MCX deluged by foreign proposals

Multi Commodity Exchange of India Ltd said it's receiving at least one approach a month from overseas investors seeking a stake in a national market that may double to more than $900 billion of trading volume this year.

India's biggest commodity exchange wanted a global broker or rival exchange to join Fidelity International Ltd as a shareholder once the government would relax investment restrictions imposed last year, Jignesh Shah, managing director of the Mumbai-based bourse, said in an interview yesterday.

Overseas capital will help the exchange boost services as commodities trading surges in the world's biggest buyer of gold and second-largest sugar and rice-producer. Fidelity and Goldman Sachs Group Inc are the only overseas investors so far allowed to buy stakes in India's commodity exchanges.

"There's a tremendous potential in commodities trading as the penetration level is low compared with the equity market," UP Bhat, who manages $553 million at Canbank Investment Management in Mumbai, said adding, "It's a market in its early days."

Commodity-derivatives trading on global exchanges surged 44 per cent in 2005 as prices of energy and metals rose to record highs, according to International Financial Services, London. About 878 million contracts were traded in 2005, more than double four years ago, the London-based company said in a report in July.

The number of contracts traded on the Multi Commodity Exchange surged to 26.4 million in April - October 2006 compared with 5.8 million contracts in the entire year to March 2005, its first full year of operation.

India's economy grew at an average of 8 per cent annually over the past three years, fueling demand for gold, iron ore and coal.

The Multi Commodity Exchange (MCX) was the world's third biggest gold exchange and accounted for more than four-fifth of bullion futures traded in India and had a monopoly in energy products and base metals, Shah said.

The MCX accounted for just under half the $476 billion worth of the 91 commodities traded on India's 24 futures markets in the year-ended March 31. The value of trades in the six months to October has already outstripped the previous year, more than doubling to $487 billion.

"Foreign capital is a must for Indian exchanges to become globally competitive. We cannot do things in isolation. I want to see India on the global commodities map," Shah said.

Shah hopes India will relax restrictions imposed in July that barred overseas firms from investing in its commodity exchanges within two months.

Goldman Sachs, the world's biggest securities firm, already owns a 7 per cent stake in the National Commodities & Derivatives Exchange, India's second biggest bourse. It bought the stake in June last year.

Edward Naylor, a spokesman for Goldman in Hong Kong, declined to say if the firm would seek to raise its stake.

Fidelity India spokeswoman Anjali Patil said the money manager doesn't comment on its investments. Fidelity is a unit of Boston-based Fidelity Investments, the world's largest mutual fund company.

Citigroup Inc, which Shah said had investments in other exchanges, was "open to considering value-added investments in India", Sanjay Nayar, country head, said in an e-mail. He didn't give details.

Shah didn't comment on a report in the Economic Times last month that the New York Mercantile Exchange was considering buying a 9 per cent stake in the MCX.

At the same time as the MCX is seeking foreign investment in itself, Shah said the exchange's founder, Financial Technologies group, plans to set up a bourse in Mauritius to trade in bullion and natural gas.

In India, local traders and producing and consuming companies are the main participants in commodity exchanges, compared with the 13 million individual investors - three times the population of Singapore - who invest in stocks. India opened up its stock markets to overseas investors in 1993.

"The MCX expects the value of trades to more than double this financial year as it adds 20 contracts, including coffee, bringing to the existing 80," Shah said.

Still, allowing overseas funds to take a greater stake in the country's commodities markets could take time, Anupam Mishra, director, Forward Markets Commission, said.

"The central bank has to decide on how to regulate them before allowing them in," Mishra said, adding, "Our recommendations are pending with the government."

The MCX would sell some of the 5 million shares, 12.4 per cent of the 40.3 million shares it plans to sell, to domestic investors if the government did not set rules for overseas investments in exchanges, said Shah.

In February, Fidelity paid $49 million for 9 per cent in the MCX, valuing it at $539 million or Rs 600 a share, Shah said adding that the new shares would be sold for at least that much.

Citigroup Global Markets India Pvt, DSP Merrill Lynch Ltd, and Kotak Mahindra Capital Co are managing the sale.

"World over, Citibank or Merrill can invest in exchanges," Shah said, adding that they must follow global trends.