If it happens, there will be speculation of some alliance between the MCX and the BSE for sure
The news of a possible merger of the NCDEX with the NSE is interesting, though one is still not sure of the veracity of the news. It points to certain broader issues that afflict the commodity derivatives market; this is unfortunate, given when futures trading was resurrected in 2003, the belief was, for a commodity-based economy, growth would be exponential. Twenty years later, it is a distant dream.
The NCDEX has grown to become an agri-exchange, while the MCX is a metals and energy exchange. Such creation of natural monopolies in segments is not uncommon in global markets either. While all exchanges are ‘multi-commodity’, they end up being specialists in certain lines. The NCDEX had an annual turnover of Rs 14 lakh crore in 2010-11, but averages Rs 6.35 lakh crore in the last five years ending FY20; the MCX had Rs 98 lakh crore and Rs 84 lakh crore, respectively. The problem in agri-futures is there is no buoyancy in trading and it is concentrated in a handful of products (soya complex, chana, mustard, castor and guar). The NSE, which has just started operations, had volumes of less than Rs 10,000 crore in 2019-20, while the BSE was around `40,000 crore.
The NSE was a founding member of the NCDEX with 25% share; it is now down to 15%. When the NSE started its commodity trading division, a question was posed as to whether it was better to go on its own or take over the NCDEX. The challenge is for the NCDEX to get capital—in the two years ending FY20, there were cumulative losses of about `80 crore. The company was contemplating to go in for an IPO or have infusion of capital from shareholders. With shareholders like NABARD, LIC, IFFCO, PNB and Canara Bank, among others, ideally one would have expected more capital from them as agri-futures appeared to be a national priority. For the NSE, this probably would be an easier way to scale business.
The issue for the regulator is to balance this possible merger with the view that there need to be more players in the market. It was virtually a duopoly with the ICEX clocking volumes equivalent to that of the BSE in FY20. It was believed the NSE and the BSE would add to competition in the market. But it appears there would be challenges for even these two players to garner market share. While they have a large section of equity brokers who could trade in commodities, unless special market making privileges are bestowed will they be willing to move away from the NCDEX or the MCX. Now, merging with the NCDEX will only keep the path clean for the NSE.
The larger issue is whether such a merger would accelerate business. There can be no answer right now as the NSE has the advantage of scale and can reach out to a larger section of the trading community. With deep pockets, expenditure will be less of a constraint than for the NCDEX. The disadvantage is that the saturation in trading volumes is a hurdle. The commodity basket is narrow and agriculture futures will be a political issue in the coming years, especially after the pandemic. The price discovery process has been pushed back by the political agenda, which ensures that it cannot be market-determined. But adding the NCDEX to the NSE platform will add value if the NSE is planning an IPO.
Commodity trading history since 2003 has been replete with examples of exchanges that could not survive. The regional ones that were fringe players disappeared quickly. The larger ones like the NBOT had to wind up, as was the case with the NMCE that was taken over by the ICEX. Therefore, the mortality rate is high in this business. Assuredly, it would be only one arm of business for the NSE, just like it is for the BSE. It appears that it will be hard to crack the duopoly concept in this market, and if this merger takes place, there will be speculation of some alliance between the MCX and the BSE for sure.
Chief economist, CARE Ratings, author of ‘Hits & Misses: The Indian Banking Story’; was part of original team of NCDEX
Views are personal