Navinchandra Pandya, president of the Bombay Oilseeds Exchange (BOE), has beeen lobbying hard with the government for over five years to get international futures trading in oil and oilseeds off the ground. Last August, his efforts finally bore some fruit when the Forward Markets Commission (FMC) gave his exchange the much awaited permission for castor oil futures. When it finally starts trading a few months down the line, BOE will be the world's first such exchange to offer hedging opportunities in a commodity that serves as input for a cross-section of industries from paints, varnishes, nylon threads and industrial oil/lubricants. The BOE, based in Mumbai's twin city of Vashi (Navi Mumbai), will get a fresh lease of life after losing the bulk of the domestic forward business in castorseed to Ahmedabad and rajkot in Gujarat a couple of years ago.
In a freewheeling interview with Sharad Mistry and Shishir Asthana of The Financial Express, Shah discloses how the world's first international castor oil futures exchange is proposed to be run and the products that will be available for hedging. Excerpts:
On whether futures trading will succeed in India.
The BOE's new international wing (which is part of the existing Bombay Oilseeds Exchange at Vashi) will provide the most cost-effective and foolproof trading platform to international producers (primarily three countries) and buyers (numbering 12-15).
This will surely be useful in hedging risks (currently absent) for consumers and suppliers of castor oil. We are setting up a Prime Commodities Corporation of India (PCCI) to guarantee and settle all trades done on the international wing of the BOE. We have informed the International Castor Oil Association of the US about the setting up of the exchange. Vithal Udeshi of Jayant Oil Mills is the chairman of the association. Given India's statusin castor oil we do not need much marketing exercise. We only have to offer trading comfort and volumes.
On the size of the country's castorseed oil output and whether it can generate enough futures business.
India, with a crop size of around eight lakh tonnes of castorseed, produces around 80 per cent of the world's crop, distantly followed by China and Brazil with some three lakh tonnes and one lakh tonnes respectively. India's castorseed crop yields an annual castor oil supply of some 3.20 lakh tonnes. Thus, the volume in castor oil futures, assuming trading of about four times production, could be around 12 lakh tonnes. In India, the forward trade in castor oil is some nine times that of castorseed, the bulk of which is exported.
On whether the BOE intends to join hands with the Ahmedabad and Rajkot oil exchanges, specially because the bulk of domestic forward trading in castorseed has shifted there.
Currently, there is no such intention. Though the seeds trade is outside Mumbai,castor oil supplies and demand are in Mumbai. We do have plans to link up with these centres through hotlines. But since this involves expenditure, we have decided to pursue it at a later date. The trading members from these centres can trade on both the wings -- domestic and international -- but only if they have affiliations with our clearing members.
On how BOE plans to take up international castor oil futures.
BOE will provide a separate segment for international trades. However, trades conducted on this segment will be guaranteed and settled through an independent clearing house (i.e. the Prime Commodities Corporation of India -- PCCI).
PCCI will have an authorised equity capital of Rs 5 crore, of which 45 per cent will be offered to banks and financial institutions. BOE members will pick up 45 per cent, and the balance 10 per cent will be held by BOE itself. The bylaws and memorandum and articles of association are being finalised and will soon be forwarded to the FMC and the Registrar ofCompanies for clearance. This could be in place by end-February.
Global Trust Bank has committed Rs 1 crore towards PCCI's equity and is likely to get the status of clearing bank. For the balance, we are negotiating with IndusInd Bank and Union Bank of India.
On the eligibility criteria for membership on BOE's international wing.
Two sets of membership are being considered--clearing and trading. The clearing member will have to contribute towards the equity of PCCI -- minimum Rs 5 lakh, maximum Rs 20 lakh--plus a Rs 1 lakh eligibility fee which will also be considered as the guarantee security. We are yet to finalise details for foreign entities seeking a seat on the BOE's international wing.
Trading members can trade on the international wing on payment of Rs 50,000 as security deposit, but must have affiliations with any of the clearing members. Even existing members can trade on the international wing by payment of a nominal fee of Rs 50,000, but they too will have to have their affiliationswith clearing members. In short, the clearing members will have to take on the responsibility on behalf of trading members.
On the contract details and members' capital adequacy.
International castor oil contracts will be denominated in Indian rupees and will have five delivery centres in India -- Naroda, Unjha, Palanpur, Rajkot, Kapadwanj (all in Gujarat) and Hyderabad.
This serves two purposes. One, Indian traders, with low levels of familiarity with international trade rules, will not be afraid to take on the necessary volumes on the exchange. They will thus be shielded from the risks of international currencies. Higher volumes will, in turn, attract foreigners to take up membership on BOE.
On why international castor oil contracts are denominated in Indian rupees and why there will be no international centres for deliveries.
Most of the south-east Asian countries like Indonesia and Malaysia among others have international commodity trades denominated in their own currencies, not inUS dollars. International exchange means providing safe hedging facilities to foreigners -- and not surrendering to their requirements while risking our own members.
There will be two types of contracts which will be settled daily. One is first special group (FSG) and the other is commercial grade. While all contracts of 10 kg each will be denominated in FSG (acceptable in international markets), sellers will be allowed to settle their trades in the locally acceptable commercial grade, albeit at a discount of 12 per cent. If required, the BOE board may change this level.
For a start, we have decided to levy a five per cent margin on purchases and sales. The margin on the open positions of members during a delivery period will have to be maintained at 10 per cent of the value of the contract.On the kinds of contracts to be offered.
In one year, there will be six contracts of up to six months each, starting with February. After that there will be April, June, August, October and December. Thus, atany point of time there will be three contracts available. Each member will be allowed to keep his position open up to the 15th of every alternate month, after which a new contract will begin.
The members will have to settle their positions within five consecutive working days after the closure of the contract, failing which he will have to face strict mandatory auctions.
Clearing members will not be allowed to have any exposure beyond 50 times their capital contribution (including the exposures of their associate members). Also, there will be circuit filters at 0.02 per cent, or Rs 5 per 10 kg contract. All these are aimed at preventing heavy speculation, and also any cornering of stocks in tight market conditions.
On whether it makes sense to have just one big multi-commodity exchange, as proposed by RH Patil, managing director, National Stock Exchange.
The government is keen to set up multi-commodity exchanges in each of the major cities of the country. BOE has been informally cited forMumbai. And castor oil futures is te first step in this direction. We have applied to the government and the Forward Markets Commission to permit futures trading in other oilseeds and oils as well, for no commodity exchange can be viable with just one commodity.
What Dr Patil has mentioned is nothing new. It is his own opinion and the government is in no way supportive of the idea of granting the status of multi-commodity exchange to NSE.
This is so because commodities trading is far more complex than trading in paper scrips. The NSE may have succeeded in creating volumes in securities trading, but it may not be able to do so for commodities, which involves not just futures but also handling large volumes of physical deliveries. It requires a high level of quality inspection and similar other infrastructure will become necessary. The NSE simply does not have this. For us at BOE, it's a part of daily routine.
Also, the cash and futures markets in commodities are highly specialised activities and areinterlinked. They cannot be separated as NSE thinks.
On whether commodity futures is catching on as a concept.
Hedging risks through futures trading will take some time. However, there have been increased enquiries from a section of finance professionals. At least 50 recent entrants on the BOE have come from the once-vibrant equity market (Bombay Stock Exchange and other bourses). They are apparently convinced that there is positive future in commodities trading.
And the Rs 1.50 lakh price for a seat on the BOE is attractive for them, given the plans for a multi-commodity exchange.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
