FPIs: High costs could turn FPIs away from commodity derivatives – Blue Barrows

Mumbai: Foreign portfolio investors (FPIs) are unlikely to participate in the exchange-traded commodity derivatives in the country due to high trading costs in India compared to the leading global commodity exchanges, market participants have said.

Currently, the cost components for executing commodities transactions in India include commodities transaction tax (CTT), exchange transaction charges, Sebi turnover fees, goods & services tax (GST), stamp duty, and brokerage, among others, they pointed out.

In June, market regulator Securities Exchange Board of India (Sebi) allowed FPIs to trade in the commodity derivatives market. FPIs are allowed only in cash-settled contracts in non-agricultural commodities and select benchmark non-agricultural indices.

“The prevailing high cost has already affected trading volumes on the Indian commodity exchanges and might turn out to be a major hurdle for the FPIs participation tool,” said Naveen Mathur, director – commodities and currencies at Anand Rathi Share and Stock.

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“The current cost components make derivative transaction in India much expensive compared to cost in other nations including the US, China, and London,” he added.

In the US, trading costs include brokerage, exchange, and regulatory fees. In India, the share of the CTT component, which is 0.01% on the sell side for non-farm commodities, is the highest among all the costs and a real deterrent to the growth of the commodity derivatives market, said brokers.

Volumes in commodity markets took a big hit when CTT was introduced on July 1, 2013, and they never recovered. The total traded volumes in commodities, which hit a record of ₹1 lakh crore before CTT, remained in the range of ₹25,000-35,000 crore ever since CTT was introduced.

“The cost of trading commodities is much higher in India due to statutory charges and other levies while higher margins compared to global markets also add to the cost of trading,” said Kishor Narne, head of commodities and currencies at

.

For instance, in

, the total cost of trading one lot of gold valued at ₹51.80 lakh is ₹3,403, which includes ₹1,036 brokerage, ₹135 exchange transaction charges, ₹7.77 Sebi charges, ₹518 CTT on the sell side, ₹51.80 stamp duty, ₹212 GST.

The buy-side cost without CTT is ₹1,442, and the sell-side cost including CTT is ₹1,960.

In comparison, a transaction of gold in one lot valued at ₹1.41 crore in Comex cost just ₹463.

Similarly, trading one copper lot in MCX cost ₹1,090 compared to ₹202 on London Metal Exchange.

“Apart from CTT, there has been a constant tightening of the regulatory hold, which also adds to the pressure on volumes and the intermediaries like members of various commodity exchanges have lost confidence in this business and investments dried out, which led to further decline in traded volumes,” said Narne of Motilal Oswal.

Anuj Gupta, vice president of

, said volumes in commodities future trading declined drastically due to the higher taxes and costs. “No other countries levy taxes like CTT, GST, SGST,” he said.

Last month, Association of National Exchanges Members of India (ANMI), in a letter to Sebi, highlighted several issues pertaining to the commodity market, including spread margin benefit, pre-expiry margin, mini contract in base metals, and margins in crude oil contracts, among others, and said a healthy discussion on these issues would lead to ease of doing business as well as lift the much-required sentiment for orderly growth of commodity market.