The news of a possible merger of the NCDEX with the NSE is interesting, although it is still not sure whether the news is true. He points to some broader issues plaguing the commodity derivatives market; This is unfortunate, given that when futures trading was resuscitated in 2003, the belief was that for a commodity-based economy, growth would be exponential. Twenty years later, it’s a distant dream.
The NCDEX has become an agricultural exchange, while the MCX is a metal and energy exchange. Such creation of natural monopolies by segments is not uncommon in world markets either. If all the exchanges are “multi-product”, they end up being specialized in certain lines. The NCDEX had an annual turnover of Rs 14 lakh crore in 2010-11, but averaged Rs 6.35 lakh crore over the past five years ending FY20; the MCX had respectively Rs 98 lakh crore and Rs 84 lakh crore. The problem with the agro-future is that there is no commercial dynamism and that it is concentrated on a handful of products (soy, chana, mustard, castor and guar complex). The NSE, which has just started operations, had volumes of less than Rs 10,000 crore in 2019-2020, while BSE was around 40,000 crore.
The NSE was a founding member of NCDEX with a 25% share; it is now down to 15%. When NSE launched its commodities trading division, the question arose as to whether it was better to go it alone or take over NCDEX. The challenge is for NCDEX to secure capital – in the two years ending FY20, there have been cumulative losses of around 80 crore. The company was considering an IPO or an injection of shareholder capital. With shareholders like NABARD, LIC, IFFCO, PNB and Canara Bank, among others, one would ideally have expected more capital from them, as the agro-future seemed to be a national priority. For the NSE, this would probably be an easier way to move the business forward.
The challenge for the regulator is to balance this possible merger with the idea that there must be more players on the market. It was practically a duopoly with ICEX timing volumes equivalent to those of the ESB in FY20. It was believed that NSE and BSE would increase competition in the market. But it seems that even these two players would struggle to gain market share. Although they have a large portion of stock brokers who could trade commodities, unless special market making privileges are granted, they will be willing to move away from NCDEX or MCX. Now, the merger with the NCDEX will only keep the path clean for the NSE.
The bigger question is whether such a merger would speed up business. There can be no answer at this time as the NSE has the advantage of scale and can reach a larger part of the trading community. With deep pockets, spending will be less restrictive than for NCDEX. The downside is that saturation of transaction volumes is an obstacle. The basket of basic commodities is narrow and the future of agriculture will be a political issue in the years to come, especially after the pandemic. The price discovery process has been pushed off the political agenda, ensuring that it cannot be determined by the market. But adding NCDEX to the NSE platform will add value if the NSE is considering an IPO.
The history of commodity trading since 2003 is full of examples of exchanges that have failed to survive. The regions that were marginal players quickly disappeared. The bigger ones like the NBOT had to disappear, as was the case with the NMCE which was taken over by the ICEX. Therefore, the death rate is high in this business. Certainly that would only be a line of business for the NSE, just like for the BSE. It looks like it will be difficult to break the concept of a duopoly in this market, and if this merger takes place there will certainly be speculation about an alliance between MCX and BSE.
Chief Economist, CARE Ratings, author of “Hits & Misses: The Indian Banking Story”; was part of the original NCDEX team
Views are personal