Commodity market participants seek FM's intervention as volumes shrink in Feb-Mar

The Commodity Participants Association of India (CPAI) on Thursday met Finance Minister Nirmala Sitharaman and sought her immediate intervention and policy support following a sharp decline in the volumes of exchange-traded commodities.

During the meeting, the CPAI representatives expressed their concerns pertaining to current challenges and hurdles that the industry is facing, which are contributing to diminishing liquidity on Indian commodity exchanges. Commodity markets' average daily turnover (ADT) has shrunk further by 27 per cent between February and March 2021. Besides, equity markets have also seen a sharp fall of 19 per cent in ADT in this period, while equity futures volumes are down by 14 per cent.

Indian commodity exchanges are failing to recover from liquidity issues owing to existing challenges pertaining to IGST, peak margin and commodity transactions tax (CTT) and securities transactions tax (STT), CPAI, the pan-India apex association of commodity market participants, said in a statement.

''In today's pandemic times, when GoI (Government of India) is supporting industries with schemes like production-linked incentive (PLI), commodity market participants have also urged the MoF (Ministry of Finance) for policy support to improve market depth and liquidity, and enable India to emerge as a price setter of commodities,'' Narinder Wadhwa, President, CPAI, said.

''Implementing our suggestions will reduce the cost of hedging in commodity markets, bring ease of doing business,'' he added.

The CPAI has placed their concerns and sought the FM's intervention on three key issues -- rationalising the peak margin requirement to maintain market depth and turnover; rationalising cost of transactions and amending IGST Act owing to the challenges faced by market participants while delivering or receiving goods at the designated centres. Sebi implemented a peak margin requirement for all clients from December 1, 2020. Under the plan, clients were to be allowed reduced leverage on intraday positions in phases. In first phase from December 2020, the client was required to have 25 per cent of the peak margin available with the broker. In the next phase (Mar-May 2021), the peak margin that needs to be available with the broker is 50 per cent while in the third phase (June-August 2021), the client needs to have 75 per cent peak margin wih the broker. By September 2021, clients need to have 100 per cent peak margins. With margins slated to increase in phases, the CPAI said markets are likely to witness a significant drop in volumes and participation. ''Our markets are already saddled with higher costs as compared to global markets. A large part of the costs is regulatory costs. Further with the increased margin requirements on day trades, overall liquidity and depth could go down further,'' it added.

The CPAI, therefore, urged the Finance Minister to help the industry for rationalising peak margin requirement to maintain market depth and turnover. On cost of transactions, CPAI said the cost of transaction started increasing from 2004 when STT was introduced and incidentally the turnover to market ratio fell more steeply when section 88E was withdrawn in 2008 and STT started getting treated as an expense instead of a tax.

Similarly, introduction of CTT in 2012 led to a sharp fall in commodity market volumes as well, it added.

With regard to IGST, the association urged the FM to suitably amend the IGST Act in order to allow the seller of commodities to raise the tax invoice from the state where he is already registered. It also requested FM to do away with the need of obtaining a casual taxable person registration in the state where the accredited warehouse is located.

The CPAI further submitted that the place of supply of goods should be the registered address of buyer and not the physical location of the goods at the time of delivery-- either actual or constructive. All trades which result in delivery on the exchange platform are covered under IGST except for where the buyer and seller are located in the same state. If the buyer and seller are located in different states from the place of delivery, challenges are faced by market participants on IGST registrations, which increases their compliance burden, CPAI said.