Only two commodities exchanges feasible

KATHMANDU, AUG 25 -

Amid a growing number of commodities exchanges in the country, a study by the Securities Board of Nepal (Sebon) has shown that only the operation of two such exchanges is feasible.

Currently, six commodities exchanges are in operation in the country and about 50 have registered at the Company Registrars’ Office.

The report on the commodities derivative market of Nepal states that commodities exchanges here are profit-oriented, lack good corporate governance and are operating under low capital. According to the study, the six exchanges and agents within them have invested around Rs 250 million.

These exchanges are being operated as private limited companies, bearing in mind the principle of self-regulation without proper infrastructure and minimum standard, says the study. There is no uniformity in commodities being traded, nature of contracts, margin, commission and fees within different exchanges. Also, there is no timely disclosure of statistics which has created confusion among the investors, according to the report. The study has found a single person/group having ownership of up to 95 percent in the exchange.

Such a person/group has also been found taking ownership of more than one exchanges.

The study found promoters of the exchanges themselves involving in investment and trading of commodities. It has also been seen that they are taking advantage of the privileged information which is not available to other general investors. Also, a majority of investors are found unaware of how the commodities market operates. A majority of those who took part in the survey said they just followed others expecting high returns. Only 60 percent of the 150 respondents said they were satisfied with their investment. The report has cited that an exchange earned Rs 20 million last fiscal year after directly practicing in trading. However, it has not mentioned the name of the exchange.

The Sebon’s study has pointed out cut-throat competition among the exchanges and has found investors vulnerable to paramount risk. “There are no provisions at all for the mitigation of the risks that investors are exposed to,” reads the report.    

The study has highlighted the urgent need for a regulatory institution to govern the exchanges — either a new one or assigning the responsibility to existing. It has suggested that commodities exchanges can be regulated by establishing a separate directorate under Sebon.

The study has recommended that commodities exchanges should be classified into three types — unified commodities derivative exchanges, mixed products commodities exchange and local agricultural commodities derivative exchanges, based on the nature of commodities traded in the exchange as well as the size of their paid-up capital. It has recommended a minimum paid-up capital of unified commodities at Rs 500 million, mixed products and commodities at Rs 250 million and local agricultural commodities at Rs 100 million.

Source: The Kathmandu Post