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Mumbai: The spot exchange is dead. The holding company is not fit and proper. The equity exchange runs on a conditional licence. And the group founder himself faces multiple charges.

But Multi-Commodity Exchange of India Ltd (MCX), the flagship exchange founded by Jignesh Shah, continues to dominate commodity futures, even as his empire lies in tatters.

Ironically, Shah himself holds no stake in MCX now.

Ever since a 5,574.35 crore payment crisis erupted at the National Spot Exchange Ltd (NSEL), in which Shah’s Financial Technologies India Ltd (FTIL) held a 99.99% stake, most FTIL-promoted institutions have taken a hit.

NSEL is now a non-functional bourse with all contracts suspended and equity exchange MCX-SX has a conditional licence which expires next September.

FTIL itself saw net profit falling by nearly 14% in the fiscal ended 31 March 2014, though the quarter ended 30 June 2014 saw net profit rise by 58% to 128.25 crore when compared with the same quarter a year ago.

The exchange recently went through an ownership restructuring, which saw FTIL selling its 26% stake to various entities, including Kotak Mahindra Bank Ltd and well-known private investor Rakesh Jhunjhunwala. Kotak Mahindra Bank now owns a 15% stake in the exchange.

How did MCX hold on to its market leadership through the storm?

Limited competition in the commodity futures market is one reason.

Quite similar to the equity market landscape where BSE Ltd and National Stock Exchange Ltd (NSE) are the only two national-level exchanges, the commodity space is dominated by two bourses—MCX and rival National Commodity and Derivatives Exchange (NCDEX).

According to data from the Forward Markets Commission (FMC), the two share 99% of the total commodity market turnover. MCX leads with 80-85%, followed by NCDEX with around 15%.

The rest 1% comes from National Multi-Commodity Exchange of India Ltd (NMCE) and ACE Derivatives and Commodity Exchange Ltd, besides nearly 10 other commodity bourses that specialize in just one or two commodities.

Market experts say MCX’s initial strategy of focusing on non-agricultural commodities, namely precious and base metals, along with energy, paid off.

Naveen Mathur, associate director of commodities and currencies at Angel Broking Ltd, says metal and energy contracts traded on MCX have a global presence and so, the exchange was able to capitalize on the volatility and the surge in global commodity prices.

“When equity market took a beating 2008 onwards, investors started looking at alternative avenues and metal became a favourite of many," says Mathur.

The top commodities traded on MCX include gold, silver, crude oil, natural gas, copper, lead, zinc, nickel and aluminum. In some of these commodities, MCX is the only exchange which offers contracts.

MCX, led by P.K. Singhal since Manoj Vaish resigned as managing director (MD) and chief executive officer (CEO) in May, attributes its success to factors like robust risk management and settlement systems.

“MCX primarily enjoys a competitive edge due to its domain expertise, experienced and credible team, confidence of market participants, technology edge, and extensive reach," said an MCX spokesperson while responding to Mint queries.

To be sure, MCX did see a significant drop in the turnover since July 2013 after the government introduced the commodities transaction tax (CTT) on all non-agricultural contracts from 1 July.

The fortnight ended 15 July 2013 saw trades worth 3.59 trillion as against 6.46 trillion worth of trades in the previous fortnight. However, there has been no significant swing in the turnover on NCDEX, which trades in farm commodities.

Since April, MCX has seen an average of 2 trillion worth of trades every fortnight.

NCDEX has chosen to primarily focus on futures trading in agricultural commodities, where it is the leader. Castor seed, soya oil, soya bean, coriander, cotton, cotton cake, turmeric and cumin seed are the top traded commodities on NCDEX.

Samir Shah, MD and CEO of NCDEX, says that the exchange has over 80% market share in the agricultural commodities segment because the contracts, he says, are backed by a robust delivery mechanism and provide value to farmers, processors, merchandisers and consumers.

Last month, NCDEX stole the first-mover advantage by launching exchange-traded forward contracts in maize and sugar. Forward contracts can only be settled by way of physical delivery of the underlying commodity.

According to Shah, forward contracts will help in developing storage infrastructure for the traded commodities and will also increase the geographic reach of buyers and sellers who initially had to incur huge investments.

“We have received an encouraging initial response from the market, with 1,360 mt (metric tonne) of trades done so far from across the country. With the systems in place, the exchange shall be shortly launching forwards contracts in several other commodities," he says.

Though MCX and NCDEX do not compete directly in the case of most commodities, earlier this year, NCDEX took tentative steps to try and compete with MCX by launching a gold hedge contract to compete with MCX’s gold contract.

According to FMC data, the fortnight ended 30 September saw gold contracts worth 60,481 crore being traded on MCX while gold hedge contracts of NCDEX registered a turnover of only 1,441 crore.

Turnover is a function of volatility in commodity prices and intra-day trading, says Shah, adding that participation of hedgers continues to increase in the gold contract.

Viral Shah, head of institutional business at Geojit Comtrade Ltd, feels that the legacy has now been well established and it is now difficult to move liquidity from one exchange to another.

“Any new contract requires market-making, which is currently not allowed by the commodities regulator. So MCX continues to dominate in the metals space, while NCDEX flourishes in agriculture commodities," he says.

Though NCDEX has tried to venture into non-agriculture commodities and has put in vigorous efforts, MCX has been able to maintain its clear lead, says Mathur.

Still, there are lingering concerns, since MCX has failed to appoint a full-time MD and CEO since May. FMC has given the exchange time until 3 November to finalize the appointment.

“We are in the process of appointing an MD and CEO. The shareholders have approved the appointment of P.K. Singhal as the joint MD and director on MCX’s board for a period of three years, approved by Forward Markets Commission (FMC) on 14 October 2014," an MCX spokesperson said.

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