NMCE: The rise, fall and survival of India’s oldest commodity exchange

From its rise to the zenith to a later state of despair, the country’s first commodity exchange (commex), the National Multi Commodity Exchange of India Ltd (NMCE), has a story to tell about India’s changing regulatory framework, participants’ apprehensions and promoters’ manipulations.

On September 11, 2018, the nation’s oldest commex ceased to exist post merger with its youngest peer, the Indian Commodity Exchange Ltd (ICEX).

Quick climb

Since its launch in November 2002, NMCE pioneered several firsts in the commodity futures space. As Anil Mishra, MD and CEO, puts it, the objective of the exchange was to bring value to farmers and provide a risk management platform to the hedgers in niche commodities. Dominating the futures trade for the niche agri-commodity segments of rubber, copra, sacking and raw jute, NMCE put India on the global map by competing with the likes of SFE-Shanghai, Tocom-Tokyo and Sicom-Singapore, especially in rubber trade.

From ₹47,369 crore in 2003-04 to ₹4,55,803 crore in 2009-10, its turnover rose 10 times. Though agri contracts dominated the trade, metals and bullion contracts contributed 22 per cent and 9 per cent, respectively.

The contribution of non-agri contracts increased to 50 per cent — with 41 per cent from metals and 9 per cent from bullion — in 2011-12, when the exchange achieved peak volumes of ₹5,36,702 crore. Rubber, however, remained the top traded commodity, with single-day trade turnover reaching ₹272 crore on January 5, 2011.

Mishra brought several innovative products to keep the ship afloat amid tight competition. In November 2009, NMCE launched the first deliverable gold guinea (.999 purity) contract to reach the masses. It tied up with Muthoot Group to operate multiple delivery centres. The December 2009 contract recorded volumes of ₹591 crore with 4.28 lakh trades from over 100 members. The first delivery of coins was conducted across 12 Indian cities.

“NMCE has been at the forefront of bringing several firsts to commodities futures. We were the first to introduce advanced technologies in the trading platform. We brought the warehouse receipt funding model, which was a great success,” recalled Mishra.

Early headwinds

Even as NMCE was rapidly scaling new heights came a blow in 2011, when the erstwhile regulator, Forward Markets Commission (FMC), accused the commex’s founder-promoter Kailash Gupta of fraud to the tune of ₹28 crore.

The senior management ensured refunds to the ‘affected’ members and tried to restore confidence in the exchange, but the membership base took a hit. The turnover started falling in the subsequent years, with reduced trades in both non-agri and agri segments.

According to Mishra, the exchange suffered another blow in 2013, when the UPA government introduced the commodities transaction tax (CTT) on non-agri commodities futures contracts at 0.01 per cent of the price of the trade. This made trading unviable for hedgers, arbitrageurs and day traders.

“This was like taxing the hedgers for risk management. This massively hurt business on the exchange with the non-agri segment completely reducing to zero, and a big impact on coffee and rubber trades, too,” Mishra said.

Subsequently, the share of the non-agri segment in the total turnover fell from 50 per cent in 2011-12 to zero by 2014-15. And the total turnover remained restricted to the agri segment at ₹72,080 crore, down 86 per cent from the peak reported in 2011-12.

The merger of FMC with equity markets regulator SEBI made survival an uphill task for small exchanges like NMCE. SEBI stipulated a ₹100-crore net worth for exchanges, which became a tall order for NMCE amid its falling turnover and dubious history of promoters.

Merger bounty

NMCE’s merger with ICEX is seen as win-win. While ICEX inherits ready-made contracts from NMCE, the latter gets support to meet regulatory requirements. The merger also creates a new and sustainable platform for the participants.

Terming the “timely merger” a big success ahead of the regulator cracking its whip, Mishra said: “This merger addresses two concerns. First, the net worth requirement, and second, the requirement of setting up a clearing corporation. We will on-board all NMCE members on ICEX.”

The existing NMCE contracts have already been integrated on ICEX, while the technology integration will be completed shortly. ICEX, which launched the world’s first diamond futures contract last year and recently launched steel futures, will get the agri commodity vertical as a heritage from NMCE.

The services of Metropolitan Clearing Corporation (MCC), floated by the Metropolitan Stock Exchange of India, will be used from next month, while statutory funds such as member deposits and settlement guarantee fund will also be transferred to MCC.

Traders upbeat

Traders find the merger a positive step. “We expect that after the merger, the volume will increase, because of which market participation will go up and liquidity will improve. And we look forward to long-term futures contracts instead of nearby-month contracts,” said Nisarg Vora, Director, Flexilis Pvt Ltd, one of India’s largest rubber traders.

The merged entity will be India’s third largest commodity bourse after MCX and NCDEX. “Together we will have excellent marquee kind of investors, who are willing to contribute to new and good business ideas and pump in further investments for future growth,” said Mishra.

“As a universal exchange, we can now look at contracts in currency, interest rates, equities and others. This bigger base will help the exchange leap-frog to a larger position.”

While the operational synergies are being worked out, the major benefit to the members of the merged entity is the reduction in operational expenses.

Despite gaining access to ‘two exchanges’, the participants will not require two membership fees, audit costs etc. Though the CTT remains, the cost of operations will come down.

Anil Ambani-led Reliance Capital is the largest shareholder in the new entity with an over 19 per cent stake. The other shareholders include MMTC, CWC, PNB and Bajaj Holding. The merged entity will altogether have over 100 members.

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