Commodity exchanges of India: Impact of increased competition

S a r a v a n a n C 0 9

A n u j P a t n i 4 5

A n u j P o d d a r 4 8

S h a l m a l i S a r d e s a i 5 1

A k s h a t V y a s 6 0

V i v e k A g r a w a l 2 0 3

Commodity Markets

Group - 7

Commodity trading is an interesting option for those who wish to diversify from the traditional options like shares, bonds and portfolios. The commodity market in India facilitates multi commodity exchange within and outside the country based on requirements. India commodity market consists of both the retail and the wholesale market in the country. However with the improvement in transport facilities across the country, the wholesale trading is diminishing. The growth in the India commodity market is largely attributed to the boom in the retail market. Policy reforms, liberal government policies, increased purchasing power and the heavy inflow of foreign direct investment in the retail sector have ensured that the retail commodity market is growing at a good pace.

In India all the exchanges have been set up under overall control of Forward Market Commission (FMC) of Government of India.

National Commodity & Derivatives Exchange Limited (NCDEX) located in Mumbai) is a professionally managed online multi commodity exchange promoted by ICICI Bank Limited, Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE).

Multi Commodity Exchange of India Limited (MCX), is an independent and de-mutualised exchange whose key shareholders are Financial Technologies (India) Ltd., State Bank of India, Union Bank of India, Corporation Bank, Bank of India and Canara Bank. MCX facilitates online trading, clearing and settlement operations for commodity futures markets across the country.

National Multi Commodity Exchange of India Limited (NMCEIL) is the first de-mutualized, Electronic Multi-Commodity Exchange in India supported by Central Warehousing Corporation Ltd., Gujarat State Agricultural Marketing Board and Neptune Overseas Limited.

Indian Commodity Exchange (ICEX), the country’s fourth national commodity exchange is floated by Indiabulls Financial Services Ltd and state-run metals and minerals trader MMTC Ltd.

Besides these, there are 18 regional exchanges, including the India Pepper and Spice Trade Association-run oldest pepper exchange in Kochi and the Sangli Turmeric Commodity Exchange in Maharashtra.

Competition

Regional exchanges dealing in a single commodity as against national commodity exchanges trading in multiple commodities

Banks and financial institutions which as of now cannot participate in commodity trading will be tough competitors once restrictions on the entry of these financial intermediaries, including mutual funds and foreign institutional investors, are lifted.

FMC has given in-principle approval to Kotak Mahindra Bank Ltd to pick a substantial stake in the Ahmedabad Commodity Exchange, a regional exchange which will be converted into a national bourse.

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The newly formed ICEX which offers an integrated commodities platform with equal emphasis on agriculture and non-agriculture commodities can give competition to MCX that currently dominates the bullion trade and enjoys at least 85% share in the overall market.

BSE or Bombay Stock Exchange has decided to purchase 26% equity shares of National Multi-Commodity Exchange of India (NMCE) in order to diversify its portfolio and in order to enter the booming commodity trading market of India.

National Stock Exchange or NSE holds almost 2.56% equity shares of Multi Commodity Exchange of India(MCX).It also owns 15% equity stakes of NCDEX or National Commodity and Derivatives Exchange thus giving NSE an opportunity to explore commodity trading.

Benefits of competition for Indian commodity exchanges

Expansion of the network and going beyond the cities by bringing more and more physical players and producers

Competition has made the existing players come up with innovative products for eg. ICEX has planned to introduce delivery option in copper contracts and has already launched gold futures with five delivery centres against the older exchanges’ one or two such centres. The Multi-Commodity Exchange of India has launched the Exchange of Futures for Physicals transaction facility, which is essentially exchange of futures contracts for physical commodity between two market participants. The National Commodity and Derivatives Exchange (NCDEX) is also planning to offer the facility, which allows hedgers in certain farm and non-farm commodities to transfer their physical market positions to the futures exchange and vice versa.

Competition will allow commodities like rice, cotton and tea, are either not traded in the futures market or are not generating volumes and liquidity despite potential to be traded

It has helped build awareness and drive innovation in products and technology It has led to more transparent and scientific methods of storage and up gradation of

quality-testing techniques. 

Thus competition in the commodity markets can be viewed positively as it will help the existing players gear up with innovative products and strategies, to increase the circumference of the trading community - which includes products, players and regions.

Disadvantages of competition for Indian commodity exchanges

Increase in competition can be a double edged sword. It entails low margins from exchanges which can encourage poor money management, leading to excessive risk taking. Not only are profits enhanced but so are losses!

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Under various pretext, government intervention, meddling, enquiries, bans on trading in futures, etc. have been more frequent than expected. This has grossly coloured the perception about commodity futures in general and in turn has badly hit the business of various commodity exchanges

Conclusion

For the overall growth of the commodity and risk management market in India, commodity exchanges prefer more transparency, more serious players and a stronger regulation.

References

http://www.fmc.gov.in/

http://www.business-standard.com/india/news/commodity-exchanges-joininnovation-game/378506/

http://www.thetradenews.com/long-intent-short-speed

http://finance.indiamart.com/markets/commodity/commodity_exchanges.html

http://business.mapsofindia.com/india-market/commodity.html

http://biztech2.in.com/interviews/business-continuity-disaster-recovery/competition-in-commodities-trading-mkt-will-foster-innovation/78552/0

http://finance.mapsofworld.com/commodity-trading/exchange/bse.html

http://www.livemint.com/2009/08/05214005/New-commodity-exchange-set-to.html?h=B

http://www.sebi.gov.in/dp/mcxdraft.pdf

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