Akin to fight for change, somewhere in the corridors of India's second largest commodities Exchange--National Commodities and Derivatives (NCDEX)--Samir Shah, MD & CEO, NCDEX, was stirring up a small revolution. When Shah took over the Exchange in the summer of 2013, markets were down and growth prospects bleak. The Exchange itself was stuck in a time warp and needed a fresh coat of paint. But Shah was unfazed.Today, less than a year at the helm, Shah has launched several innovative contracts and breathed new life into shelved IT projects. And that's transforming NCDEX.
CIO: You took charge of NCDEX last year. What challenges did you face?
When I joined NCDEX, the Exchange was facing a drop in volumes and a reduction in trading participants. Concurrently, the commodity cycle worldwide was in a bearish mode. Commodities Transaction Tax (CTT) had been announced in the budget and that had adversely impacted market sentiments and investor confidence in the commodities market. Then the NSEL crisis happened. Although we were not affected by the crisis because it happened at another Exchange, but it affected the agriculture sector and NCDEX is the largest agriculture Exchange in the country. The crisis shook the confidence of stocks in warehouses and the credibility associated with warehouses and commodity trading. The crisis was the last straw. The series of unpalatable events unfolded one after another. I took the reins of NCDEX in such trying times. How did you tackle these challenges?
There is a tremendous growth opportunity in the commodity markets in India. I firmly believe that commodity markets in India should be significantly larger than equity markets. There are three segments in the commodity market: Agriculture, metals, and energy. Let's look at agriculture. Worldwide, a significant portion of agricultural production actually gets traded and churned on commodity Exchanges. If you were to value last year's crop production, in terms of rupees, it was about Rs 9 lakh crore. But only a fraction of that amount actually got traded at the commodity Exchange. I realized that there is a huge untapped opportunity in the commodities market. To tap into that, we needed to refresh some of our old contracts. For example, our key contracts like gram and castor needed a refresh. We had to develop a slightly different way of looking at these contracts. So we introduced a smaller size contract for gram and castor.
With this, we targeted a specific segment of the market place which hadn't been tapped into: The financial and retail investors. They had been excluded from participating in the market because they did not have a fit-for-purpose contract. This experiment is still in its initial stages. Once it gains traction we want to replicate it for other contracts as well. In the non-agriculture sector, we re-launched the steel contract. I am very bullish about steel contracts. We made an attempt at launching steel contracts a couple of years ago but there were changes in BIS (Bureau of Indian Standards) laws, hence steel contracts did not perform well. So we had to retire our contract and re-launch it. It's gaining traction in the market now. We re-launched the crude palm oil contract (CPO). Despite being the largest agriculture Exchange in the country, it was a bit strange that we never had an active CPO contract. So I thought it necessary to focus on one. We launched more contracts in the last one year than the Exchange has done in the last five years. And the idea was that if we have to tap into the potential of the market place then we need to have contracts that are designed to suit the different needs of the customer. You can't have a one size fits all. The market is quite complex. You have arbitragers, real hedgers, farmers, mandi traders, large corporates, and retail investors. And each investor has a different way of looking at the market. We also launched a very unique design called the gold hedge and the silver hedge contract.
Earlier, gold and silver contracts were physical delivery-based contracts. The government is now discouraging investment in gold in the physical form because it creates current account deficits and leads to higher amount of imports. So we needed to convert the physical holding to a financial form. Keeping that need in mind, we launched a financial version of gold and silver contracts. The contract is a month-and-a-half old now but it brings in almost Rs 200 crore a day. This shows that there was an appetite for this kind of a contract. Therefore, designing products that are customized to suit different segments of the market was one of my focus areas.
CIO: What other innovations did you introduce?
NCDEX has been a pioneer in warehouse infrastructure. We created COMTRACK, an electronic Web-based system which facilitates electronic accounting of commodities deposited in the warehouses approved by the Exchange. It connects the Exchange, warehouses, assayers, members, investors, and clients.
However, the warehouse mechanism in India is fairly underdeveloped. It's barely 10 years old and a lot needs to change. So I embarked on a strategy that I call logistics version 2.0 to create a new set of standards in warehousing. We are in the process of implementing that. Also, after the NSEL crisis people's confidence in stocks stored at warehouses got shattered. It was extremely important to come out as a leader to show to the market that we believe in the warehousing way of participating in the commodities market.
Then I focused on customer centricity. We weren't perceived as a customer focused Exchange. So, for the first time in the history of commodity Exchanges, I ran a customer satisfaction survey--conducted by an agency called Grass Roots. The findings of the survey stated that customers wanted us to make a step change in customer orientation. Based on that, I restructured the front office of my company.
I made two groups in the company:One is the business development group and the other is a relationship management group.
Another key aspect is technology. I re-prioritized a technology project that was languishing for three years. We indigenously developed what is called a Spread Engine. Worldwide, commodity markets are driven by spread trades. Our spread engine helps participants place spread orders. This facility enables spread trading using day-limit orders. Today, 25 percent of all our trade comes through this spread tool.
CIO: The true barometer of an Exchange is a healthy open interest. How does IT help you achieve that?
Open Interest (OI) is an extremely important metric that shows the health and effectiveness of an Exchange. We have the best volume to open interest ratio in the country. We may be the second largest Exchange in the country in terms of volume but our volume to open interest ratio is much better than MCX.
This shows that people trust us. Open interest indicates that the true end user is actually participating at the Exchange. Our OI is actually higher than our volume which is a fantastic foundation to have for any Exchange and we have always focused on it. We achieve that focus by keeping the end user in mind. We have a special team of product specialists who engage with end users, explain to them the meaning of hedging and get them connected on to the platform. At the same time, we like to connect our mandi participants and farmers with our platform and technology has a very critical role to play in that.
Also, our three technology platforms--spread trading, COMTRACK and unified market platform--are indigenously developed and they contribute to price discovery.
CIO: That's interesting. Would you prefer to be an early adopter of technology?
I tend to believe that it's wise to be an early adopter and take some calculated risks. The growth opportunities in the market are aplenty. Commodity markets in India have been fairly uni-dimensional as far as the use of technology is concerned. We need to deploy more leading edge technologies to widen the participation of retail players, farmers and traders in the mandis.
I've had the fortune of working with companies that are at the cutting edge of technology. It gives me the confidence to explore possibilities that have so far not been explored in the commodities market in India.
CIO: Should the role of the CIO be given to someone from business rather than technology?
I thinks that's far too simple a way to look at it. It's important that the heads of business and IT are joined at the hip. They should work like a pair of Siamese twins. I've made that integration happen. For instance, we are in the process of selecting our new trading system and that we believe is a paradigm shift to the way trading is done.
The sponsor of that project is my chief business officer. However, the CIO is a key participant in the project because he handles the selection of the partner and implementation of the project. Likewise, when we rolled out our Spread Engine, we put in place a cross function team comprising business and technology people.
CIO: The retail investor base is small in India. How are you using IT to tap into this opportunity?
There is a two-pronged strategy to engage and attract retail participation. One is to have better designed contracts to suit retail investors. For instance, gold and silver hedge contracts, and the one metric ton contract that we launched for gram and castor are better suited for a retail investor.
Another strategy is to launch an awareness drive for retail investors. We are using IT, mobile, Internet technologies and social media to promote awareness and connect with them more effectively.
Aggregation of retail investors through fund structures is a global best practice that is needed in India. Worldwide, retail investors participate mostly indirectly through financial institutions. They participate through vehicles called CTA (commodities trading advisors). This is a unique practice followed worldwide and we need to import it to India. But we need a regulation to make that change.
CIO: What are your plans for expanding the agricultural futures market to benefit the farmer fraternity?
We are trying to create more transparent electronic modern markets at the APMC (Agricultural Produce Market Committee) level. The experiments that we are doing in Karnataka form part of that strategy. We want to replicate that in the other states in the country. Modernizing the APMCs and then connecting them to the futures market is the first part of the strategy.
The second is to launch more customized products for them. For instance, we launched a service called Exchange of Physicals for Futures (EPFs) that is a better suited product for farmers and physical participants.
The third part is to create more membership categories to allow farmers and Farmer Producer Organizations (FPOs) to participate more easily in the Exchange. We need to bring a change in the membership structure.
CIO: What reforms are needed in the commodity market to boost investor confidence?
We should start by allowing foreign entities to participate in Indian commodity Exchanges. China and India are driving consumption in the global economy. Likewise, commodity markets will shift their gravity from west to east. India is the largest producer of many commodities so ideally we should be the price setter and not the price taker. However, in the current scenario, we are the price takers because our liquidity is low and we do not allow foreign participants in our market. Foreign participants can make our market more liquid.
The third reform we require is that the micro structure of agricultural commodities should be brought to a level-playing field with non-agricultural commodities. More liberalization needs to happen in agricultural contracts. Till now, they have been treated with a lot more control. Bringing the two on a level-playing field will help us deal with inflation and food security more effectively.
Also, we should allow banks, financial institutions and mutual funds to participate in the markets. Banks have an extensive exposure to the commodities market due to programs like priority sector lending and farmer loans. Participation of banks will bring in more professional expertise and research. This will make the market more liquid. We also need to reform the primary APMC markets.