The Union ministry of consumer affairs has told the Forward Markets Commission (FMC) to overview, monitor and regulate electronic commodity spot exchanges.
In an internal note to the FMC a little over a week ago, the ministry asked it to regulate two spot online commodity exchanges in India — Financial Technologies-promoted National Spot Exchange Ltd (NSEL) and the National Commodity & Derivatives Exchange-promoted NSpot. The third spot exchange, promoted by Ahmedabad-based National Multi Commodity Exchange (NMCE), is yet to commence trading. Confirming the development, a senior FMC official said: “The ministry has extended our role to regulate online spot trading of commodities.”
FMC was regulating futures trading since 2003, when hedging in commodities was allowed after 40 years of suspension. The online spot trade, however, remained largely self-regulated, as they were exempted from reporting to FMC under the Forward Contracts (Regulation) Act.
Exemptions were also granted to spot exchanges for reporting to the central government in the absence of any nominated agency. But, they were asked to comply with all other statutory regulations, alongwith compulsory delivery of all positions outstanding during the day.
The physical spot trade of commodities in mandis, however, is currently regulated at the state level by the Agricultural Produce Marketing Committee (APMC). In most states, this body is unable to do so, because of age-old provisions and lack of technical skills for handling electronic trade.
FMC has asked spot exchanges to report with trading volume and turnover on a fortnightly basis, as is the practice for futures exchanges.
The FMC can also penalise in case of wrongdoing. “This is a good development. Since spot exchanges attained a significant volume and turnover size, a regulator was required to monitor day-to-day operations,” said Anjani Sinha, managing director of NSEL.
On Thursday, the online commodity trade attracts a daily average turnover of around Rs 1,000 crore, of which NSEL enjoys 98 per cent market share. NSEL started operating in 2008 and facilitates trade in 33 commodities with terminals available in 14 states. Government organisations such as Food Corporation of India, Haryana Cooperative Supply and Marketing Federation, MMTC, Cotton Corporation of India and the National Agricultural Cooperative Marketing Federation of India sell agricultural commodities.
“Earlier, when we used to go to big corporates to seek participation, they used to ask about the regulators amid doubts and fear. The decision to have a regulator will help attract corporate participation now, which will also translate into multiplier effects on exchange turnover,” said Sinha.
Until now, participation was seen on spot exchanges only from retail traders in small lots. Electronic trade in commodities in small denominations has become very popular on NSEL.
“Having a regulator would help in the development of an organised spot market at the national level and FMC’s facilitation would be crucial to negotiate with state APMCs and, thus, develop a robust national spot market,” said Rajesh Kumar Sinha, head, NSpot.
Going forward, spot exchanges will see other regulators. The warehousing regulator is set to monitor warehouse receipt trade, while the regulator of hydrocarbons will handle environmental products.