Agricultural Commodity Exchanges in

India: Issues and Concerns

Group 1
MBA (IB) 2009-11
Indian Institute of Foreign Trade

Naveen Kumar
Ashish Sinha
Prateek Mangal
Abhishek Rai
Tushar Gavishter
 Presentation flow

1 NCDEX

2 NMCEIL

3 ICEX

4 Issues and Problems

Need of a Commodity Exchange
 Commodity exchange is a platform for trading different
derivatives, product and commodities
 It is usually a non profit organization that enforces rules
and practices for trading commodities and related
investments
 This type of exchange aims to benefit grower or producer
and seller of commodity
 Commodity exchanges have gained popularity as they offer
investors, producers and consumers to optimize profit and
minimize risk
 Major commodity exchanges are linked electronically and
modern day future trading are mostly done online for
improved and secured features
 National Commodity & Derivatives
Exchange Limited (NCDEX)

 Location : Mumbai
 A public limited company incorporated on April 23, 2003 under the
Companies Act, 1956 Commenced its operations on December 15,
2003

 It is promoted by ICICI Bank Limited, Life Insurance Corporation of

India (LIC), National Bank for Agriculture and Rural Development
(NABARD) and National Stock Exchange of India Limited (NSE)

 NCDEX current average daily turnover is Rs 35 billion

 NCDEX is regulated by Forward Market Commission and is

subjected to various laws of the land like the Companies Act, Stamp
Act, Contracts Act, Forward Commission (Regulation) Act and
various other legislations
 NCDEX – Agri products

Ncdex- Agri Products

Cereals only
by NCDEX

The top 5 commodities, in Only by

terms of volume traded at the
NCDEX
Exchange, were
Rape/Mustard Seed, Gaur
Seed, Soya bean Seeds,
Turmeric and Jeera.
NCDEX- Non Agri Products

Ncdex- Non Agri Products

 National Multi Commodity
Exchange of India Limited (NMCEIL)

 Location – Ahmedabad, Operational from November 26, 2002

 First de-mutualized , Electronic Multi-Commodity Exchange in India
 It is being supported by Central Warehousing Corporation Ltd., Gujarat
State Agricultural Marketing Board and Neptune Overseas Limited

Cereals
not Traded
NMCE- Agri Products
 Indian Commodities Exchange Board

 Location – Gurgaon , Started in November 2009

 It is jointly promoted by Indiabulls Financial Services Ltd and MMTC Limited.
Other partners- Indian Potash Ltd., KRIBHCO and IDFC
 ICEX is India's third commodity exchange and offers contracts primarily in
metals and energy
 Its current average daily turnover is Rs.15-20 billion as against 200 billion
for MCX and 35 billion for NCDEX

ICEX- Agri Products

Commodities Futures Market
Financials – 2008-09 fig in Crores
NCDEX (market share of 12%)
NMCE (3%)
17 regional exchanges together under the Federation of Indian Commodity Exchanges
(FICE) to form a common electronic trading platform.
 Problems
Lack of price transparency
 The commodity futures markets suffer from problems of lack
of price transparency
 No common interface or communications infrastructure
using which prices from one market become accessible at
another.
 Central governmental intervention by way of minimum
support price, minimum and maximum price bands for
specific commodities
 Agriculture is a State subject : Official permits are required for
out-of-state sales of some commodities (paddy in Tamil Nadu
and AP, edible oil in Gujarat, cotton and alcohol in
Maharashtra).
 Issues
Warehousing :
 No central notification agency for standards and grades
 Central and state government controlled warehouses
major providers of agri-produce storage facilities :
Central Warehousing Corporation of India operating
500 Warehouses with a storage capacity of 10.4
million tonnes
 Only about 3% to 5% of the total commodity derivatives
traded settled in physical delivery

International Practice:
 Certified warehouses (CWH) for physical settlements :
Quality Assurance
 Warehouse receipt becomes good collateral
Why the Warehousing Problem?
 Central and state government controlled warehouses major providers of
agri-produce storage facilities; apart from these, a few private warehousing
being maintained
 However there is no clear regulatory oversight of warehousing services
 There is a lack of minimum standards in procedures, design and
management of the warehouses
 As a result any commodity exchange which enters into an arrangement with
a warehouse
(a) have to implement its own methods of assessing warehouse
quality and
(b) depend entirely upon general law in the event of non-performance
by a warehouse
 There is a need for setting up of a nodal agency for regulating warehousing
and various allied issues such as licensing standards, registration of
certification and inspection agencies, warehouse inspection
 Reliability and efficiency of the current set of warehouses are still to be
established
Issues
The Regulator :
 Unlike SEBI ,Forwards Markets Commission
(FMC) is under the Department of Consumer
Affairs
 Autonomous body needed

Tax and Legal bottlenecks:

 Regulatory changes are required to bring about
uniformity in octroi and sales taxes
Issues
Lack of Economy of Scale:
 Too many (5 national level and 23 regional)
commodity exchanges
 Over 80 commodities are allowed for derivatives
trading but only a few commodities are traded in
bulk.
 Still in nascent stage

International Scenario :
 China : from 80 in 1993 to 3 in currently. 
 Japan : from 17 in 1994 to 6 now
Issues
“Illegal” Derivatives Markets
 The black market in future trading
 Every commodity has got a local shadow
market where futures trading takes place
 eg : Jaggery future : Original Market
Muzzafarnagar , Shadow Market : Delhi
 eg : castor seeds and oils futures market in
Bhabhar in Gujarat
Way Forward

 Price Transparency through Boot

Strapping Model ( followed by NSE) for
Spot Prices
 Physical Delivery through robust
distribution system and proper
Warehousing facility
 Tradable ware hose receipts as
Securities to increase the volume and
transparency
THANK YOU!!!