
Joseph Massey, managing director and chief executive of MCX, seems to be unfazed. According to him, the overall pie can always increase as there is scope for several new product segments, service areas and innovative features which are in the pipeline after necessary regulatory changes take place.
Anil Mishra, chief executive officer of NMCE, however, has a word of caution. “If too many players do the same thing, they won’t be successful. But if they expand the network and go beyond the cities and bring more and more physical players and producers, there is still space for more,” he said.
NMCE has focused on farm commodities and has a market share of at least 5%. NCDEX also largely focuses on farm commodities.
Akshay Agarwal, head of Kochi-based broking firm Acumen Commodities (India) Ltd, said FMC could bring in some kind of time frame for the existing exchanges to achieve a minimum market share. This is to ensure that that only serious players remain in business. It could also take a call on the maximum exchanges it would permit.
“If they are tech-savvy, innovative and aggressive, they will help expand the market with newer products, better liquidity and, most important, higher penetration,” Agarwal said.
“If new products are introduced such as livestock trading, then there is certainly a large market. Innovation will be the driver for the success for any exchange, new or old,” said Jayant Manglik, president of commodities broking firm Religare Commodities Ltd.
“We are still in the growth phase and consolidation is still a few years off. Globally, exchanges have existed for decades before natural consolidation has happened. Competition is always good and one of the by-products should be lower cost,” he added.
“A mature market would decide who should stay and who should wind up. Competition would certainly bring down the transaction cost and improve the overall efficiency of the system. Each exchange may specialize and would be known for its own actively traded commodities,” said P.R. Dilip, managing director of Mumbai-based portfolio management firm Impetus Wealth Management.
Motilal Oswal, chairman and managing director of Motilal Oswal Financial Services Ltd, said commodity trading is a big business globally and the opportunities in India, too, are huge but there are a few challenges. “The regulatory regime is still to fall in place and local and state laws need to be unified. There is room for many more exchanges so long as their horizon is for the long-term,” he said.
PTI contributed to this story.
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First Published: Wed, Aug 05 2009. 09 40 PM IST