The Securities and Exchange Board of India (Sebi) has sought one year’s action plan from the National Commodity and Derivatives Exchange (NCDEX), which has been falling out of favour with investors and traders.
Sebi has recently given the go-ahead to an Initial Public Offer (IPOI) plan by NCDEX, in which the National Stock Exchange has 15 percent stake.
“Basically, Sebi is not happy with the way trading volume in the exchange is diminishing on a yearly basis. In fact, Sebi called a board meeting of NCDEX last week and sought the exchange’s plan of action for the next one year,” a source close to the development told Moneycontrol.NCDEX trading volume goes downhill
The trading volume in NCDEX has fallen by more than 70 percent. In January 2018, it was around Rs 3,031 crore on a monthly basis, which has come down to Rs 784 crore in July 2020.
In January, it was Rs 1,639 crore. At the peak of COVID-19, in May 2020, trading volume reached Rs 587 crore.
A source from a commodity broking house told Moneycontrol: “At this rate, the exchange will not earn sufficient money even for running itself. Under the current structure, the exchange earns Rs 6 for every transaction worth Rs 1 lakh. A rough calculation would show that the exchange earns around Rs 30 lakh per month.”
One broker who stopped trading in NCDEX said: “Many brokers stopped trading on NCDEX after it increased transaction and warehousing charges. The exchange was charging higher fees for keeping open positions. This is something unheard of.”Where did the rot begin?
“As far as NCDEX is concerned, they have never shown how they are building up this market or their plans for development. They have failed to create confidence among hedgers, traders and even members of the exchange,” Kishore Narne, Head of Research, Commodity Division, Motilal Oswal, said.
Vijay Sardana, a techno-legal expert of commodity market, told Moneycontrol: “Too much focus on brokers and brokerage earnings will never make commodities a viable business. In fact, this will shake the confidence of the user industry and kills volumes.”
Last year, for instance, when castor prices shot up, NCDEX increased the margin overnight. Two major broking houses, Motilal Oswal and Angel Broking, stopped trading on the exchange after that.
"Agro-commodities need full attention on commodity fundamentals to attract hedgers. Too much focus on technical analysis only promotes speculation and leads to all-round losses. It is high time for a course correction,” Sardana said.Are farmers not interested in NCDEX?
“Farmers and stock holders are not much interested as the exchange does not provide much liquidity in long-term contracts. It is mainly focused on near-term contracts. They may be useful only for traders,” a Mumbai-based broker said.
“Physical delivery of metals is an attractive destination for those traders arbitraging in the spot and futures markets. Higher costs and perishable items discouraged trading in NCDEX," he said.
Narne of Motilal Oswal, said: “Agricultural markets are fairly localised and small, with almost nil information dissemination. This makes it difficult to understand the market and the participation is always concentrated in smaller towns.
“Secondly, any large trading movement instantly attracts media and government attention. This makes traders nervous and they fear government intervention. Though the common belief is that farmers will hedge on commodity derivatives, our farmers are very small and ill-equipped to handle the complexities of a derivative markets,” he said.Is there hope for NCDEX?
Narinder Wadhwa, President of Commodity Participants Association of India, believes not all is lost and has a few suggestions.
“Volumes in the agri-futures market have decreased because of the castor price episode and other issues on NCDEX in the last few years. We need to tackle this and sops should be in place. Market participants should know in advance about outcome of contracts they get into. With the recent regulatory changes in APMC and other agri-marketing Acts, lot of interest is there in agri-products,” he said.
“The time has come for futures markets to widen their contracts basket. NSE and other exchanges are also working on this. With big corporates and Farmer Producer Organisation s (FPOs) becoming active in the agri-sphere, we should see a pickup in volumes in our agri-commodities,” he said.
However, the situation is no different in India’s largest derivatives exchange, the Multi Commodity Exchange, either. While trading in mentha, cardamom, crude palm oil and cotton saw good volumes in the past, in the last two-to-three years, there is not much volumes in mentha and cardamom.
The Bombay Stock Exchange has also launched trading in turmeric, guar gum, guar seed and cotton. But it has succeeded only in cotton trading, with a 30-40 percent market share gain.What NCDEX has to say
The COVID-19 pandemic has disrupted physical market operations and has impacted volumes at the exchange platform as well. The exchange, along with its subsidiaries, has managed this difficult period effectively and helped value chain participants, not only in transparent price discovery but in physical operations as well, the NCDEX said.
During the pandemic period (April to July), National Commodity Clearing Ltd (NCCL)-approved warehouses have received 1,50,000 MT deposit and there was delivery of 1,22,000 MT from the futures platform.
The exchange is actively working for the higher level of operations expected after the Covid related supply chain disruptions.
NCDEX remains committed to its investments and efforts to help agri-markets achieve the transformation expected at a national level.
With good monsoons following the sowing of Kharif crops, opportunities created by agri-reforms, and higher participation from a wider set of participants, the segment is expected to bounce back in the months ahead, the NCDEX said.