COVER STORY

© the boss Illustration/Shraddha Shrestha By Sagar Tamrakar

Commodity market
Waiting on the sidelines
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COVER STORY
G
old was in use as a form
of money, in one form
or another, at least from
2560 BC. It has been
used as a store of value
both by individuals
and countries since
then. The central banks still use gold as
an international trading and swapping
currency. It is still considered by many as a
store of value and a safe bet in times of crisis.
Gold and other precious metals are assets
that are both tangible and liquid. However,
over time, people began to consider any
commodity, chiefly agro products, as a form
of finance, and the first modern organised
futures exchange began in 1710 at the
Dojima Rice Exchange in Osaka, Japan; a
century later, the US followed suit with a
similar set-up in Chicago, which is located
at the base of the Great Lakes, close to
As far as the seminars/
sessions that CEs offer
are concerned, those are
inadequate to effectively
educate the investors
and brokers.
Bijesh Shrestha
president, ACBN
the farmlands and cattle belt of the US
Midwest, making it a natural centre for
transportation, distribution and trading
of agricultural produce. The glut and
shortage of these products were causing
chaotic fluctuations in price, and this is
what led to the development of a market
enabling the grain merchants, processors,
and agriculture companies to trade in ‘to
arrive’ or ‘cash forward’ contracts so as to
insulate them from the risk of adverse price
change while at the same time enabling
them to hedge.
Forward contracts were standard at
the time. However, most forward contracts
weren’t honoured by both the buyer and
the seller. For instance, if the buyer of a
corn forward contract made an agreement
to buy corn, and at the time of delivery the
price of corn differed dramatically from the
original contract price, either the buyer or
the seller would back out. Additionally, the
forward contracts market was very illiquid
and an exchange was needed that would
bring together a market to find potential
42 the boss 15 Mar - 14 Apr 2011
buyers and sellers of a commodity instead
of making the people bear the burden of
finding a buyer or seller; thus, was born
the commodity exchange (CE).
CE entered the Nepali market only
in 2006, but has not been able to grab a
major chunk of investors. However, in the
past three years, the number of brokers
has grown five-fold, investors 60-fold, and
CEs five-fold; yet the size of investment has
not witnessed a similar growth rate—the
growth is merely divided into many shares
of the same pie entering the market. Yes,
there was a big boom in the initial period
as many investors rushed in enamoured
by the glamour of testing the new market,
but most of them did not elect to return
to it as they found no substantial returns
on their investments. Vijay Satyal, CEO,
Commodities and Metal Exchange Nepal
(COMEN), the pioneer CE of Nepal, says,
“Those who came to invest/trade were less
informed; they were less aware about the
CE they were associated with and are still
uneducated about the trade mechanism.”
He adds, “The brokers ought to have a
good R&D and should be particular in
informing their clients. The CEs have rules
that stipulate the training of brokers about
R&D; here at COMEN, we have conducted
a lot of symposiums and seminars for our
brokers to inform them about international
markets, international monetary policies,
and about the influences of the prices
of different commodities.” However,
Bijesh Shrestha, president, Association of
Commodity Brokers Nepal (ACBN), is not
at all happy with the infrastructure and
human resources. He says, “There is a lack
of basic infrastructure and human resource;
the businesses are being run without
adequate market survey, growth analysis,
and policies to fit the business atmosphere.
As far as the seminars/sessions that CEs
offer are concerned, those are inadequate
to effectively educate the investors and
brokers, which is evident from the market
with a lot of investors incurring losses.
There really is a horrendous lack of experts
in the market. The CEs or the government
ought to focus on this issue—they could
even hire people from abroad.” Shrestha
warns that if the required human resource
is not culled within two years, the business
would hit a stumbling block.
Meanwhile, ACBN has been holding
talks with the Global Exposition and
Management Services regarding a book
fair on commodity market (CM); the fair
is aimed at exposing the market to the
public at large and to educate them about
it. Shrestha says, “This is how we are
aiming to be a medium for promoting CM
in the coming five to six months. All the
initiative towards these goals are being
taken by the private sector alone; the
government representatives are there only
to collect taxes and participate in various
inaugural programmes as chief guests.
The government is ignoring issues like
awareness development, infrastructure
development, policy formulation,
human resource development, capital
management, etc. “If experts are available,
the CM can take a giant leap. However,
expertise generation is a costly affair
beyond the capacity of broking agencies;
that said, the issue can be addressed
through mutual efforts, and the ACBN
has been working on it along with our
backers.”
Regulation or the
lack of it
As there’s a blatant lack of a central
regulatory authority for CM, the investors
have been diffident about joining in.
CEO Satyal says, “We are a self-regulated
organisation. Even though we are an
exchange, we regulate our members—
trading members, clearing members,
cleansing members, and market makers.
Ultimately, we will start facilitating the
market when the government starts
regulating CM. The compliances that the
government has laid out in the committee
and the rules and bylaws that it has
formulated show that the Securities Board
of Nepal (SEBON) is the most feasible and
practical body to regulate the derivative
market (DM). A proposal to this effect has
already been forwarded to the Ministry
of Finance.” Dr Nabaraj Adhikari, head,
Planning and Development Department,
SEBON, says, “We have not really reviewed
the data and statistics of derivative
trading. Yet, we have come to hear from
the participants in the DM, particularly
the investors, that they are not confident
enough on the clarity of the DM perspective
in the country. But then the CEs are doing
If the responsibility
of the DM is given
to SEBON, it should be
along with operational
autonomy and
enhancement of its
institutional capability;
otherwise, it won’t be
effective.
Nabaraj Adhikari
head, Planning and Development
Department, SEBON
their best to develop the market in the
country and are building a good network
with their counterpart markets.” Satyal
points out, “The DM in other countries
are regulated by stock market regulators
except in India where the DM is regulated
by the Forward Market Commission. As we
have reviewed Indian CEs’ arguments, they
are also not satisfied with the ministry-
run commission.” Adhikari elaborates,
“SEBON feels that as commodities are
also financial products, they need to be
regulated properly. After all, any market
without regulation cannot run for a long
time. The global financial crisis has also
underscored the importance of a strict
and proper regulatory mechanism.” And
he thinks SEBON can play the role of the
regulatory authority when it comes to
DM, but he is looking for more structural
autonomy. He says, “We think SEBON
should be assigned the responsibility of
handling the regulation of DM as we have
the experience of regulating the stock
market. But to regulate DM, we have not
become fully autonomous operationally;
we also lag far behind in terms of our
institutional capability to even regulate
the stock market fully. If the responsibility
of the DM is given to SEBON, it should
be along with operational autonomy and
enhancement of its institutional capability;
otherwise, it won’t be effective.”
Shrestha says, “We anticipate that
the government will formulate business-
friendly regulations and a scientific tax
framework. Tax is something that is
payable after someone has gained and
not something that a person keeps paying
regardless of gains or losses. Because of
policy discrepancies, genuine brokers
and/or investors have not showed up in
this market. This has been hampering the
overall business of genuine stakeholders.
To avoid these circumstances, there has
to be a system of regulation that defines
the criteria for investors, brokers, CEs,
capital, etc. Only then will there be enough
liquidity.” Satyal points to another crucial
aspect: the absence of a Commodity Act.
He says, “We don’t have a Commodity Act.
The government, in fact, has drafted it,
but it has not been made into an Act. The
government has formed a committee to
formulate a Public Warehouse Act which
will compel the demutualised commodities
to be traded only through the commodity
exchange; only if that works out can the
market come into good shape. As of now,
the CEs are simply providing a platform
where some arbitragers, hedgers and some
speculators come and trade to gain short-
term profits/benefits, and even among
them only some are well informed and the
rest come for the glamour of it.”
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Adhikari elaborates on SEBON and
what it has to evolve into before becoming
the regulatory authority for DM. He says,
“SEBON has a long way to go before it
regulates DM. Currently, it is under the
jurisdiction of the Ministry of Finance; the
finance minister guides the operations
of SEBON. Its composition of a seven-
member board involves four government
representatives, a majority, which should
be reformed. In a way, major professional
participation should be encouraged
at SEBON rather than bureaucratic
participation. Along with the board, the
whole organisational structure should be
changed. As of now, SEBON is acquiring
technical assistance from the Securities
Board of India, and its Institution Reform
Committee is formulating a five-year
master plan under the technical assistance
of the World Bank. But the assignment of
regulating DM is not covered in this master
plan and it only covers the formation of a
Central Securities Depository, monetary
fund and enforcement departments.”
Amidst these issues, Shrestha raises a
concern, “ACBN is not in a position to
pinpoint any party because any step it takes
will impact the whole market; therefore,
it chooses to keep the market safe and
promote it as much as it can. Actually,
solutions do not seem to be evolving from
any direction, and they need to come about
within the next two to three years.”
Spot exchanges,
warehouses…
Talking about the objectives of CEs,
Satyal points out, “CEs shall supply investors
with the commodities they require. They
have an alternative to invest rather than in
other investment instruments so that the
national investment liquidity has an added
advantage. Secondly, there are places where
investment is required in a real sense for
the growth of the GDP. We say agro is one
of our economy’s major resources; the thing
is how many people in the urban territory
are interested to invest in paddy, wheat or
other agro products? If via the CEs, some of
the financial liquidity is thrown into the agro
industry, ultimately the development of these
commodities, producers, market, and the
pools of the liquidity on their part will also
become the financial pool of the economy,
and a new collateral will be developed by
which the rural people will also have an
approach to the mainstream financial system/
services of the country.”
COVER STORY
A few months back, COMEN started
the wheat market, but could not carry it
forward. Satyal says, “There are a lot of
problems related to unions, pricing, grading;
we will never know which price is formal as
long as there’s a lack of an apex regulatory
body, and until there is regulation.” But
in what seems as a challenge to Satyal’s
contention, two companies—Nepal Spot
Exchange (NSE) and Wealth Exchange
Nepal—have approached the market to run
spot exchanges. Tejaswi Sharma, CEO, NSE,
explains, “We are promoting two kinds of
market segments—rollover and spot. The
rollover segment is similar to the existing
market scenario and thus we are running it
in a full-fledged manner—chiefly exchanging
gold, mini gold, silver, mini silver, copper,
mini copper, corn, coffee, wheat and sugar,
based on international prices. We have not
been able to introduce local pricing; we
are not dealing in futures price, but the
spot price. The response of the farming
community to the spot segment has been
overwhelming. Actually, people are excited
about this because they are likely to get the
delivery of the commodities they trade in,
quote the price on their own, edit prices on
order matching basis, without taking into
consideration volatility/liquidity; thus, we are
in the process of entering the spot segment.
We will be launching a few products in the
spot segment very soon.” As it prepares
for the venture, NSE has been carrying out
massive awareness programmes from the
west of Nepal to the east, chiefly in the
agro sector, for the farmers and farmer
cooperatives.
The spot exchange mechanism demands
that some entities need to be in the system
besides exchange, clearing member,
broker member, clients, ie, warehouse
vendors of designated warehouses. Sharma
elaborates, “The warehouses that can
maintain the standard for the commodities
With our warehouse
financing initiatives,
the financial institutions can
reach out to certain groups
of farmers, which they
would not be able to reach
via branching out no matter
how extensively.
Tejaswi Sharma
CEO, NSE
44 the boss 15 Mar - 14 Apr 2011
that we are launching and that can abide
by our agreement, will be designated. We
will designate a few of the warehouses at
different locations based on the production
area, the facilities that the warehouses
deliver and the feasibility of the warehouse
itself.” Having warehouses increase the
holding capacity of the producers (farmers),
and they can retain their prices for a long
term. This way the producers can break
the long chain of supply of their products.
Sharma says, “The farmer’s cooperatives,
which have been facilitating the producers
in distributing their products, have shown
a positive response to our initiative
because we can tie up with them so that
they can also benefit from the alternative
market. As of now, we are not looking at
international standard warehouses. We
If via the CEs, some
of the financial
liquidity is thrown
into the agro
industry, ultimately
the development of
these commodities,
producers, market,
and the pools of the
liquidity on their part
will also become the
financial pool of the
economy.
Vijay Satyal
CEO, COMEN
have been designing contracts by collecting
the views of experts who have been in the
field for a long time and who can judge
the moisture-oil content of agro products
and the time of retention-degradation. We
have lined up agro products that include
cash crops as well as a few food crops—to
be specifically revealed once we finally
launch the spot segment.” Pointing out the
challenges, she says, “The producers fear
losing their clients once they deal with spot
exchanges. As CSR, we design programmes
to educate the farmer groups in the rural
areas rather than being city-centric. We
are even approaching the regions which
do not have an organised market or where
the pricing mechanism is totally in ruins.
In the process, we have had chances of
interacting with different I/NGOs who
have been working in the sector of agro
production, but without being able to
provide a market. We aim to fix the chain
of supply throughout the country.”
Besides ordinary warehouse use, NSE
is introducing the concept of warehouse
receipt financing. Sharma says, “Regarding
warehouse receipt, we are having talks with
different financial institutions that it can be
pledged for loan, provided the regulations
support it. With our warehouse financing
initiatives, the financial institutions can reach
out to certain groups of farmers, which they
would not be able to reach via branching out
no matter how extensively, and thus there’s
benefit. The formation of a committee to
formulate the Public Warehouse Act is good
news because we can move ahead further
and it will be an efficient way for us once we
can proceed in a regulated framework and
make people aware of it.”