Grappling with its biggest ever scam running into Rs 5,600 crore, it appears to be a journey down the hill for the commodity markets with total exchange traded turnover halving to almost Rs 65 lakh crore in 2014.
Although not a formal member of the commodity futures market, the payment default at National Spot Exchange Ltd (NSEL) shook the market to its core, resulting into a series of regulatory steps to revive investor confidence and credibility during 2014 and it is now hoping for a fresh start in the new year.
As a result, the total turnover appear to be falling to around Rs 65 lakh crore, almost half of Rs 123 lakh crore clocked in 2013, although the industry players and regulator FMC are hopeful that “the worst is over”.
“Bright days are ahead for the commodity market as the confidence and credibility, which was shaken up due to the NSEL scam, has fully been restored now,” Forward Markets Commission (FMC) Chairman Ramesh Abhishek said.
In 2014, the regulations were tightened for promoter and shareholders of the exchanges, warehouse facilities were strengthened, ban was lifted on tur, urad and rice trade, while exchanges were allowed to launch forward trading to bring effective price discovery and efficiency in physical markets.
Going ahead, the FMC chief said that the focus would be on increasing depth of the market and quality trade volumes, and is in talks with RBI to allow more market participants like FIIs and banks in the commodity market.
On the wish-list for next year, the exchanges — MCX, NCDEX, NMCE and ACE — said that they want the government to scrap Commodities Transaction Tax (CTT) and allow more products and market players.
On major milestones achieved in 2014, the FMC said that “the biggest achievement of the year was that we have initiated measures to ensure investors get back their money from the National Spot Exchange Ltd (NSEL), promoted by FTIL.”
A strong message was sent to the industry by ensuring Financial Technologies India (FTIL) implement the FMC’s December 2013 order that declared the company unfit to run any exchanges, it said. FTIL exited completely from MCX, MCX-SX and other exchanges in India and abroad.
FMC chief said: “All uncertainty and regulatory issues that were there have all been resolved. Post NSEL crisis, there is better regulation, more depth and participation.”
Ace Derivatives and Commodity Exchange CEO Dilip Bhatia said, “So many regulatory changes have happened post NSEL crisis that the market is now on a sound footing. Now, we must bring structural reforms.”
The Rs 5,600 payment default at NSEL, which surfaced in August 2013, is one of the biggest scam in the history of financial markets in India. The scam exposed lack of regulation in the spot commodity exchanges.
With poor progress made by NSEL in recovery of dues from 22 defaulters, the FMC recommended to the government to merge NSEL with FTIL and takeover management.
NSEL has been able to recover only Rs 360 crore so far of the total Rs 5,600 crore dues, as per the NSEL data.
Bad times also meant survival for only a few in the market. Only 10 bourses are operational now, as against 20-odd last year. Two national bourses — Universal Commodity Exchange (UCX) and ICEX also suspended trading during the year.
Among the four national exchanges, who weathered the post-NSEL crisis, agri-commodity bourse NCDEX said it suffered the most as investors were “skeptical” of trading in agri-items due to concerns about warehousing facilities.
“Although the NSEL crisis happened at our competitor’s group firm, but it affected us more because it happened in agri-segment. Our business was affected quite significantly,” NCDEX Managing Director and CEO Samir Shah said.
The exchange had embarked on a reform project and awaiting regulatory changes. “But we did not get any input for 6-8 months from FMC, which was busy dealing with NSEL crisis. Things have started moving only in the last one month,” he said.
Noting that the “worst is behind us”, Shah said, “We are bullish about next year given that we have launched forward trading in some commodities. He also hoped to get regulatory approval to launch forward trading in tur and urad next year.
Leading commodity bourse MCX, from which FTIL had to exit after the NSEL scam, said that some governance-related issues that plagued MCX during the latter half of 2013 and early part of this year are, “fortunately behind us”.
“We have been able to address all these issues, ensure compliance with the regulator’s directives and move ahead. As we draw the year to a close, we have been able to quickly gain lost ground,” MCX Joint Managing Director P K Singal said.
In 2015, he said the exchange expects a slew of policy reforms that can take the commodity futures market to the next stage of its growth and development.
“The imposition of CTT on non-agri commodities has dampened the growth potential of the commodity markets, which is still in its nascent stage. Therefore, the government should consider either removal of CTT altogether or reduce it on the non-agri commodities,” he demanded.
The long-pending amendment to the Forward Contracts (Regulation) Act, 1952, should hopefully be cleared by the Parliament, he added.
Both NMCE and Ace Derivatives and Commodity Exchange said that they would see about 30 per cent drop in their turnover this year.
NMCE Managing Director Anil Mishra said CTT has been a “dampener” to the market. “Improvement in trade volumes is going to be very difficult unless CTT is reduced,” he said.
He said that the exchange has sought approval to launch forward trade in rubber and other commodities in the next year.
Among key regulatory measures, FMC issued new ownership and shareholding norms for commodity exchanges under which an individual promoter is allowed to hold not more than five per cent stake in any commodity exchanges. Also, at least 51 per cent of the paid-up equity share capital was allowed to be held by the public.
For better corporate Governance, revised norms were issued on the constitution of the Board of Directors, committees, nomination and role of independent directors and appointment of Chief Executives at the exchanges.
The exchanges were told to share information about any defaulter/suspended/ expelled members with other commodity exchanges and also display them on websites. They were asked to avoid multiple audit of the member in the same financial year.
Not only exchanges, brokerage firms too suffered blows from the NSEL fiasco as some of them had to downsize their business and shift their focus on equities and currency markets.
“The regulator has come down heavily to address the bottlenecks. Relaxing daily price limit and tightening of margin, among others, are good initiative. We are looking at more products like options,” said Harish Galipelli, Head of Commodity and Currency Derivatives at JRG Wealth Management.
He also said that that the market has already hit the bottom and good things are ahead. “I think the commodity futures market should take off in 2015,” he added.
