The edict to demutualised commodity exchanges to widen their equity base within a year is bound to evoke an adverse reaction from the affected circles, with some reason, though the move may not be wholly illogical.
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In principle, diversified ownership for an exchange is not a bad idea, especially considering the present and emerging role of the commodities sector in the country’s economy.
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Trading volumes at the commodities exchanges are likely to be in multiples of the present physical commodities market of Rs 11,00,000 crore, and could even outdo the equity market in this respect.
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However, the issue to be addressed is whether diversified shareholding automatically ensures fair and transparent trading on the exchanges.
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If not, why focus on the shareholding pattern so soon after issuing trading licences? Would it not be better at this stage to concentrate on strengthening the regulatory mechanism and putting in place an effective legal framework for this purpose?
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For instance, the Forward Markets Commission has the right to appoint three or four directors on to the boards of the new commodity exchanges, over and above which there is the requirement that independent directors comprise a third of the total.
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Have such directors been appointed, and are they effective? If some of the promoters of commodity exchanges seem dodgy specimens, the question would be how they were issued licences, when one was denied to even the Bombay Stock Exchange.
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If there is indeed malpractice at the exchanges, despite the safeguards, then the exchange’s licence can always be withdrawn.
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While this does not rule out dilution as a valid course of action, the justification for an arbitrarily determined cap on the shareholding of the promoters and other investors is not clear — especially when caps are being removed in sectors like banking.
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In commercial terms, there is also the question of timing. Most of the commodity exchanges are only a few months old.
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The time limit of one year for diluting the promoters’ holding seems much too short if the promoters are to be given time to create value in their enterprises before being forced to shed a part or the bulk of their stake — especially when such a dilution condition was not a part of the original licence issued to them.
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What the government needs to do is to focus on the lacunae that still exist in futures trading in commodities. The Kabra committee, which had recommended resumption of futures trading in commodities after a gap of more than four decades, had stated that the Forward Markets Commission should be adequately strengthened and its branches opened at all centres before allowing trading to begin.
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This recommendation is yet to be adequately implemented. Besides, since warehousing is critical for the success of commodity futures, there is a need for modernisation of existing warehouses and opening of new ones to create a nationwide infrastructure. The issues related to sales tax, too, need to be addressed for the smooth operation of futures transactions.
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