INDIAN markets have been internationally linked through trade as evidenced from history and the visitors to the country. From Ashoka to the British colonial regime of the 19th century, Indian producers and traders have remained “price takers” despite our significant share in global supply and demand. However, with the ongoing economic liberalisation and globalisation processes, not only the need to provide better prices to the farmers but also providing the participants with a platform for risk transfer was felt by the government, thus leading to the advent of commodity exchanges.
It is imperative to have efficient markets for an economy to compete globally in a cost efficient way so that ecosystem participants and consumers benefit. To enhance the competitiveness of our domestic commodity exchanges, there was an urgent need to allow capital infusion to help them put up a robust market infrastructure.
The recent policy allows 49% foreign investment in commodity exchanges. Now FDI up to 26% and FII up to 23% is allowed with the proviso that no single investor holds more than 5 %. It also bolsters up the demutualised character of the commodity exchanges. The Government deserves kudos for meeting the long-felt need with these policy initiatives which act as catalysts for orderly growth of commodity exchanges.
Commodity Exchanges – A Reliable Platform
Since its inception in 2003 till 2005, Indian commodity derivatives segment led by three national level online exchanges have witnessed remarkable growth. The commodity exchanges were no exception to its older siblings such as NSE and BSE, in terms of their turnover, technology, regulatory structure, and operations.
Commodity exchanges, since their inception, have grown on their own steam with little fiscal support. The markets grew despite non-availability of many instruments like indices and options trading until recently and also non-participation by banks, mutual funds and FIIs to trade. The recent amendment of FCRA Act paves the way for the introduction of such instruments on commodity exchanges. It is remarkable that the total turnover on the commodity exchanges in the last two years was close to the real GDP of the country, thus indicating its growing penetration besides contributing towards economic stability.
With a growing population of over one billion (2001 Census), India would remain one of the largest markets for the traders in global commodities, with metals and energy playing a crucial role in the growth and development of the India’s industrial sector and agricultural products providing for food security and nutrition needs of the masses. In this juncture, allowing foreign investment in commodity exchanges and FCRA amendment would:
lEmpower the regulator with more teeth for orderly development of markets
lCreate a “near-perfect market situation”.
lBroadbase participation in commexes from different corporate segments.
lPosition India as a global hub for trading in commodities due to its strategic geographical location.
lMake India a potential “price setter” for many commodities.
Strengthening Credibility of Markets
The need of the hour was to invite more industry participation on commodity exchanges and concentrated efforts to increase awareness levels among participants.
The policy changes will spur the industry to take development back to the rural areas and bridge the urban-rural divide to invest in capital intensive market development infrastructure.
Consequently, economic benefits, such as employment avenues and development of commodities market facilities, will boost commodity markets. Thus capital infusion through foreign investment eases the pressure on exchanges and helps them to grow organically.
The Way Forward
Overall, intensified competition has put pressure on exchanges to reduce costs for users and compensating it through economies of scale, while they had to invest heavily on increasing their scale of operations since inception.
This requires that they shall acquire capital from sources cheaper than the domestic markets due to the high cost of acquiring it and the competition from the high return industries. This would also bring along with it the global best practices, technology, and efficiency for the domestic exchanges in their path to become global market places. In fact, many of the leading commodity exchanges in the global arena are forming strong consortiums through strategic tie-ups or merger/acquisition plans to emerge as global leaders and to simultaneously avoid extinction.
Probably, the move to allow foreign investment has come at the right point in time when the global industry insisted that ‘bigger is always better’ thus paving way for Indian domestic commodity exchanges to emerge as truly “global exchanges”.
The move would definitely augment the potential of the market places to help the rural areas unlock values in their economy and help spread benefits of economic growth.
(The author is deputy managing director, MCX. Views are personal)
It is imperative to have efficient markets for an economy to compete globally in a cost efficient way so that ecosystem participants and consumers benefit. To enhance the competitiveness of our domestic commodity exchanges, there was an urgent need to allow capital infusion to help them put up a robust market infrastructure.
The recent policy allows 49% foreign investment in commodity exchanges. Now FDI up to 26% and FII up to 23% is allowed with the proviso that no single investor holds more than 5 %. It also bolsters up the demutualised character of the commodity exchanges. The Government deserves kudos for meeting the long-felt need with these policy initiatives which act as catalysts for orderly growth of commodity exchanges.
Commodity Exchanges – A Reliable Platform
Since its inception in 2003 till 2005, Indian commodity derivatives segment led by three national level online exchanges have witnessed remarkable growth. The commodity exchanges were no exception to its older siblings such as NSE and BSE, in terms of their turnover, technology, regulatory structure, and operations.
Commodity exchanges, since their inception, have grown on their own steam with little fiscal support. The markets grew despite non-availability of many instruments like indices and options trading until recently and also non-participation by banks, mutual funds and FIIs to trade. The recent amendment of FCRA Act paves the way for the introduction of such instruments on commodity exchanges. It is remarkable that the total turnover on the commodity exchanges in the last two years was close to the real GDP of the country, thus indicating its growing penetration besides contributing towards economic stability.
With a growing population of over one billion (2001 Census), India would remain one of the largest markets for the traders in global commodities, with metals and energy playing a crucial role in the growth and development of the India’s industrial sector and agricultural products providing for food security and nutrition needs of the masses. In this juncture, allowing foreign investment in commodity exchanges and FCRA amendment would:
lEmpower the regulator with more teeth for orderly development of markets
lCreate a “near-perfect market situation”.
lBroadbase participation in commexes from different corporate segments.
lPosition India as a global hub for trading in commodities due to its strategic geographical location.
lMake India a potential “price setter” for many commodities.
Strengthening Credibility of Markets
The need of the hour was to invite more industry participation on commodity exchanges and concentrated efforts to increase awareness levels among participants.
The policy changes will spur the industry to take development back to the rural areas and bridge the urban-rural divide to invest in capital intensive market development infrastructure.
Consequently, economic benefits, such as employment avenues and development of commodities market facilities, will boost commodity markets. Thus capital infusion through foreign investment eases the pressure on exchanges and helps them to grow organically.
The Way Forward
Overall, intensified competition has put pressure on exchanges to reduce costs for users and compensating it through economies of scale, while they had to invest heavily on increasing their scale of operations since inception.
This requires that they shall acquire capital from sources cheaper than the domestic markets due to the high cost of acquiring it and the competition from the high return industries. This would also bring along with it the global best practices, technology, and efficiency for the domestic exchanges in their path to become global market places. In fact, many of the leading commodity exchanges in the global arena are forming strong consortiums through strategic tie-ups or merger/acquisition plans to emerge as global leaders and to simultaneously avoid extinction.
Probably, the move to allow foreign investment has come at the right point in time when the global industry insisted that ‘bigger is always better’ thus paving way for Indian domestic commodity exchanges to emerge as truly “global exchanges”.
The move would definitely augment the potential of the market places to help the rural areas unlock values in their economy and help spread benefits of economic growth.
(The author is deputy managing director, MCX. Views are personal)
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