Financial Technologies India Ltd’s offloading of 15 per cent stake in MCX to Kotak Mahindra Bank is good news for commodity derivatives trading in India. MCX is the country’s leading commodity trading exchange, accounting for 78 per cent of the total value of derivative trades put through between January and March this year. The Forward Markets Commission (FMC) had ordered FTIL to divest its 26 per cent holding in MCX after concluding it was unfit to hold any stake in a commodity exchange. This, of course, was the fallout of the scam at the National Spot Exchange Ltd (NSEL), which was also an FTIL-promoted bourse that shut down last year after defaulting on payments to investors in controversial commodity ‘pair contracts’. The fact that FMC was able to enforce its order and make FTIL sell its shares — the latter was reluctant to do so as bidders were quoting low prices — is important for establishing the commodity markets regulator’s credibility. It also helps that a credible investor like Kotak Mahindra has considered it worthwhile to take a significant stake in MCX.

The latest events, above all, demonstrate the continued relevance of exchange-traded commodities futures among investors and other market participants. True, FTIL and its promoter Jignesh Shah were responsible for the scam that resulted in volumes on MCX declining sharply in the last one year and the exchange’s market share dipping from 88 per cent in January-March 2013. But the fact that the daily turnover at MCX is still in the region of ₹20,000 crore — mainly comprising bullion and crude oil — indicates that the exchange serves more than a useful purpose for those trading on it. Now that the FMC has ensured the effective exit of its erstwhile promoters, the next step is to ensure a good team to lead MCX. The FMC’s new regulations restrict the maximum shareholding to 15 per cent in any commodity exchange. With MCX’s ownership now dispersed between a handful of banks (Kotak, IFCI, Nabard and HDFC Bank) and other domestic and foreign institutional investors, shareholders will no longer be able to unduly influence the running of the exchange. This would allow MCX to transform itself into a truly de-mutualised and professionally-run bourse akin to the National Stock Exchange or even its main rival, the NCDEX.

The Centre should take steps to strengthen the FMC’s effectiveness by giving it the search and seizure powers that the Securities and Exchange Board of India now has. It is also time to broadbase participation by allowing banks, mutual funds and foreign institutional players to trade on commodity exchanges. Together with the launch of option contracts, this will bring in much-needed liquidity to make commodity trading useful to all stakeholders.

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