Mumbai: Volumes in Indian commodity exchanges, particularly in new and small ones, have fallen significantly in the past few months, raising questions over the survival of these bourses.

The total trading of commodity exchanges during the fortnight ended 30 November was 2.6 trillion, and the total value of trade in the fiscal so far is 7.7 trillion, according to data from commodity markets regulator Forward Markets Commission (FMC). The corresponding figures for the previous year were 7.5 trillion and 11.6 trillion, respectively.

“The NSEL (National Spot Exchange Ltd) fiasco, unfavourable rupee value against dollar and import duty on gold have resulted in commodity trading volumes going down," said Rajnikanth Patel, former managing director and chief executive of BSE Ltd.

Irregularities at NSEL came to light on 31 July, when the exchange abruptly suspended trading in all but its e-series contracts. These, too, were suspended a week later. The closure of trading may have been prompted by an instruction from the ministry of consumer affairs asking the exchange not to offer futures contracts. A spot exchange isn’t supposed to do so, but NSEL was doing that.

NSEL tried to implement the change, but because its appeal was to investors and members who were not interested in spot trades, it eventually had to suspend all trading. It later emerged that all the trading on NSEL happened in paired contracts, with investors, through brokers, buying a spot contract and selling a futures one for the same commodity.

The entities selling on spot and buying futures were planters or processors and members of the exchange. It turned out there were only 24 of them, and they used the paired contracts as a way to raise easy money. When the trading was suspended, the investors were left holding contracts that the members couldn’t buy because they didn’t have the money to do so.

On 14 August, NSEL proposed a payout plan, but it has been unable to stick to the schedule and has not made a single successful payout since.

The NSEL fiasco eroded the confidence of investors in commodity markets and has had a greater impact on small exchanges, making them loose a high percentage of their trading volume.

For instance, National Multi-Commodity Exchange of India Ltd had a total volume of trades of 5,316.434 crore at the end of November, down from 6,041.880 crore for the second fortnight of April. Indian Commodity Exchange Ltd had a total volume of trades of 1,934.457 crore at the end of November, down from 6,579.798 crore for the second fortnight of April.

Similarly, ACE Derivatives and Commodity Exchange Ltd’s total volume of trades dropped to 1,223.558 crore at the end of November from 3,440.761 crore for the second fortnight of April.

Patel said these exchanges should think pragmatically and sort out differences among themselves for their survival and growth. He also suggested that these exchanges merge among themselves to enable cost rationalization and product synergy.

Patel also said it is a lot easier for a regulator to regulate three exchanges that are technologically strong than to regulate six exchanges.

A few of the small exchanges are already thinking of ways to grow and exploring mergers as one of the options.

Regional exchanges should merge among themselves to achieve better volumes, said Shomy George, chairman at First Commodities Exchange of India Ltd (FCEI). Also, making various products available on a single platform post a merger would be beneficial for its members, who find it difficult to go to various exchanges to access various products, he said, adding that he plans to merge FCEI with other regional exchanges shortly.

FCEI had a total volume of trades of about 62 lakh at the end of November, from about 34 lakh for the second fortnight of April.

Dilip Bhatia, chief executive of ACE Derivatives and Commodity Exchange, said volumes in his exchange dropped because of the introduction of the commodity transaction tax (CTT) in 2013. He added that unlike large exchanges, small ones do not have the strength to withstand such shocks.

But, differing with the others, Bhatia said a merger is not a wise strategy for ailing small exchanges as there is no product-wise synergy among them.

Bhatia is of opinion that it takes at least three years for a product in a commodity exchange to mature and gather momentum as market making is not allowed in commodity exchanges, and since many of these exchanges are small, they need to be given some time to grow.

Most of the small commodity exchanges in India are trying to build a niche for themselves, which is a smart strategy and, with time, may attract more volumes, Bhatia said.

Few market participants suggest other strategies these exchanges can use to grow.

“It is a challenging time for smaller commodity exchanges who are facing a tough time as a result of NSEL fiasco," said Motilal Oswal, chairman and managing director of brokerage Motilal Oswal Financial Services Ltd. “The only way these exchanges can survive and prosper is to launch innovative products, practice good corporate governance and have a strong sales and marketing team."

A few market participants also say there has to be a change in policies to enable more firms to enter commodity markets, which can help the small exchanges grow.

“What we need is commodity market to attract a wide variety of participants and not just speculators, especially corporates who can use this platform to hedge their physical exposure," said Hitesh Jain, a research analyst who looks at commodities, metals and currencies at brokerage India Infoline Finance Ltd.

Jain said Indian regulators need to bring in proactive policies to help these exchanges grow. For instance, there is a school of thought that futures and options in commodities leads to hoarding and price rise, he said, adding the government should introduce options trading at least in non-farm commodities.

An executive at one of the small commodity exchange, who did not want to be named, said the commodities market regulator should provide protection to smaller exchanges to build and establish their products, as large exchanges tend to hijack products introduced by the small exchanges.

“The cost of transaction has gone up ever since CTT has been introduced," said C.P. Krishnan, whole-time director at Geojit Comtrade Ltd, a commodities trader. “This has made the market unattractive to players who used to profit from small spreads."

Krishnan also said India needs a maximum of two exchanges and not more than that as clients can’t trade in all the exchanges at the same time. In spite of rising equity, many of the small exchanges have not been able to give returns, he said, adding that these exchanges can’t survive for long on their own.