The government is gradually realising that fragmented trading hampers liquidity and volumes. The idea of a National Commodity Exchange was recently suggested by NN Mookerjee, secretary, department of consumer affairs, at a speech read out during the inauguration of the East India Cotton Association's launch of cotton futures trading on December 5 in Mumbai. Mookerjee suggested that either a few commodity exchanges should merge or the stronger ones should be allowed to trade in more than one commodity.

Said Mookerjee: "The trend today is to have fewer and fewer exchanges and a beginning can be made inthis direction by going in for multi-commodity exchanges...there is no reason for us to shy away from consideration of the possibility of mergers between commodity exchanges...".

"The logical conclusion to this process would be the setting up of a national commodity exchange which would organise trading of all permitted commodities, have membership spread throughout the country, provide facilities for screen-based trading at different centres, guarantee the performance of contracts and promote facilities for public warehousing and a warehouse-based delivery system".

Accordingly, the FMC has informally floated the idea of merging several of the more important commodity exchanges. The major commexes include the Bombay Oilseeds and Oils Exchange (BOOE), the East India Cotton Association (EICA), the Ahmedabad Seed Merchants' Association (ASMA), the East India Jute & Hessian Exchange, Calcutta, the Indian Pepper and Spice Traders' Association (IPSTA), the Hapur Commodity Exchange (potatoes futures) and thecommodity exchanges at Muzaffarnagar and Bhatinda (gur futures).

The government has sought, and managed to obtain, World Bank aid to strengthen commodity futures trading in the country. Under an agreement signed in May this year, the World Bank will grant $490,000 from its institutional development fund for the development of futures market in the country. The government would contribute the equivalent of $79,000 for this purpose--a total of around $569,000, or Rs 2.5 crore. A part of this fund would be used to strengthen the FMC itself, but the money is not intended to strengthen either the existing commexes or the proposed NCE.

In order to get a first-hand feel of commodity trading in developed markets, the government had recently sent a high-level team, headed by Aggarwal, to study the functioning of the exchanges in Chicago and New York. The team included representatives from BOOE, EICA and ASMA. Another high-level tour is being planned "in the near future" with representatives of the other fivecommexes mentioned above. It is expected to visit the major European commodity exchanges.

"Theoretically, it is possible to set up the proposed NCE," said BOOE president Navinchandra Shah. "We are not opposed to the idea, but the question of raising the necessary funds is what is disturbing us. None of the commexes have funds for improving their own operations."

The government doesn't have the required resources either. The FMC, therefore, feels that it would be a good idea to ask the various commexes to jointly develop software for online trading and link themselves through a common trading system before moving towards merger.

Thus far, no comex has taken up screen-based trading for want of funds. "The existing commexes are poor organisations of rich members," feels Aggarwal.

But he is clear that in future permission for futures trading will be given only to those who accept screen-based trading. This pressure, together with higher capital adequacy norms, could push commexes towards the logic ofmerger.

"Instead of demanding permission to trade in more than one commodity on their exchange, these commexes need to get their act together and strengthen themselves collectively", says Aggarwal.

One of the major blockages in the road to a strong NCE is the "individualistic" nature of the various exchanges. Each exchange is a cosy club of members with narrow interests. "There's no reason why they should continue to be individualistic," Mookerjee said in his December 5 address, and added: "We must learn to adjust. After all, if mergers of exchanges...have been taking place in other parts of the world there is no reason for us to shy away from consideration of the possibility of mergers between commodity exchanges."

BOOE, on its part, has been demanding the FMC's nod to trade in more oil and seed-related commodities rather than just castorseed. BOOE has been permitted to set up an international trading platform for castor oil futures. it has been finding it difficult to kick off the same for variousreasons, resource crunch not being one of them.

EICA, on its part, has with extreme difficulty kicked off trading in cotton futures after a gap of more than three decades. Given the lukewarm trading interest shown by various constituents of the cotton economy, it remains to be seen how soon will EICA become successful with just one commodity to trade in, especially when there is heavy trading in cotton in the illegal centres in and around Gujarat (Surendranagar, for example) and even in Karnataka.

As regards, ASMA, there is severe infighting among the members and the office bearers, with each group trying to pull strings at the exchange in its favour.

Getting these disparate bodies to merge or even think alike is a tall order.