‘GST regime, SEBI supervision will boost commodity exchanges’

The operations of the National Multi-Commodity Exchange, whose stakeholders include the state-run Central Warehousing Corporation, Reliance Money and Bajaj Holdings, are set to grow because of two factors: the merger of the Forward Markets Commission with the Securities and Exchange Board of India (SEBI) and the likely passage of the Goods and Services Tax (GST) Bill by Parliament.

Anil Mishra, Managing Director of the Ahmedabad-based NMCE, in an interview with BusinessLine , says these two will have deep, positive impact on the commodity exchanges in the country and the way the commodities are marketed. Edited excerpts:

You seem to be upbeat about the merger of the FMC with SEBI. How will this impact the operations of NMCE?

Once the merger is over, the norms and regulations of SEBI, which are much liberal than those of the FMC, will apply to the NMCE. All commodity exchanges will benefit from the SEBI regime.

For example, we will be able to introduce options. This will also enable participation of financial institutions, mutual funds, banks, and foreign institutional investors who are already participating in stock markets, in the commodity markets. This will bring huge liquidity to the commodity market.

This is currently not possible under the FMC and the Forward Contracts (Regulation) Act.

The trading community is excited about the GST Bill, which is now before the Lok Sabha. How is the GST going to help commodity exchanges?

The GST is going to help farmers, traders and commodity exchanges. It will help participants of the exchange from different locations to easily take and give delivery at various locations without opening offices in each State. This will reduce operational costs substantially.

Tax arbitrage between States will disappear. Traders will not have to do tax registration on the borders of each State. Goods can move across the country smoothly without being stopped at inter-state borders. Thus logistics cost will be reduced considerably.

GST will increase velocity of business and business volume. Hassle-free movement of goods and huge reduction in delay in the movement will help traders execute their orders easily. It will thus increase the efficiency of commodities business.

These benefits will naturally benefit the exchanges to increase their business volume. Also, much of the benefits the trade gets from the GST will be passed on to farmers.

What is the role of the exchange in the commodities market?

NMCE, like other commexes, has two main functions: helping producers and processors/consumers in ‘price discovery’ and in price risk management.

Price discovery of a commodity is achieved through the combined opinion of all who are interested in the commodity.

The exchange provides the platform for this and it helps flow of price information and transparency.

The exchange manages price risk through the margin system and others. It is also the buyer of last resort.

Aren’t the speculators harming the interests of the exchange and the trade?

No, without the speculators, exchanges cannot function. They take the risk. Speculators, through their action, ‘predict’ price. Politicians, bureaucrats and the media misconceive speculation as gambling.

Gambling is creating a risk where there is no risk while speculation is managing the risk which is very much there.

There is also a misconception that at the commodity exchanges, delivery does not take place. The threat of delivery on the exchange platform is extremely important in price discovery. The threat of delivery aligns future price with spot price.

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