Spot exchanges to trade in commodities are set to be launched across the country in a few months' time. The man in the limelight most of the time these days is Anjani Sinha, managing director and chief executive officer of National Spot Exchange, promoted by the Multi-Commodity Exchange of India limited.
In an exclusive interview with Commodity Market Correspondent Gagandeep Kaur, Sinha explains how the spot market will work.
How will spot exchange benefit the farmer?
The biggest benefit of a spot exchange will be to the Indian farmer. He will begin to get a better price for his commodities. Today, the farmer's realisation of the crop is dependent on the price prevalent at APMCs. At APMCs, only the licensed trader can buy, and outsiders are not allowed to make any purchases. Supposing a corporate house wants to buy, it will not be allowed to do so. So whatever price they fix, it has to be accepted by the farmer. When we set up the National Spot Exchange, the buyers from other markets will be allowed to purchase through this electronic market. Then, the price won't be decided or controlled by the local traders. It will be decided by a large number of traders. Another advantage will be that the cost of intermediation will reduce in this case because today there are at least 7-8 intermediaries, between the farmer and the end-consumer. The number of intermediaries will get reduced from seven to two or three.
How will it function? Supposing I am a farmer how will I go about selling my produce at spot exchange?
The National Spot Exchange will have multiple contracts available on the system. Now, if you talk about Maharashtra, you will have multiple contracts, for say, tur. It can be Jalgaon delivery, Jalna delivery, Latur delivery. Farmers in Latur will sell in Latur delivery contract, give delivery in Latur warehouse of spot exchange and buyers could be mills located in Jalgaon, Jalna or Nagpur, anywhere.
They would know that they have to buy tur from ex-Jalna delivery. The farmer might be located in Jalna, but he would know that he has to give delivery in Latur warehouse. Trading will happen through electronic platform, which would be available with brokers, sub-brokers, franchisee etc. Farmers might not become members directly but still they can trade through the members and they can give delivery and get the money. The pricing will be ex-warehouse basis. The buyer knows that he is buying tur at ex-Latur basis and he has to incur the transportation cost.
The advantage is that supposing I have a mill in Nagpur, I can look at different prices, ex-Latur, ex-Jalna etc and opt for the best price. Buyer and seller, both would have more options. In electronic system, nobody can control the price since it will be decided by the interaction of different buyers. The trader can decide which is the best price and then take a decision.
This way, the entire nation will become a common Indian market. Whosoever will offer the highest price will get the commodity. Similarly, whichever farmer offers the lowest price will be able to sell his produce first. We would be offering a platform, which would be used by both buyers and sellers spread across the country.
What is the future of this project?
The scope is huge looking at the size of the physical market in our country. It will take a lot of time to implement this project in the entire country. I believe that if we are able to show the result in some places; if we are able to prove that the farmer's realisation has increased without increasing the consumer paid price and there has been reduction in intermediaries cost and there has been improvement in marketing efficiency; and if we are able to show this in 10 to 20 centres, then the entire country will realise the advantages of this and then the process of replicating this model in the entire country will be faster.
Is there going to be any value proposition for the traders?
Yes, definitely. The existing traders will also benefit. In the present scenario, traders face problems like credit risk, counter-party default, and those relating to quality. When a trader sells on spot exchange and he delivers on our platform and delivers in our warehouse and the quality is checked and we give him a warehouse receipt. After that if the buyer doesn't give money, the trader is not bothered since we assure them that we would give them payment. If the buyer defaults, we take the responsibility to make payment. That is the counter-guarantee provided by us. For a trader the value proposition is that the trade becomes totally risk free and hassle free.
In spot exchange once I deliver at the warehouse, the matter is closed. The biggest advantage to the local trader is that because of these new norms, bank financing will also reach out to the traders. Today, traders face liquidity crunch as they operate with a capital of Rs 10 to 20 lakh only and they don't have access to banks, which look at I-T returns etc. Now, bank finances will be done through warehouse receipts. So traders can deliver in warehouses and get a bank loan and sell when the rate is good.
