The ongoing payment crisis at the National Spot Exchange Limited (NSEL) has trained attention not only on regulatory issues but also on the greater need to create an effective pan-India, farmer-friendly, physical market. Business Line spoke to the former MD and CEO of NCDEX, R. Ramaseshan, who, during his tenure, accelerated the pace and trajectory of the NCDEX Spot Exchange even while cautiously guiding the business to ensure genuine benefits to vulnerable stakeholders like small growers. Excerpts from an interview:
In 2007, the government granted permission (exemption) to three spot exchanges, including NCDEX, on certain terms. Where did the initiative for spot exchange originate?
A transparent spot market is
In the absence of a transparent nationwide spot market, NCDEX had instituted a spot price polling mechanism. However, nothing can substitute actual transaction prices that can be collated from spot markets across the country and from that perspective the need for creating a market similar to the futures exchange for spot transactions was felt. As futures exchanges are regulated by the Forward Markets Commission and spot markets in agriculture are regulated by legislation of State governments, it was decided to keep spot market activities distinct from the NCDEX. And so the NCDEX Spot Exchange was incorporated as a wholly owned subsidiary of the futures exchange.
In the early stages one thought that commodities in the spot market would also be traded continuously, akin to the futures exchange. To facilitate such continuous trading, the Government of India was requested to exempt the spot exchange under section 27 of the Forward Contracts Regulation Act, 1952. While granting such exemption, the government laid down two important conditions, namely, no short-selling and no outstanding positions at the end of the day.
Very soon, we realised that spot market trading was vastly different from futures market — the most significant difference being that spot transactions are not continuous. The trading period is limited and giving and/or taking delivery is the key market need, and not squaring off one’s position intraday. Once we realised this critical difference, the exemption accorded by government was of no use to the NCDEX Spot Exchange. So we did not make use of this exemption at all.
How was the NCDEX Spot Exchange promoted? What turnover did it record?
The NCDEX Spot Exchange was incorporated as a wholly owned subsidiary of the NCDEX in October 2006. Given the background against which the spot exchange was formed, there were two clear phases in its evolution. First, we experimented with a few contracts, approached the same members as the futures exchange for popularising the concept. We believed that the participants in the futures exchange would require the spot market and oriented the exchange towards that objective. But as we realised that both the markets were different, the next phase witnessed the spot exchange spreading itself to primary agricultural markets, auction markets, procurement activities, MSP operations, commodity funding, and so on. In short, we realised that the spot market was all-pervading, except in forward and futures contracts and so marketed the concept with that larger framework.
The turnover recorded by the exchange was modest — it was just Rs 10 lakh in the first year. In the next year it increased to about Rs 58 crore. The last financial year recorded a value of Rs 1,306 crore. Certainly, the turnover was modest; but the key issue was about changing existing trade practices, be it in the mandis or in the distribution chain. From that perspective, one has to be patient and wait for acceptance of the concept by a large cross-section of participants.
In 2011 the NSEL started to register huge volumes. Did it attract your attention? How did you respond to pressure (both internal and external)?
Certainly. The turnover of NSEL was always in our radar. Initially, we were perplexed at the growth — the swashbuckling growth if one may call it — and were wondering what we were lacking. But once we realised that NSEL contracts were not complying with the conditions laid down by the Government of India and there were finance options bundled into the contracts, we decided that the NCDEX Spot Exchange would never entertain such contracts. We were clear the exchange would not adopt any questionable practice.
Yes, there were questions. The board — both NCDEX and NCDEX Spot boards — did raise questions. One had to explain the key differences and it took time for the boards to appreciate the issues involved. But once the executive management explained the infringements the boards appreciated the stand taken. Brokers did raise these issues — so much so the NCDEX and its subsidiary were branded as conservative and advised to be more ‘innovative’. Despite all such criticism and branding, we were firm that we would not stray into questionable areas and that being compliant would stand us in good stead.
For spot exchanges, do you think there was/is a regulatory gap? What reasons would you attribute for the crisis at the NSEL?
A regulatory gap has emerged as commodity exchanges came in. If I can speak of agri markets, while the primary market — the farmer selling to the trader — is regulated by a State law, subsequent trades which are bilateral in nature are not regulated. An organisation like an exchange offering a platform for secondary trades was inconceivable till national commodity exchanges came in; and such secondary trades offered by exchanges, whether within the State or across States have to be regulated. For such regulation to emerge, we require the Centre and the States to work together and bring an effective regulation, not stifle economic activity. A challenge even in the best of times!
Well, crises in markets have one common theme — eagerness to make quick profits. NSEL was no exception!
How to strengthen spot exchanges and to make sure growers benefit?
Our primary agricultural markets should cater to the needs of our predominantly small and marginal farmer; and so the model adopted in other countries would never suit us.
Having said that I strongly feel spot exchanges should seek to create a national market for agricultural produce and bring the advantages of a transparent pan-India market to the farmer. But such a gargantuan task cannot be achieved by spot exchanges alone; governments will have to be a part of the process. While exchanges can provide the knowhow and technology for creating a pan-India market, governments at the Centre and in the States should formulate a national mission in this direction. Am I asking for too much? Well, a strong marketing system is one of the steps that we have to take to make agriculture remunerative and that is important for self-sufficiency in food production.
Any other thought you may like to share with our readers?
I look forward to the day agricultural markets are one continuum — mandis , intermediary traders, distributors and others, with the derivative markets well integrated to the physical market. And for this to happen, agri marketing should move to the centre stage in policy circles. I hope policymakers are listening!