New regulations for spot exchanges

To be registered, regulated by warehouse authority; draft rules issued on warehouse receipt trade.

In a move that can help develop an integrated pan-India market for commodities, the new Warehouse Development and Regulatory Authority (WDRA) has issued draft guidelines for issue of negotiable warehouse receipts /and registration of spot commodity exchanges.

There are 7,500 wholesale markets (mandis) for trading in agricultural commodities but their jurisdiction is very regional. Spot exchanges have electronic national platforms, much more transparent and efficient compared to mandis or the Agricultural Produce Marketing Committees (APMCs).
 

PROPOSED RULES

• Sponsors of these exchanges to hold minimum 51 per cent holding
• Warehouse receipts can be traded on such exchanges
• Financing for agri commodities to improve
• Integrated pan-India market for commodities will emerge
• State will continue to grant licences
• Taxes may have to be paid only on first and last transaction

Spot exchanges, however, lacked any central regulation till now. The new rules would put these under one central regulation, of the WDRA, though they’d have to take licences from the respective state governments.

Anjani Sinha, CEO of the National Spot Exchange (a Financial Technologies Group company) said, “The new regulations are a move in the direction of reforms in agri-marketing and clarity on who would regulate spot exchanges. It will also give greater credibility to the system.”

Goods and commodities stored with warehouses would be traded through warehouse receipts (WRs) on such spot exchanges and WDRA become a regulatory authority for such exchanges, too. These WRs would become negotiable and be traded on a national platform, instead of commodities moving all the time. WRs are to be issued by warehouses registered with WDRA, and having standardised quality norms. They represent the dematerialised form of the commodities stored with them. The move could also remove several hurdles in granting loans against agricultural commodities.

The draft norms say negotiable WRs issued in electronic form can be traded on spot exchanges registered with it. This would simplify the delivery mechanism on the exchange and the same goods can be traded more than once through electronic receipts. All spot exchanges are to register with the Authority and their net worth criterion to be fixed. The sponsor of the exchange must hold at least 51 per cent equity at any given time and any participants cannot hold more than five per cent equity in the exchange.

At present, WRs are not traded on spot exchanges. However, apart from enabling development of a pan-India national market for commodities, “the new regime would greatly enable the providing of bank finance against commodities once electronic negotiable WRs trade begins,” said Rajesh Sinha, executive vice president of NSpot, a group company of NCDEX. He believes the new regulations and regulator could be a big game changer for loans against agricultural commodities. Banks would find it safe, with the agri-commodities being a collateral. The electronic WRs would be highly liquid and quality would also be standardised.

Spot exchanges function in a multi-regulatory regime, as they are given licences by the state governments under respective APMC acts.

The proposed regulations also suggest that taxes on commodities traded on spot exchanges will have to be paid on the first and last transaction. This could boost buying and selling commodities through spot exchanges. More tax-related clarity would emerge once these regulations are approved.