The United Commodity Exchange (UCX) is getting ready to enter the crowded space of the Indian commodity futures market. The exchange is in the final round of discussions with domestic and foreign private sector investors to sell a nine per cent stake for which it expects a premium — despite the fact that it is yet to start operations. This is not an unreasonable expectation given that Oman Investment Fund paid Rs 27.5 per share (face value Rs 10) for its five per cent stake. UCX is also in the process of selling five per cent more to a public sector unit.
Once UCX meets the mandated equity holding norms – which require promoters and anchor investors to reduce their stake to 40 per cent and for public sector companies to hold 46 per cent – it will write to the futures market regulator, the Forward Markets Commission (FMC), and could go online by early April.
UCX, thus, will become the sixth commodity futures exchange in the country — and this is apart from some active regional exchanges like Indore-based National Board of Trade (NBOT). No other major country has so many national commodity exchanges (see table) and, not surprisingly, market shares are fragmented. The Financial Technologies- promoted Multi Commodity Exchange (MCX) accounts for an 85 per cent share of total annual turnover, followed by the JayPee Capital-owned National Commodities and Derivatives Exchange (NCDEX) with little over 10 per cent. This means that the remaining three exchanges together have a five per cent share — and it is for this pie that UCX, promoted by Comex Technology, will be competing.
So are we looking at consolidation in exchange’s space or will India remain unique in terms of the multiplicity of exchanges? The answers depend on the outlook for the business.
UCX’s promoter and Managing Director Ketan Sheth thinks the structure of the market ensures that there is space for his exchange. That’s because each of the five exchanges have carved out niches. Within the three national commodity exchanges that started trading in late 2003, for instance, MCX has branded itself the exchange for metals and energy, NCDEX is known for trading in agri-commodities and National Multi Commodity Exchange, an Ahmedabad-based exchange, is a leading player in plantation commodities like rubber, albeit a small one. In terms of contracts traded, India’s MCX is world’s fifth largest commodity derivative exchange ahead of even the London Metal Exchange. Newer exchanges like ICEX owned by Anil Dhirubhai Ambani group and ACE, promoted by Kotak Mahindra group, are yet to achieve significant volumes and market share.
In other words, there could well be space for a broad-spectrum commodities exchange, according to Sheth. “Investors and hedgers in commodity futures have no arbitrage opportunities today because the national exchanges established in the first phase are active in their niche areas and there is no serious competition,” he says, adding, “we will provide both — arbitrage as well as competition because we will be active in all commodities from the start.”
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Apart from arbitrage, however, there is huge scope for further development of India’s Rs 174-trillion commodity futures market that, unlike the stock markets, trades throughout the day and till 11.30 at night. The Indian market, however, trades only in commodity futures and almost 80 per cent of its volumes come from four commodities — silver, gold, energy and copper.
At the moment, however, the limited range of instruments and players that are allowed by reputation means that the new risk takers and real hedgers will stay out of the market. For instance, banks and institutional investors – domestic and foreign – are not allowed in this space. Nor are index-based derivatives and options, even though they account for most of the volumes on stock exchanges.
All this could change now that the stage is being set for the introduction of index-based derivatives and options. These instruments are expected to attract genuine hedgers and introduce more depth and liquidity to the market. A parliamentary standing committee reviewing amendments to the Forward Contract Regulation Act (FCRA) has also submitted its report recently recommending independence and teeth to the market regulator FMC and permitting index derivatives (futures and options) and options in individual commodities.
“Options trading will also help new players to gain some share since many new products based on options can be introduced that will suit various players,” said Ramesh Abhishek, chairman, FMC.
In a separate move, the finance ministry has already sought the Reserve Bank of India’s (RBI) opinion on allowing banks to hedge their risks on commodity futures and RBI is understood to have asked banks to give their views. Banks are prepared to enter this space because it helps them manage their risk while financing the commodity trade or companies. In fact, several banks have bought stakes in commodity exchanges. For example the State Bank of India holds 5.2 per cent in MCX and IDBI Bank holds 10 per cent in new exchange UCX.
New instruments and the entry of new players will provide opportunities to all players to gain market share. As Rajnikant Patel, CEO and MD of ICEX, points out, “If exchanges can bring new products, bring real hedgers and integrate with spot markets, then there is scope for growth even in today’s market.” In other words, the true potential of the India commodities market is yet to be seen.