Consolidation in commex segment

Two have stopped trading and another is struggling to keep above water; only niche players appear to be able to sustain

Commodity futures trading in India is passing through a consolidation phase. Two nationwide ones, Indian Commodity Exchange (ICEX) and Universal Commodity Exchange (UCX), have shut down in a short span. A third, National Multi Commodity Exchange (NMCE), is struggling to restore traders’ confidence.

ICEX, promoted by MMTC-Indiabulls and anchored by Reliance Money, discontinued trading this April. The exchange was doing reasonably well earlier, with innovative contracts, including iron ore. However, since its launch in November 2009, ICEX incurred continuous losses. A commodities transaction tax, imposed in July 2013, was perhaps the final spoiler.

Similarly, after having failed to grab enough participation since its launch a year before, UCX, newest entrant in the  commodity exchange business, announced last week that it would not launch any new contracts. According to informed sources, the Forward Markets Commission ordered Ketan Seth-owned Commex Technology,  promoter of UCX, to return the funds ICEX lent to some of its group companies. Efforts to reach Seth and UCX managing director Praveen Pillai were futile.

UCX said in a circular that all contracts with even marginal open interest would be put on square-off mode. “The exchange will, meanwhile, draw up a revival strategy afresh,” said Jeyakumar A S, company secretary & chief compliance officer.

Ahmedabad-based NMCE has experienced a sharp fall in  turnover. There was an 86 per cent decline in daily average turnover to a mere Rs 162.5 crore in June this year, compared to Rs 1,204 crore in the same month last year.

The exchange is yet not out of the troubles that began with FMC declaring its promoters not fit; net worth is eroding. The original promoter was alleged to have siphoned funds from the exchange. The income tax department has slapped a recovery notice on the exchange, saying the original promoter was debiting false expenses and the exchange had evaded tax. If this demand is met, the exchange will hardly have money to run.

According to Anil Mishra, managing director and chief executive officer, NMCE has drawn up several strategies to revamp business. He attributes falling turnover to the commodities transaction tax (CTT).

After the fallout of the National Spot Exchange payment crisis in July last year, FMC strengthened regulations. Adhering to that, NMCE has set up a minimum net worth criteria for its members of Rs 50 lakh. “So, there was a natural exit of some traders that failed to meet this criterion, resulting in a decline in turnover,” Mishra added.

FMC has, to help exchanges, been asking them to consider launching forward contracts. To survive, NMCE has decided to capture the vacuum in the spot exchange space. It plans to send a proposal to FMC, seeking approval of forward contracts, where both buyers and sellers would opt for delivery-based settlement.

NMCE’s problem is till the issues created by the earlier promoter are resolved, no one is ready to put in new funds and so, net worth will keep eroding. So, the time for the exchange to implement a revival strategy is short.

“Each exchange has to create a unique selling proposition to attract participation. While Kotak-anchored Ace successfully created a niche in cotton and soybean, both ICEX and UCX have failed in doing so. NMCE has been negligible in business generation since beginning. Starting an exchange with contracts that exist on other platforms will not make the business successful,” said P H Ravikumar, former managing director of National Commodities and Derivatives Exchange.

If exchanges keep shutting shop, the regulator will have to have regulations for mergers of these.