Recently, all top guns of Indian commodity futures markets had gathered in Delhi to deliberate on the ?Future of Commodity Futures in India?. An interesting theme, given that ever since trading in commodity futures was started in 2003, bouquets and brickbats have come simultaneously for this market. On one hand, turnover of 22 commodity exchanges, now largely dominated by the four national exchanges, has jumped from a mere Rs 1.29 lakh crore in 2003-04 to over Rs 63 lakh crore in 2009-10 (till January) and the number of contracts now exceed over a hundred. On the other hand, political parties and civil societies have blamed the markets for fostering speculative tendencies, mainly in essential farm products.
Though, the debate is still on as to whether trading in commodity futures leads to an inflationary trend, mainly in essential food items, the government, it seems, is also in a quandary. The latest development is the suspension of sugar futures, which came barely months after the government restarted futures trade in wheat, one of the largest foodgrain grown in India.
As the intelligentsia ponders on the pros and cons of commodity futures, one thing that stands out is the unclear picture over the extent of participation of small retail investors and primary producers in commodity futures, considered vital for giving depth and vibrancy to markets. The retail segment in commodity markets is broadly classified into two categories?one retail traders, who participate to take deliveries of commodities and use the platform to hedge their physical risks and second the retail investors, who participate in commodity exchanges just to diversify their portfolio.
Mathur, whose brokerage firm has one of the largest client base among retail participants, says of the total retail participation in commexes, around 50% is in gold and silver, 20%-25% in base metals, 20% in energy and 10% in agriculture. ?Information flow in agriculture is not very reliable, whereas in precious metals, base metals and energy we have international price parameters to refer to,? says Jayant Manglik, president, Religare Commodities, another big player in client-based commodity futures trading.
For a retail trader, buying an agri futures contract is difficult as there are quality issues. The delivery mechanism is not up to the mark and tax issues are complex. Similarly, for a retail investor, the option to participate in commodity futures markets and the instruments to do so are limited. Of the approximately 3-5 lakh registered commodities clients in India, just around 2-3% are retail investors and less than 2,000 are corporates, while the rest are people who have a stake in the markets.
?Today, whatever volume growth we are seeing in commodity markets is largely driven by jobbers and arbitragers and retail participation is seriously lacking,? says Ajit Mittal, MD and CEO, ICEX, India?s newest national commodity bourse. MCX, the country?s largest commodity exchange, says its initiative of organising investor meets at different places in association with the commodities market regulator, Forward Markets Commission (FMC) or otherwise, has resulted in creating a great buzz among the investor class and people now consider commodities an integral part of their investment portfolio. ?The enthusiasm has definitely grown in the last three years and people have also become more aware,? says PK Singhal, deputy managing director, MCX. Now, people who attend the meetings have started demanding contracts specific to commodities grown in their geographical proximity to get more benefit from futures trade, exchange officials said.
Recently, the National Multi-Commodity Exchange (NMCE) registered a record delivery of 100% in its second gold guinea contract, largely on account of its tie-up with the Muthoot Group, which also acts as delivery centre for the contract. ?Muthoot has more than 1,300 branches across India, of which 22 act as delivery centres, leading to such huge number of people taking deliveries,? says Anil Mishra, CEO of NMCE. But the NMCE experience has not found many takers, with rival exchanges contending that the futures platform is meant to hedge your risk and not for taking delivery of goods, which is the domain of physical markets. Nevertheless, having a robust delivery system does help in improving public participation in commodity exchanges.
?Futures trading is not really a delivery platform and hence deliveries are incidental. However, in the Indian context, on account of a large section of end-user participation, we have seen that deliveries are becoming important,? senior officials from National Commodity and Derivatives Exchange Ltd (NCDEX) say.
That apart, on their own, commodity exchanges are holding various awareness programmes and tie-ups to push the retail agenda forward. ?MCX has tied up with India Post to disseminate information on prices, seeds, etc,? Singhal adds. NCDEX is strengthening its warehousing network, presently around 1.3 million tonnes of capacity, to reach out to more people. ?Being the dominant player in agriculture, we are encouraging more people in the value chain of a product to use our platform and hence the logistics aspect keeps pace with the growth in this segment of traders,? NCDEX officials say. And, NMCE on its part is looking for more tie-ups like that with Muthoot Group to facilitate greater participation before launching new contracts. Among the newer ones, exchanges like ICEX have put a large part of their focus on developing the retail segment of the market. ?Start-ups like ICEX need to carve a niche for itself in the current market and are hence looking strongly at retail segment,? Ajit Mittal says.
So, what ails active participation of small retail investors in commodity futures market, given that it?s a good option to diversify the investment basket? Forward Markets Commission chairman BC Khatua has some answers. He says limited opportunities to invest, lack of good consultants and inadequate instruments for the small investors to put their money into are some of the reasons for low retail participation in commodity futures markets. Others, too, acknowledge that at the current level of awareness and knowledge there is big chance that small retail investors might burn their figures in commodity trading, but at the same time, their participation is vital for giving depth and credibility to commodity futures. An answer could be in the still pending amendments to the Forward Contract Regulation Act, which should pave the way for participation of mutual funds in commodity futures, at par with capital markets.