Mumbai: National Commodity and Derivatives Exchange Ltd (NCDEX), which ruled commodities trading in India in 2004, is steadily losing ground to its peer Multi Commodity Exchange Ltd (MCX).
In 2005, both exchanges were in a close battle for market share bragging rights but, by the end of 2006, MCX surged ahead. And, by the end of 2007, NCDEX’s market share has dropped to less than 25% and just around one-third of MCX’s share. Trading volumes at the exchange are down by 50% as agricultural commodity traders migrate in droves to stock markets. Amid changes in executive ranks, NCDEX was buffeted by rumours that P.H. Ravikumar, managing director and CEO of the exchange, is on his way out.
An unfazed Ravikumar says he holds India’s policymakers responsible for curbing trading in agricultural commodities. In a free-wheeling interview with Mint, he unfolds his plans to reposition NCDEX by cutting down the share of agri commodities trade on the exchange and focusing on energy and metals trade. Edited excerpts:
P.H. Ravikumar, managing director and CEO of NCDEX
So, have you quit?
If you’re sure that I have quit, please tell me where am I going. I am tired of telling people that I have not quit. Why should I quit?
The exchange is not doing well…
I agree on this. The past year has been very difficult and each month was worse than the previous month, but things will change. In January 2007, there was a ban on trading of pulses—urad and tur. In February, wheat and rice trading was banned. Then, between March and May, there was a steep increase in margin of all major agricultural commodities.
We impose margins on traders to protect the exchange from any default from either side—the buyer and the seller. The quantum of margin is dependent on the volatility in the prices of a particular commodity. If we were charging, say, 10% margin on any commodity, an additional 10-15% margin was imposed. Trading in all major agri commodities, such as pepper, jeera, chana, guar gam witnessed a higher margin requirement.
Who did this?
These were regulatory measures, driven by policy concerns. A section of the policymakers felt that we were driving the prices up and the margins were hiked to curb the level of trading in exchanges. When the margins are high, it becomes unattractive for the participants to take fresh positions. So, commodity traders started moving out of the market and getting into stocks and real estates where returns are high.
Another offshoot of this is the sudden appearance of dabba trade in commodities. Dabba trade is an unofficial market that runs parallel to the exchange. Traders started working outside the exchanges to avoid the higher margin requirement.
Finally, in June-July, the regulator, on the rising policy concerns on inflation in commodity prices, brought down the open interests on all major commodities drastically. The level of open interest is very critical for the participants at the commodity exchange and, if it’s too low, traders may not find it worth the trouble.
All these measures collectively have shaken the market confidence and people have started migrating to stock market that is offering good returns. Traders prefer a stable regulatory regime that rules the stock exchanges, and not an evolving and continuously changing structure that we see in commodity trade. The only segment of the market that has not been affected is trade in metals.
So, your competition, MCX, has not been affected?
Yes. To some extent, MCX is not being affected because, unlike us, its focus is on non-agri commodities. However, the overall sentiment has been affected and the market confidence is shaken. To that extent, all three exchanges are affected.
Won’t you like to bring down your focus from agri commodities?
Yes, we are doing that. We are diversifying into metals and energy trade. Agri commodities now account for 85% of our total trading and we want to bring it down to about 50%.
Any time frame for that?
As quickly as possible, by the next one year.
What is the share of agri commodities in overall trading volumes?
In December 2003, it was over 95%. Now, it has come down to about 30%. We, however, continue to enjoy 85% market share of agri commodities’ trading volume.
We hear your trading volume has been halved?
Yes, from about Rs4,000 crore daily, the volume went down to Rs2,000 crore. We have over two lakh registered traders and, at any given point of time, 8,000 used to be present in the market. That number has gone down to 4,000.
Would you blame the regulator, Forward Markets Commission (FMC), for this sharp drop in business?
I would blame the policymakers because the FMC measures were in response to concerns and pressures exerted by the policymakers. We knew for sure that FMC was against the ban on pulses and wheat, but it was forced on the regulator.
Who are these policymakers?
They are in politics and government. For instance, trading of wheat was banned on the day the ruling party lost elections in Punjab and Uttarakhand.
A section of policymakers last year genuinely, and incorrectly, believed that the exchanges were causing the inflation. In fact, the ban on wheat and pulse trading was a blessing for us as, even after the ban, prices rose sharply.
FMC has been continuously meeting policymakers and explaining to them the reasons behind the price rise. The exchanges reflect the market sentiment and do not drive the prices.
You will be surprised to hear that many of the policymakers even did not know that a commodity exchange is a mere platform, and we do not buy and sell.
Does the business outlook continue to be bleak in 2008?
Things will look up. Last week, the FMC removed all regulatory margin requirements. Next, we expect the restoration of the open interest limit, and we also believe that this is the right time to introduce trading in wheat because there are genuine concerns about the expected level of production.
Your profitability will be hurt.
Yes. We are still profitable but not as profitable as we were in the previous year.
This means your plan for the initial public offer (IPO) is off.
What do I answer? It’s like asking me whether I have stopped beating my wife. If I say yes, you will write I was beating her, and if say no, you’ll say I continue to beat her! We never had any plans for IPO. Where is the question of shelving it?
We are still far away from the maturity level that we should attain before our IPO. A segment of the market also feels that there is a conflict of interest when an exchange gets listed. It’s somewhat like Sebi (Securities and Exchange Board of India, the capital market regulator), getting listed. If we list ourselves, then profitability and financial performance will become more important goals for us and the regulatory aspects of an exchange may get diluted.
But, globally, exchanges do get listed.
Yes, but they operate in a far more mature market. Let us first attain that level. Personally, I am against listing of both commodity and stock exchanges at this stage. This is, however, my personal opinion.
So, you will continue to do private placements.
We have sold 7% stake to Goldman Sachs Group, Inc. and 8% to Intercontinental Exchange Inc. (ICE).
Goldman Sachs will add tremendous value in terms of risk management, strategies and product development while ICE, the largest energy exchange in the world, will help us launch energy products. It also has fantastic clearing capabilities for both exchange-traded products as well as the over-the-counter market.
We will continue to look for partners that can add value to our business by bringing in new skills. We will not privately place stakes merely to raise money.
And, now, with one more exchange coming up, your business will be further dented.
Are you talking about the Indiabulls (Financial Services Ltd) and MMTC Ltd’s proposed exchange?
Whether the trade volume will go down or up with the expansion of the market will depend on how we develop the market.
In banking and insurance, we have seen the market expanding with new products, innovation and competition. There is no reason to believe that it will not happen in the commodity segment as well.