A pioneering innovation in the Indian commodity markets to ramp up competition and attract global gold and metals traders may be scuttled because of governmental delay in clearing a critical legislation. The innovation is from the National Commodity and Derivatives Exchange, or NCDEX, which almost introduced differential pricing for trades done at different times of the day. The aim was to encourage commodity traders to trade in the Indian evening hours when the New York and London markets were open.
But the innovation was stopped by the market regulator, the Forward Markets Commission, on the eve of its introduction. NCDEX has challenged the ban, saying it was within its rights to charge different fees. The problem is, the government could not get a critical bill that gives statutory powers to the regulator cleared by Parliament in time. Instead, it allowed an ordinance that had amended the Forwards Contracts Regulation Act to lapse in September 2008. Now the commodity market players do not know what powers the regulator has to decide on new products.
So the NCDEX innovation has become a court battle between the exchange and the regulator. On Monday, the Bombay High Court reserved its decision on the writ petition filed by NCDEX. A two-member bench consisting of chief justice Swatantra Kumar and justice DY Chandrachud heard arguments from the NCDEX counsel, who said the revised transaction charge was a commercial decision conforming to the bye-laws of the exchange.
Delays of this sort has been seen earlier too in the Indian equity markets. A proposal to introduce gold exchange traded funds shuttled between the regulators, the ministries and the exchanges for more than two years till NYSE took the lead and introduced it. The Indian markets thereafter copied the product.
In January, NCDEX split the working hours of the exchange. In a circular sent to its members, the exchange said that it will allow trade in agricultural commodities between 10 am and 5 pm and non-agro commodities between 5 pm and 11.30 pm. There would be a uniform transaction charge of Rs 3 per Rs 1 lakh of value of all trades in all commodities in the morning block and Rs 0.05 per Rs 1 lakh of value of all trades in all commodities in the evening block.
This takes into account the practice of commodity traders in gold and metals watching how LME and Nymex prices moved before they took position. NCDEX, the second largest commodity platform after MCX, wanted to grab a share of this business through this new pricing mechanism. The daily turnover of the exchange is Rs 2,800 crore one way, most of it in the morning block.
Leading analysts, who didn’t wish to come on record because of the entities involved, said the court battle was necessary to give the markets transparency in regulation.