Hedging MCX?

IIPM - Admission Procedure

“Since markets are not mature and since regulation is not autonomous, getting corporates to participate in the market is a big problem for MCX,” explains an analyst. Admits an MCX insider, “Corporates are as it is not coming to the platform.” For example, in the metals segment, big players like Hindalco, Vendanta, Tata Steel, Jindals, et al, are - as always - continuing to hedge their risks on the London Metal Exchange (LME), instead of coming on to MCX. “The reasons are two fold. One, because LME is more liquid than MCX and two, entry cost is on a higher side at MCX,” says the source. With the Indian government now contemplating an even higher commodity transaction tax – for every 1 lakh rupees, the trader will pay Rs.17 as tax as opposed to the two rupees he shells out now – the entry load is all set to become more expensive for hedgers on the platform. Liquidity and low volume players are a problem too. Even if corporates want to come to the exchange, they are constrained by low volumes. “Thanks to government restrictions, large players like FIIs, financial institutions, mutual funds, banks, et al, are not allowed on commodity exchanges in India, leading to a host of smaller players (dabbling in with minor volumes) on comex bourses, but hardly any big transactions,” says Mathur of Angel Commodities. Analysts say that corporates form less than 10% of the total business on Indian commodity exchanges, as opposed to them constituting over 75% of the total business on global exchanges.

The volumes problem is aggravated by a dearth of a range of products and participants on commodity exchanges, again restricted by government regulations. In a stock exchange, you can trade on nifty, indices, options, as also buy & sell physical shares, but with commodity exchanges, there is only one product offering that is futures. Similarly equity markets enjoy participation from FIIs, Banks, Mutual Funds, HNIs and retail investors, in comexes there are only traders and brokers. Autonomy for the commodities markets regulator – Forward Markets Commission – at present under administrative control of the Ministry of Consumer Affairs could be the way out of this quagmire.

Besides, marketing guys at MCX say that when they make awareness presentations in corporates, sometimes they are blocked out as companies do not want to answer their shareholders (in case of losses at the bourses) about why they were betting on commodity futures at all. Analysts say that because of unawareness, many corporates would even liken it to gambling. Ask Massey, whether linking commodity hedging to gambling was right, and he shrugs. “In gambling, you have one outcome – you win or lose. There’s no scientific basis to it. In this market, it is not win or lose. The market simply helps you in fixing your long term (futures) price in a firm manner; so you can follow your present (physical) strategy independently.”

For more articles, Click on IIPM Article.

Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Programme :- SUPERIOR COURSE CONTENTS
Now IIPM's World-Class Education... for everybody!!
IIPM INTERNATIONAL - NEW DELHI, GURGAON & NOIDA
IIPM, GURGAON
IIPM : EXECUTIVE EDUCATION
IIPM’s 36th Glorious Year of Academic Excellence
IIPM Ranked No. 1 B-School In Global Exposre - Zee...
4Ps Power Brand Awards 2007
When IIPM comes to education, never compromise
IIPM is A World of Career
Why Study Abroad When IIPM Gives You 3 global Advantages!
IIPM Ranked No. 1 B-School In Global Exposre - Zee...