Financial Daily from THE HINDU group of publications
Sunday, May 30, 2004
Agri-Biz & Commodities
`IPSTA's experience can't be matched by others'
Kochi , May 25
THE India Pepper And Spice Trade Association(IPSTA) finally launched its online trading system on April 26 amidst strong objections from members. Being a regional exchange, it now has to compete with several major players. Mr Kishor Shamji, President, IPSTA, explained the various issues before the exchange in an interview to Business Line. Excerpts:
How do you rate IPSTA compared to national multi-commodity exchanges?
IPSTA, having been in the trade for over 48 years, is the only exchange next to Japanese commodity exchanges wherein the individual net open positions of the members are published on the notice board ensuring transparency. The national exchanges may be richer than us but subsequently they have as many commodities to look after. IPSTA is self-sufficient both technically and financially to support pepper and other few commodities that it puts in its kitty.
It has always facilitated delivery and believes that the function of a commodity exchange is half done unless it is able to carryout actual delivery. Advance margin is collected which makes sure that no party is affected in case of default by the opposite member and further, the considerable size of IPSTA trade guarantee fund allows to withstand any risk that may arise in case of any default. IPSTA continues to stick with its delivery guidelines and advance margin system and would not dilute these to achieve namesake turnover, which would do more harm than good to the exchange. We have proven delivery mechanism that has been and will continue to be the mainstay of IPSTA contracts.
The turnover of other exchanges has been on the higher side. What do you attribute to this?
Though few other national exchanges have made their presence felt in the commodity market, IPSTA is still a force to reckon with. The experience that it has gained cannot be equalled by any other national exchange.
If we look into the nature of turnover these exchanges have gained over IPSTA, it can be noticed that the major chunk of pepper and rubber turnover still comes from Kerala, where the commodity-specific exchange of pepper is functioning. However, taking the trading ring to the participants' place (by way of online screen-based trading) induced more players. The concept of `seeing is believing' has thus proved to be true in this case, to give more turnover through the members of such exchanges who had introduced franchise holders in the producing and trading areas of the state.
Also, it is reported that these franchises provide margin finance and therefore, it is but natural that futures trading which can be done with 10 per cent investment only shows an increase in turnover. When this 10 per cent is also financed, it in turn, means that the players have no stake at all. Therefore, in the favoured market, this type or risk-supported turnover will not be revealing anything but higher turnover.
What are the commodities traded presently at IPSTA and what else are in the pipeline?
Apart from the MG1 grade of pepper, we have added the 550GL grade also. This is the grade that is largely traded in the domestic market. Another commodity that has been recently added is RSS4 grade in rubber. We will be adding turmeric and chillies in the near future.
Do you think online trading benefits the trade?
Yes, certainly. Earlier, during the outcry system, the producers sitting in the interiors of the State were unable to know the price movements and did not have much contribution to the market. They could participate only through members and brokers sitting in the exchange. With the advent of online trading, the risk prone producers of the crop are able to manage their risk sitting in their hometowns. This would mean that there are lot more participants who can manage their risk by way of hedging.
There had been apprehensions that online trading would deprive the brokers of their role, what do you say on this?
The important role that the brokers/franchisees play in the trade cannot be downplayed. They have been instrumental in taking the trading system to the common man and most importantly to the growers. There is certainly profit involved for them, but as far as it does good to the industry by way of increased participation that they bring certainly adds to the betterment of futures trading in the country.
The actual beneficiaries are many. These may be the farmers, traders, importers, exporters or even the common man who are protected by the adverse price fluctuation.
What are the advantages?
The seller/farmer can use the future market to obtain fair price for his produce. The farmer can also predict the future prices as per the price of future contracts prevailing in IPSTA. Comparing this with the current spot price, the farmer can decide to hold or sell his produce to get maximum benefits. Additional benefits to farmers are: Seasonality of the crop forces farmers to sell at low prices during the season. This can be avoided as farmers stagger their sale to any or all of the future contracts in IPSTA at the best price available. Intermediaries can be avoided and so also their commission.
The existence of a futures market helps in providing long-term stability in prices, providing farmers the utility of a healthy market. If short-term need for funds arises, the farmer can sell small quantities in the spot market and at the same time square of his future position to that extent.
Do you think the new entrants especially the novices would be able to perform well in the system?
It would be disastrous if a novice were to participate without understanding the basics of futures trading. Thus it is always better to have more and more participants with good knowledge on the intricacies of trading in a futures exchange. The major players of pepper and rubber are in and around Kerala and the two major participants Geojit Infofin Technologies Lt., and JRG Wealth Management Ltd, are also members of IPSTA.
Therefore, the participants through these members will also be able to compare the prices and we are sure it is only a matter of time by which the participants will understand and decide as to which exchange they wish to participate.
You have introduced online trading late in this competitive market and do think IPSTA would be able to catch up?
The management, staff and members as well as the brokers will have to work hard for the next three months so that the time gap IPSTA has lost can be made up popularising IPSTA's screen among the participants, not only from the producing areas but also from the consuming states . The commodity-specific exchanges, which are branded as regional exchanges, have to keep pace with the changes in spite of their constrained financial resources. However, the experience and time-tested system will always help these exchanges to withstand the competition. What about introduction of warehouse receipt system?
IPSTA is also seriously looking into the warehouse receipt system to cater to the needs of its participants/members to fulfil their obligation in the form of delivery.
Since premiums for the later deliveries available are because of price difference, this attracts many investors to participate as hedgers in the futures market resulting in more deliveries and more switchovers from nearby to later positions.
Do you plan to introduce options along with futures?
Though the commodity exchanges in India have been requesting the Government to consider including options for trading, so far we haven't got the approval yet.
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