West Bengal lands a blow on commodities trading
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Kolkata: Trading volume at commodities exchanges are likely to fall sharply after the West Bengal government raised stamp duty on contract notes, making it unviable for short-term traders and arbitragers based in Kolkata who survive on wafer-thin margins.
On 11 March, West Bengal increased the stamp duty on contract notes for commodity trades and linked the duty to the volume of trade.
A stamp duty of Rs.0.50 will be imposed for every Rs.5,000 in commodities traded, the state government said in a notification. This translates into a duty to Rs.10 for every Rs.1 lakh traded, bringing it on par with states such as Delhi, Gujarat and Maharashtra. The stamp duty in West Bengal was earlier Rs.0.50 per contract irrespective of the value of the contract or commodity.
The unusually low stamp duty in the state had spawned the emergence of scores of commodity traders who survived on ultra-thin margins and high volume. So much so that Kolkata alone accounted for about 30% of all trades in the nation’s commodities exchanges, according to an official of a leading commodity exchange, who declined to be named.
The increase in stamp duty is the latest in a series of events that have resulted in a sharp drop in trading volume at commodities exchanges, including the introduction of the commodities transaction tax (CTT) in 2013 and the payments crisis at the National Spot Exchange Ltd (NSEL).
“State governments should understand that they are getting good revenue from trading activities of these jobbers. As these jobbers play with very small spreads, introduction of CTT had already hurt them badly,” said C.P. Krishnan, whole-time director at Geojit Comtrade Ltd. “The increase in stamp duty will kill whatever small cushion was there for them in the spreads they earn. It will make it very difficult for them to survive.”
Trading activity on exchanges like the Multi Commodity Exchange of India Ltd (MCX) and the National Commodity and Derivatives Exchange Ltd (NCDEX) may drop further once the higher stamp duty comes into effect, according to Vijay Kumar, chief business officer of NCDEX, the country’s second-largest commodity exchange.
These duties are likely to burden trading companies dealing with short-term traders and arbitragers, he said. Such traders focus on intra-day gains by spotting price discrepancies and usually settle for a low margin, sometimes as low as Rs.0.20, he said.
“There are different types of participants in the market operating in different states. Impact of duties and transaction costs, though a small part of the contract value, will finally depend on what type of participant you are,” said Kumar.
So far, volume on NCDEX has not been affected by the prospect of an increase in stamp duty, but volumes on MCX have slipped in March and April.
MCX registered an average trading volume of Rs.18,615 crore and Rs.17,911 crore in March and April, respectively, compared with Rs.20,096 crore in February and Rs.19,214 crore in January.
MCX declined to comment on the matter.
While there are no official numbers, analysts estimate that such short-term trading accounts for more than half the total commodity volumes traded.
Speculators contribute nearly 50-60% of the volume on commodity exchanges, according to Hitesh Jain, a research analyst who looks at commodities, metals and currencies at brokerage India Infoline Finance Ltd.
Jobbers (short-term traders) are important to commodity markets as they create liquidity in contracts, Krishnan of Geojit Comtrade said.
Trading volumes in the commodity markets have already shrunk since 1 July, when CTT was implemented. Finance minister P. Chidambaram, in his February budget in 2013, introduced CTT at the rate of 0.01% to be paid by sellers. CTT has been levied on non-agricultural commodities, including gold, sugar and edible oils.
In addition to the higher taxes, the payments crisis at NSEL which came to light at the end of July last year, has also eroded volumes on MCX, both of which are promoted by Financial Technologies (India) Ltd (FTIL). FTIL owns 26% in MCX and 99.99% in NSEL.
Average monthly turnover on MCX, which was at Rs.48,179 crore in June last year, fell to a low of Rs.14,808 crore in November.
“Volumes are already down in MCX, a fall of about 60% as compared to what it was 8-10 months ago,” said Sumeet Bagadia, assistant vice-president for commodities and currency at CD Commo Search, a commodity trading firm.
Till the MCX stake sale issue is settled, it would be difficult for MCX to increase its commodity business, he said.
The board of MCX on 7 February asked FTIL to lower its current holding of 26% in the commodity exchange to 2%, as ordered by the commodities market regulator Forward Markets Commission (FMC).
FMC had on 17 December said FTIL was unfit to run an exchange after a probe into NSEL’s operations following a Rs.5,574.34 payments crisis at the commodities spot exchange.