There are reports that Kotak Mahindra Bank is planning to sell its 15 per cent stake in India's biggest commodity exchange, Multi-Commodity Exchange (MCX). Business Today's Mahesh Nayak caught up with PK Singhal, Joint Managing Director of MCX, to discuss the issue and its impact on the working of the exchange. Singhal also spoke about the merger between commodities market regulator Forwards Market Commission (FMC) and the Securities and Exchange Board of India (SEBI), impact of the commodity transaction tax (CTT), how he was able to bring back brokers to the exchange, role of regional stock exchanges and growth of commodity exchanges in India. Edited excerpts:
Q: What have you to say on the media reports of Kotak Mahindra Bank selling its stake in MCX?
A: I don't have any idea about the news of Kotak selling its stake in MCX. I will be unable to comment on regulatory issues. However, regulation says no member on board should have any conflict of interest between them and the exchange. Assuming that the news of Kotak Mahindra Bank selling its stake in MCX is correct, it will not have any fundamental impact on the functioning of the exchange but it can have a huge sentimental impact.
Personally, I feel shareholder investors play an active role in the development of the exchange as they will help in expanding the product line as well as infuse money for future growth of the exchange. MCX is a listed entity and has a diverse shareholding. Kotak Mahindra Bank is an investor holding 15 per cent of MCX. The majority of the board of directors in the exchange is independent directors.
Q: What is your view on the Sebi-FMC merger?
A: The merger of FMC and SEBI will definitely strengthen the regulations and will be a game changer for the commodity futures market. SEBI has penal powers for raiding, searching, imposing fines and taking criminal actions against wrongdoers and thus market integrity will improve. Dabba market, which is informally said to be about 8-10 times of the regulated commodity derivatives market, subsequent to the imposition of CTT will be curbed. Moreover, down the line, in a year or so, the new regulator may allow launch of new products. The other major benefit of the merger is that securities brokers who have memberships of commodity futures through their subsidiary companies will benefit, as it will reduce the duplication in a number of issues as well as decrease the cost of transaction and compliance, in addition to better utilization of existing infrastructure and manpower. On the whole, this merger will lead to the opening up of a new chapter in the Indian financial market.
With the merger of Sebi-FMC, commodity exchanges will be called deemed stock exchanges and MCX will be able to function as an equity exchange and dabble in the entire gamut of products like stock, currency derivatives and interest rate derivatives.
Q: In 2008 we allowed new players in the market but none of them exist today. In your view what went wrong that no one could survive for even 10 years and what could have been done for them to exist?
A: The new players in the exchange space came with no product innovation. MCX was the established leader in the metals and energy space and NCDEX was doing decently in agri contracts. What was required at the time were newer products (commodities) other than the ones that were already existing and liquid on both the exchanges. However, all the exchanges that came in ended up doing a copy paste of the same contracts that were already doing well or were liquid on MCX or NCDEX. As per my knowledge, there is no instance anywhere when the liquidity of one exchange shifts to the other exchange except when the exchange which has liquidity had issues regarding risk management or technology or fails to meet the challenges required by the market by way of product innovation. Why would a client like to trade on a contract in the other exchange, when there is already liquidity on an established exchange, when there is no guarantee that he will even manage to get the orders executed at the best rate and/or has an exit option? Further, with only retail clients and corporates looking to hedge their underlying, there were only limited number of participants in the commodity future markets.
Q: Everyone blames CTT for the downfall of the commodity exchanges in India. But India is not the only one that levies transaction tax.
A: As per our knowledge, no other country except Taiwan levies transaction tax. Currently, CTT is Rs 1,000 per crore on sell side, which is extremely on the higher side, especially when the exchanges are charging less than Rs 200 per crore as transaction charges. Not only has the imposition of CTT badly affected the liquidity in the non-agri commodities, but has also not given any advantage to agri commodities where there is no CTT. The imposition of CTT has adversely affected the overall market sentiment on the commodity futures market. India being one of the largest consumers of commodities is losing the opportunity of becoming the price setter rather than the price taker. The increased participation and volume in the exchanges is a big challenge till CTT is applicable. Even if the foreign participants and banks etc., are allowed to trade, there is no rationale for them to come to the Indian markets when the impact cost or cost of transaction here is on a much higher side as compared to the other markets where they have an opportunity to participate. However, the introduction of options would result in increased participation and volumes on the exchanges, as CTT will be applicable only on the premium amount rather than the underlying.
Q: What was your strategy to increase volumes on the MCX to bring back players as well as participation in the market following the NSEL (National Spot Exchange Ltd.) fiasco?
A: As you are aware, our bullion contracts have a very good participation from all the stakeholders of this market. Anyone who is importing gold in India, the jewellers, especially exporters, participate and hedge on MCX. The impact cost in our gold contract prior to CTT was lower than what it was in CME. One of the basic reasons of such a wide participation in bullion contracts is the efforts made by MCX in market awareness and educating the various stakeholders about the benefits of participating in bullion future contracts. We are trying to replicate the same in the base metals contracts as lakhs of SMEs, who do not have access to hedging in the foreign exchanges are facing price risk, and thus can mitigate their risk by hedging on MCX. Accordingly, our thrust from the last few months is on creating awareness and spreading education, particularly among physical market participants especially stakeholders of base metals or SMEs (small and medium enterprises) on the need and benefits of hedging. The exchange has conducted over 400 awareness and other educational programmes across different centres during this fiscal year so far. We are also engaging with universities and other educational institutions for promoting financial literacy in the commodity ecosystem.
Q: Why was NSEL fiasco damaging for MCX? And why do you think other exchanges were unable to pull players and volumes into their exchange?
A: As you are aware, MCX did not have any relationship or linkages with NSEL except that FTIL (Financial Technologies), our anchor investor was associated with NSEL and a subsidiary of NSEL. Indian Bullion Market Association (IBMA), was trading on our exchange as a client of one of our members. The market participants were confident about the risk management systems of MCX and had felt that there is nothing wrong in MCX per se. The special audit in MCX following the NSEL crisis found certain areas for improvement in some of the governance-related matters of the exchange. We have been very swift in dealing with them and complying with every directive of the FMC in this matter. Of course, identifying and dealing with systemic lacunae was a huge challenge for us, but our efforts at improving governance at MCX within a very short time have finally resulted in credible outcomes. The tumultuous adverse external and internal conditions that effected MCX from July 2013 to September / October 2014 are now behind us. With the exit of several senior management people from the organisation, there has been a major vacuum in the exchange for more than a year and a half. It had become a challenge to get competent resources not only in the areas of exchange technology, but also in operations, including warehousing and logistics, but somehow we have successfully handled that vacuum too with the remaining dedicated manpower of the exchange especially at middle and junior levels.
I would not like to make any comment on why the other exchanges were not able to pull players and volumes.
Q: How do you think we can revive the lost pride of regional commodity exchanges?
A: I, personally, do not feel there is any future for the regional commodity exchanges, which already have either nil or negligible volumes. NBOT (National Board of Trade), which was the only regional commodity futures exchange having some liquidity in one of the agri contracts, has already stopped trading. SEBI has successfully handled the exit of regional stock exchanges and I feel it will be extremely difficult to revive the regional commodity exchanges, especially when an experiment of reviving regional stock exchanges through Inter-connected Stock Exchange has failed.
Q: Is inorganic growth the way to grow for MCX. Any thought of opening an exchange business outside India? And why?
A: Presently, there are no plans. MCX may explore the possibility of opening an exchange business in GIFT city either on its own or jointly with some other Indian or foreign exchanges, but so far there is no decision or concrete plan in this direction as more clarity is required.