Kotak Commodity gives up membership in Ace Exchange following FMC directive2 min read . Updated: 18 Mar 2015, 01:15 AM IST
FMC had in December said KCSL and Kotak Mahindra Bank, which has a 40% stake in Ace, were 'related parties'
Mumbai: Kotak Commodity Services Ltd (KCSL) has surrendered its membership in Ace Derivatives and Commodity Exchange after the commodities market regulator highlighted that KCSL and Kotak Mahindra Bank Ltd, which owns 40% in the exchange, qualified as “related parties". As a consequence, trading volumes on the bourse have fallen.
In December, the Forward Markets Commission (FMC) said that relatives of key management personnel of Kotak Mahindra Bank are shareholders of KCSL, which makes the commodity brokerage firm a “related party".
The new shareholding and ownership norms for commodity exchanges, released in May 2014, say there should be no relation between the exchange and members trading on it. FMC has borrowed heavily from equity market regulations on the ownership of exchanges.
In an emailed response, a spokesperson of KCSL acknowledged that the brokerage had surrendered its membership of Ace Exchange.
The commodity futures bourse has seen a sharp decline in its trading volume. Since January, the exchange has registered an average turnover of only ₹ 110 crore every fortnight. For most of last year, the exchange witnessed a turnover in the range of ₹ 1,000 crore to ₹ 2,500 crore every fortnight, according to FMC data.
An email sent to Ace Exchange seeking comments on the fall in turnover remained unanswered. Market participants, however, say that since KCSL was the prime driver of turnover on Ace Exchange, its exit as a trading member had taken its toll on turnover.
Cotton is the only commodity that sees significant trading on Ace Exchange even though it offers futures contracts in over 10 commodities and is one of the four national-level commodity exchanges.
Naveen Mathur, associate director of commodities and currencies at Angel Broking Ltd, says that niche exchanges that deal in only a couple of commodities rather than a basket of offerings face tough times because of limited trading opportunities.
There has been an overall fall in liquidity in the commodity segment due to the optimism across other asset classes such as equities and this has hit all commodity exchanges, especially the niche ones, added Mathur.
Market participants say that KCSL had started to cut back on trading on the exchange late last year in anticipation of a directive from FMC. This pulled down trading volumes to below ₹ 1,000 crore in November 2014.
FMC’s letter to Ace Exchange said that Suresh Kotak, father of Uday Kotak, a key management personnel (KMP) of Kotak Mahindra Bank, owned a 7.26% stake in KCSL while holding 99.996% of Cumulus Trading Company Pvt. Ltd, which, in turn, holds 91.91% of KCSL. Uday Kotak is executive vice-chairman and managing director of Kotak Mahindra Bank. The FMC letter lists a few other of the bank’s KMPs, who, along with their relatives, hold a stake in KCSL.
The regulator has also expressed concern over the bank claiming a board seat on Multi Commodity Exchange of India Ltd (MCX), in which it bought a 15% stake for ₹ 459 crore from Jignesh Shah-led Financial Technologies (India) Ltd in July 2014.
KCSL is a trading and clearing member of MCX and Kotak Mahindra Bank was forced to withdraw the nomination of Paul Parambi from MCX’s board. Parambi is head of strategy at the bank.
FMC’s code of ethics for directors and key management personnel of commodity exchanges require the disclosure of beneficial interest, including “any fiduciary relationship of self and family members and directorship/partnership of self and family members in any trading member or clearing member".