Should FDI in commex be capped?
Feb 2008, 0423 hrs IST,
http://economictimes.indiatimes.com/Debate/Should_FDI_in_commex_be_capped/articleshow/2754062.cms

Varied ownership will boost valuations

The government’s decision to cap foreign investment in commodity exchanges at 49%, with limits on FDI at 26% and FII at 23% with a clause that no single investor may hold more than 5% is a welcome move. The capital market needs to follow best practices: diversity in the ownership and knowledge sharing methodology. A varied ownership provides a boost to valuations, technological upgradation, product development and risk management. The knowledge, experience and global trading practices of foreign players would provide growth momentum both in exchange management and day-to-day commodity trading. Allowing FDI in commodity exchanges will give a significant push to the nature of contracts pertaining to spot prices, forwards, and futures (options are prohibited currently) by facilitating the introduction of more sophisticated trading instruments. The commodities market, which has grown to $858 billion in 2007 from $16.9 billion in 2002, could expand to $1.8 trillion by 2010, according to Assocham. Also, with its trade offers of carbon credits, Multi Commodity Exchange of India has put itself in an elite group along with the Chicago Climate Exchange and the European Climate Exchange. This growth calls for an efficient functioning of the exchanges in the entire value chain, including trading, warehousing, and delivery and processing. The fear that FIIs/FDI in commodities trade would lead to speculative trading, and thus hurt farmers, could be defused if strict rules, process and the approach is adopted under the relaxed FDI norms. Several countries follow different practices in allowing FDI in stock exchanges. The government announced key initiatives on January 22 to prevent speculative trading and give a boost to the country’s commodity markets. The Banking Regulation Act, 1949 is being amended to allow FIs and MFs to trade in commodities futures. The government is also considering allowing 100% foreign direct investment in warehousing and the cold storage sector. The government’s strategic decision to move in a calibrated manner would not only improve the efficiency of the commodities market but also make it more transparent.
Ashvin Parekh National Leader, GFS*, Ernst & Young (*Global Financial Services)

Raise the cap to make them competitive

Capital at affordable cost is a major handicap to economic development of any developing nation. With lower interest rate in developed economies, money is bound to cross borders especially to developing countries like India with potential to give greater returns. Foreign capital brings its own positives such as efficient investment practices, although it might have some negative impact. Rather than curtailing inflows, a more sensible approach is to address the negatives with better regulations. FDI in India’s employment-intensive sectors has so far been minuscule; same being the case with infrastructure as well. So, shouldn’t we leverage foreign capital to provide the necessary impetus to our enterprises? As commodities play a vital role in the fortunes of enterprises and our economy, India’s commodity market needs to be made more vibrant. Therefore, infusion of cheap capital (read, foreign inflows) is a must. Apart from price discovery and price risk management, commodity exchanges undertake capital intensive activities such as dissemination of price information, outreach to widen the market to help the rural masses unlock the value of what they produce and own. If economic growth were to be made sustainable we should make it ‘market-inclusive’ to take its benefits to rural masses as well. Estimates suggest that in the next four years the development of commexes is likely to create at least 5 lakh jobs in the rural areas. To make it happen, the industry needs robust capital support. Though the nod for foreign investment in commodity exchanges is a welcome move, doing away with the 49% cap would further propel the exchanges’ competitiveness to newer heights, bringing in global best practices, technology, and efficiency to enable the industry to take benefits of economic growth to rural India and bridge the urban-rural divide. Further, given that economically sensitive sectors such as banking (private banks), telecom, mining, petroleum and natural gas are allowed more than 49% foreign investments, our policy makers should consider relaxing the cap when the policy is reconsidered.

V Shunmugam Chief Economist MCX
(Views are personal)