India Times: Commodities trading spreads into 400 cities

Commodities trading spreads into 400 cities

TIMES NEWS NETWORK[ WEDNESDAY, FEBRUARY 23, 2005 12:23:37 AM]

Equities could be the obvious road to wealth, but commodities are now beginning to capture the punter’s imagination too. From zero volumes a year ago, the combined trading volume achieved on the national commodity exchange platform has reached Rs 260,659 crore in ‘04.

Futures trading has landed in over 400 cities in India, covering 1,000 brokers through 5,000 terminals.

The budget can give it a further boost by straightening regulations, promising legal changes, and allowing institutional investors to buy commodity contracts (which are considered securities by the Securities Contract Regulation Act).

How big is the market? Already, the futures market for gold and silver is about four times and 40 times, that of spot markets respectively. With imports of over 700 tonnes of gold every year and around 10,000-15,000 tonnes of gold stocked in the country, the futures market is definitely raring to grow. In other countries like America, futures volumes are as high as 72.9 and 55 (‘01) times the gold and silver spot markets respectively.

India is in a hurry. More than a dozen Indian banks have already taken up stake in various exchanges. Jignesh Shah, MD of MCX, which is promoted by a consortium of 10 banks says, “banks and other financial institutions like mutual funds should be allowed to participate in trading.”

Mutual fund participation on commodity exchanges is also likely, considering the regulators are open to the idea. NCDEX CEO, P Ravikumar says mutual funds will be able to diversify investors’ portfolios and ensure higher returns at limited risks.

“The biggest beneficiary of derivatives trading could be the agricultural community”, says Kailash Gupta, MD, NCME — India’s first national commodity exchange. The government support price, quota system and intervention in procurement at administered prices has distorted the market, he says.

Exchanges agree that a major reform in this segment would be the introduction of options and index-based trading, which is currently not permitted by the Forward Contract Regulation Act.

Already the FMC has recommended a modification of section 19 of the FCRA Act to allow options. FMC is also favouring the introduction of exotic commodities like weather and emissions.

Brokers, who are largely responsible for getting liquidity, have sought a modification in section 194-H of the Income Tax Act, which stipulates commission and brokerage payments. Exchanges like the MCX, argue that commodities futures trading should be viewed at par with the securities business, so that the commodities brokers are not discriminated against.

The treatment of “speculative income” is another contentious issue. Exchanges say the government must recognise commodities trading as a “line of business” and not as pure speculation, as considered under section 43(5) of the Income Tax Act.

Industry expectation is that the negotiability status of the warehouse receipt could also find a mention in the budget. A proper warehousing mechanism supported by a receipt system could boost the trade finance system.

The industry also demands rationalisation of the stamp duty. Though it is a state subject, the fact remains that due to the applicability of different stamp duties, the cost of transactions varies tremendously.

The much talked-about VAT will also have an impact on the sector, says NCDEX chief economist Madan Sabanabis. The introduction of VAT would help clear quite a few issues relating to sales tax.

As often said, futures are a zero sum game. So there have to be losers. Regional exchanges have taken a backseat, despite having domain knowledge. Rapidly decaying volumes, dwindling membership and lack of professionalism are creeping into the system.

For example, the once-flourishing East India Jute and Hessian Exchange is a shadow of its former glory, with little liquidity in their Hessian contracts.

All exchanges are unanimous that a strong regulator is the need of the hour.