Putting MCX back on track

The snail’s pace at which the commodity market regulator, the Forward Markets Commission, is moving in closing the sale of Financial Technologies’ stake in the Multi Commodity Exchange is unacceptable. As the regulator drags its feet and complicates matters further by issuing new rules for shareholding norms in commodity exchanges, the futures market has been left gasping for breath. The confidence of investors has been severely eroded in commodity trading following last July’s scam involving the National Spot Exchange Ltd (NSEL). The value of total trades in commodity futures fell 60 per cent from ₹41 lakh crore in October-December 2012 to ₹16 lakh crore in the same quarter of the following year.

This decline is primarily due to the sharp reduction in trading activity on the MCX. With Jignesh Shah, the promoter of MCX and also of NSEL, yet to repay ₹5,400 crore that he owes investors, it is hardly surprising that the exchange is being given a wide berth. Turnover is down to a third of what it was a year ago. The sale of the 26 per cent stake held by FT in MCX is critical to bring back investors. But the regulator’s latest guidelines on shareholding in commodity exchanges — which limit the stake of banks and financial institutions to 15 per cent and that of others to 5 per cent — has led to a withdrawal of interest among many of the companies that were interested in buying FT’s stake. This opaque way of functioning is in sharp contrast to what happened in Singapore. There, its monetary authority forced Shah to sell his entire stake in the Singapore Mercantile Exchange and quit within five months of the breakout of the NSEL scam. Now, a new management has taken over the exchange, all old contracts have been closed and the exchange has been renamed.

With the closure of the NSEL, the electronic trading in spot commodities has come to a standstill since the exchange enjoyed a 90 per cent share in this segment. If MCX continues to flounder, so will organised commodity futures trading. In the event, price discovery will suffer and commodity users will have no means of hedging their risk. The Finance Ministry, instead of addressing this stalemate on a war footing, is contemplating allowing foreign investors into commodity trading. Now that FT has been unable to divest its stake in MCX within the deadline set by the FMC, either the commodity market regulator or the Government should take the onus of appointing an investment banker to identify a buyer and go through with the stake sale as soon as possible.

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