Arun Raste, Chief Executive Officer of the National Commodity and Derivatives Exchange (NCDEX).
What is the purpose behind getting into equities?
Our core segment of commodities, especially agri-commodities, has been very volatile not because of the commodities per se, but because of external factors such as wars, weather, and sometimes government decisions. We have been facing bans for the last 15-20 years, and it has only been extending in the last four years.
We needed to diversify and we looked at particular commodities that were not pinching housewives’ wallets. This is difficult in this agri-commodity space. Secondly, we were making losses as 70 per cent of our business was eroded.
We also looked at non-agri space – carbon credits and weather derivatives. But, these are futuristic and unique offerings in India. We have signed MoUs with IMD for data and IIT Mumbai for product models, and we plan to launch rainfall and temperature indices by next monsoon.
Why now…when SEBI is trying to curb excessive expiry day volumes?
We want to continue growing commodities, but since it’s a smaller market, cost-effective options are limited. We have been trying to check feasibility of many products and segments, and equities is a very good option. The segment is ever growing and the pie is also very large, making space for more exchanges.
There are talks of weekly expiries going away, but we are not entering the segment for just that. The cash market and derivatives segments have many opportunities. We are looking at expanding that investor base by leveraging our commodities reach in tier 3 and 4 towns.
Further, we realised that the chances of new exchanges forming are low since SEBI regulations do not allow MIIs to have a dominant shareholder or anchor investor like before. So it is up to the existing stock exchanges to expand into the various market segments.
When we decided to speak to a few people about raising funds for this diversification, they were more than willing. Despite the adversities we have faced, our clean track record in terms of our technology, compliance, credibility, and people favoured us greatly.
We have been following the same compliance and risk regulations that apply to stock exchanges, so there are only some things that are completely new to us. For example, we need to start a listing department and get IT infrastructure for the new segment.
With NSE and BSE dominating, where will NCDEX carve out its space in equities?
Being in agri-commodities, our network and investor base is in tier 4, 5, and 6 towns, which we could convert into equity investors. We will continue growing commodities through market expansion, new products, and new segments. We plan to leverage the influence that commodity brokers have in the market to get investors into the equities segment and vice versa.
We are targeting 1 per cent of the market share. Even with a per cent of equity market share and commodities, we would be breaking even. In 3 years’ time, we can potentially have an IPO. But that will, of course depend on shareholders, if they want to exit.
When we get into equity derivatives, we will definitely have to get a product which probably has a slightly different volatility profile from the current products.
By when do you expect the final approval and subsequent launch?
We have been working on infrastructure and technology and manpower requirements, after which we will go to SEBI again for the final approval. We have received binding offers from investors to raise around 770 crores, which will be put to a vote at our annual general meeting on 25th September. Post the shareholders’ approval, we shall issue fresh equity, which is about 41 per cent of our existing equity. After which the shareholding of all our existing shareholders will come below 10 per cent. We also have to increase our share capital. We expect SEBI approval in the next few months. Next year, hopefully, we should be up and running.
How is the progress on SEBI’s conditions for final approval?
The SEBI approval outlined a few directional expectations — each of which aligns well with our vision for a broader, inclusive market framework. The regulator has asked to continue strengthening our commodity derivatives franchise, which we are doing anyway as commodities are very close to our hearts. Further, SEBI has asked us to ensure sufficient investment in technology, operations and risk frameworks before the launch.
We have evaluated the infrastructure requirement and expect delivery in about 3 to 4 months from the time we place orders. We are working on adding professionals with relevant skill sets to our team and adding relevant departments.
Currently, we have around 235 people and a year down the line we will have about 50 per cent more for new scope of work like co-location functions, listing department and listing compliance, algorithm trading facilities, equity product manager, and investor services etc. We will also increase our offices, and investor centres across the country.