End of Regional commodity exchanges: Hapur awaits Sebi nod for closure

Four other bourses had to shut shop earlier due to thin volumes and stringent Sebi norms

With the Securities and Exchange Board of India (Sebi) having refused to renew the mustard seed contract, Hapur Commodity Exchange Ltd (HCX), the last operational regional commodity exchange of the 22 that were in existence until a decade ago, awaits closure next month. 

Four exchanges, including Rajkot Commodity Exchange and India Pepper and Spice Trade Association have already shut shop. Hapur will be the fifth and last to exit after the merger of FMC with Sebi. Many others closed prior to that or merged with the bigger exchanges.  

“Days are over for regional commodity exchanges. The regulator wanted them to move to a more counterparty-based trading system with formal clearing corporations. In fact, Sebi had wanted regional commodity exchanges to function like corporations. For single-commodity exchanges, exit makes sense if they fail to the achieve operational skills prevalent in a corporation,” said Sanjay Rawal, President, Commodity Participants Association of India (CPAI). 

According to Sebi's website, HCX’s licence to offer futures trading in commodities expires on February 28. However, the regulator had denied renewal of mustard seed contract which expired last week with smooth settlement of open position. Daily average trading on HCX, which commenced futures trading in mustard seed way back in 1923, was worth around Rs 1 billion (Rs 100 crore) in mustard seed, with wide participation of traders from major growing states. 

The closure of HCX, however, is set to create problems for small and marginal mustard seed farmers who cannot afford membership on national commodity exchanges, where the fees are steep and trading lots are quite large.

Lack of computer literacy among age old traders with sharp domain expertise presents another problem for them to move to national exchanges. 

“We are awaiting shutdown despite having sound business practices. Sebi refused to renew the mustard seed contract which expired last week, even though it was marked by complaint-free delivery of open positions. With this refusal, the business came to standstill on HCX, which has been running its commodity futures business since 1923. The only problem with the exchange is Sebi’s Rs 1 billion (Rs 100 crore) minimum net worth criteria, which we failed to achieve despite repeated efforts,” said M P Singh, Secretary, HCX. 

The exchange currently has 200 members who are also its shareholders. However, due to the low capital base of these shareholders, members failed to pump in fresh capital into the exchange. As a result, HCX fell short of Sebi’s minimum net worth criteria by about 20-30 per cent. 

Earlier, four regional exchanges had to shut shop due to their inability to achieve the minimum net worth norm after merger of the erstwhile regulator the Forward Markets Commission (FMC) with Sebi in September 2015. 
 

These exchanges include India Pepper and Spice Trade Association (IPSTA), Rajkot Commodity Exchange (RCX) and Bombay Commodity Exchange and Cotton Association of India. 

Following the merger of the two regulators, Sebi had, in December 2015, introduced “exit route” for commodity exchanges, which were deemed to be securities exchange after September 2015. Of the five regional commodity exchanges were operational in December 2015, four have already shut shop. 

The regulator, in its various orders, barred entities that were permitted to continue operations from using the term “exchange” in their names. While they were allowed to conduct business normally, futures were off limits to them, as in the case of associations. 

Going by Sebi’s aforementioned condition, HCX may opt revert to its earlier name, "The Chamber of Commerce". 

Sebi also allowed Cotton Association of India to exit from futures in December 2016 due to thin volumes.

In 2007, regional commodity exchanges dominated futures trading due to their domain expertise and through the “open outcry” system of bidding. However, larger bourses such as National Multi Commodity Exchange (NMCE), Multi Commodity Exchange (MCX) and National Commodity & Derivatives Exchange (NCDEX), which offered computer-based trading, gradually strengthened their reach in major growing areas and also acquired domain expertise. Thereafter, two exchanges, Universal Commodity Exchange and Ace Derivatives & Commodity Exchanges, started nationwide online futures, However, they soon shut down.

With Sebi now focusing on universal exchanges by permitting equity exchanges to offer commodity derivatives and vice-versa, further consolidation in commodity derivatives cannot be ruled out.