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Wednesday, February 04, 2009


I wrote a piece in Financial Express titled Law and regulation shape the character of the regulated industry drawing on the recent court case filed by NCDEX against the Forward Markets Commission.

In the article, I describe this case in the context of the unique regulatory problems of for-profit exchanges [link, link]. I locate this discussion in the deeper problems of how weak legal and regulatory structures give out incentives for the wrong kinds of skills to succeed. While NCDEX/FMC/MCX is a live example of this problem, these issues are surfacing in many other areas such as telecom, electricity, etc, where malfunctioning government structures distort markets.


  1. Check this :

    Page 28-48 is advice for us as well.

  2. Oops !

  3. NCDEX Vs FMC highlights the sad state of Indian commodity markets. The agrarian economy doesn't have a geninue regulator in a true sense.

    With a slew of reforms taken place in the financial markets in the last few years, why is the commodity market been neglected its due reforms by this present government (despite the draft/bill being signed by the president, it hasn't been passed in the parliament). Is it because the NDA government introduced the new age electronic multi-commodity platforms/exchanges which UPA(read congress) doesn't want to promote?

    When the government itself shows these type of attitude and favorism, it is no wonder that FMC is favoring one exchange for the other. The entire commodity market here in Mumbai knows that FMC is nothing but the other arm of MCX and works under the table. This has been highlighted when NCDEX struggled to launch a contract/product for 2 months which MCX launched in 2 days. Can any one believe this??? This has happened.

    As no product innovation in terms of trading in index, products, options are allowed, exchanges are left only with pricing innovations to compete with each other and there is no wrong in NCDEX reducing the transaction charges.

    Unless the government passes the FCRA amedment bill and allow regulator to function the way it should be and introduce new products such as options, PMS, et al, the sad state of Indian commodity market will continue which will pave way for the death of growth in the existing commodity space.

  4. I think you must see the entire issue from unbiased angle rather being shoulder for someone's gun.

    Can you or your so called ecopnomist colleagues answer me a simple question, why any state has anti dumping guidelines in place? and what is the economical rationale behind such guidelines?

    If you can answer it, probably you will understand FMC act in recent episode.

    If you cant answer it then you should reexplore your career in aeronautics.

  5. Dear Anonymous,

    Anti-dumping is a countermeasure w.r.t overseas price gap neutralisation based on place of origin price versus the foreign price (dumping), in ultimate interest of protecting domestic produce as per local market conditions. It is a fair trade measure for insulating domestic market when tactical dumping or injurious subsidies are used by predatory nations/firms.

    A standard technical definition of dumping is the act of charging a lower price for a good in a foreign market than one charges for the same good in a domestic market. This is often referred to as selling at less than "fair value." Under the World Trade Organization (WTO) Agreement, dumping is condemned (but is not prohibited) if it causes or threatens to cause material injury to a domestic industry in the importing country.

    Related to antidumping duties are "countervailing duties." The difference is that countervailing duties seek to offset injurious subsidization while antidumping duties offset injurious dumping.

    How and where does it connect with your contention in the context with relevant content vis-a-vis FMC and FT so discursively analysed by Prof Ajay Shah, an economist of immense repute?

    How come you are air-borne on hot gas, and talking about aeronautics bereft of reference to context and without relevance to content of the analysis done by Prof Shah?

    Taking potshots under anonymity with an air of suspense and making a pretense of substance is not in good taste, at all.

    Manu Bhat

  6. No one can understand the magnitude of the issue then what we are going through in our professional life. After series of professional qualifications like CA and MBA from IIM and after working with one of the top financial groups in India, my decision of taking membership with both MCX and NCDEX and going the enterpreneurial way is gradually proving to be a bad decision. This purely comes out of the fact that it is extremely difficult to compete with the so-called leader in market because of the cost disparity. I thought knowledge will be the key differentiating factor in this kind of market and I always believed that I could fair well. But to my misery I landed up as a merely training firm which would become a hunting ground for the bigger guys.
    I really appreciate views expressed by Mr.Shah. It is indeed a much needed despare for people like me who see light at the end of the tunnel. This will give due credit to my decision of believing in my ability.

  7. FMC efforts are seenin the lopsided growth of Agri-commodity futures in last couple of years where FMC helped create a bullion exchange with almost nil deliveries wherein more than 70% trade is contributed by not more than 5 traders. It also helped kill agri-commodity futures by paying lip service and preventing NCDEX balance its portfolio. Imagine FMC chairman inaugurating a pulse committe meet by a Spot Exchange wherein it does have zero relevance. What woudl happen if regulatiors start regulating mobile prices and internet prices.

    Amen to such a regulatory regimen. May god bless FMC to create only bullion exhcnage and kill agri-commodity futures. Last two years Bullion share increased to 85% + whereas agri declined from 80%+ share to 12%.

  8. I do not understand how one can blame FMC for promoting non-agricultural products at the cost of agricultural product. Though NCDEX is the prime agri-commodity Exchange, its decision to charge near zero transaction fee after 5.00 would only cross-subsidise non-agri products trading at the cost of agri products. I am not sure, but the FMC would be glad if the NCDEX were to have uniform charges throughout the day, notwithstanding its impact on the competing Exchanges.

    I find it strange that even journalists do not rush to the press before cross-checking the facts; here an academician is condemning a regulator publicly in a press and expects that the regulator should participate in a debate.

  9. I find the conclusion "regulatory capture" drawn in Article of Ajay Shah, as well as the conclusion drawn in the "comment" on this blog without any sound basis. Even journalist would not draw such conclusions without supporting facts and figures and without cross-checking. First, how can one jump to the conclusion that the action of the FMC was to help MCX? As regards the comment in this blog, the basic literature on derivatives market tells us that this market is not for delivery, but it is for price-discovery and price risk management. Also, if one goes to the hinterland in Nizamabad and Unjha any participant would give testimony to the fact that NCDEX has never been able to handle its settlement by delivery. In bullion this problem does not arise because a)it is not perishable and b) it has international benchmark price. To blame FMC for growth of bullion trading and decline in agri-products not only displays ignorance of basic theory and facts but also having vested interest in the NCDEX and its key promoter shareholder, who is dictating both the affairs of NCDEX behind the scene as well as this smear campaign. The links are to explict to fool anybody.


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