Home >Market >Mark-to-market >The ifs and buts of MCX’s rally

Life has come full circle for Multi Commodity Exchange of India Ltd (MCX). Or at least that’s what its share price movement in the past two years suggests. Just before the budget announcement of the imposition of commodity transaction tax (CTT) in February 2013, MCX shares traded at around 1,100-1,150 apiece. Within six months, the double blow of CTT and the National Spot Exchange Ltd (NSEL) scam resulted in an over 78% drop in its share price to 242 apiece.

Now, another budget announcement has helped the company’s shares to rise to around 1,200 apiece. Last Saturday, the finance minister announced that the Forward Contracts Regulation Act will be repealed and Forward Markets Commission (FMC) will be merged with the Securities and Exchange Board of India (Sebi). This is likely to open up new opportunities for MCX, the largest commodity derivatives exchange in the country. But there are some riders as well, and investors have gone ahead of themselves in valuing the exchange.

At some point, commodity derivatives exchanges will be able to launch new products such as commodity options and derivatives on indices. It’s important to note here that while the imposition of CTT has led to a sharp drop in futures volumes, its impact on options trading will be far lower, as the tax will only be charged on the option premium. For this reason, in the equity segment, most of the trading is in the options segment.

Besides, it’s likely that new participants such as banks and foreign investors will be allowed to participate, and exchanges will gain from the increase in the depth of the markets.

Coming under the jurisdiction of Sebi may also open up the opportunity for commodity derivatives exchanges to apply for new segments such as currency and interest rate futures. Both of these segments, unlike equity, do not have transaction taxes, making it relatively easier to provide competition to incumbent exchanges. However, it remains to be seen whether Sebi will give this nod to MCX, considering that Kotak Mahindra Bank Ltd, its largest shareholder, is a participant in these markets, both as a trading member and as an end user.

The flipside of all this is that it will also be possible for large stock exchanges such as National Stock Exchange of India Ltd and BSE Ltd to launch commodity derivatives trading. BSE has already made it clear that it is interested in entering the segment. And now it makes all the more sense as it can have 100% ownership in the venture, vis-a-vis having a 15% ownership when the segment was regulated by FMC. MCX has never faced tough competition, and things may well change.

In sum, therefore, there are some ifs and buts about how much MCX may end up gaining on account of FMC’s merger with Sebi. Besides, for now, it still has to live under the reality of far lower volumes and profit vis-a-vis pre-2013 levels. In fiscal year 2013-14, profit had halved year-on-year, and things haven’t improved this year. The fact the company’s shares now trade at even higher levels compared with end February 2013, therefore, looks like a clear case of putting the cart before the horse.

The writer doesn’t own shares in the above-mentioned companies.

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