Multi Commodity Exchange of India Limited (MCX) Earnings Call Transcript & Summary

Great. Well, thank you for making time to do this. We really appreciate that. Yes. Well, I'm quite familiar with the business model -- or at least I think I am. So it's best if perhaps you can just start with a quick business update about where we are. We've seen some sort of transition in the business from futures to options also play itself out. just a quick overview of where things are, that's really the purpose of our meeting.

Did you get the opportunity to attend our call?

No. Unfortunately, no. I think when you had the call, I was traveling on those dates. Yes. So it's very difficult for me to attend all the calls because I also look at other markets, and so it's a very large spectrum.

So it is -- I can say the progress has been very good in the option compared to the last quarter. Even this quarter, the performance happened to be much better. We have done something about INR 31,000 crores in the options compared to INR 23 crores -- maybe INR 23,000 cores, INR 24,000 crores in futures. So that way, it is like our options now is performing better than the futures. But you would be knowing that the realization that we're getting out of options is comparatively less with the futures. But it is better than the way -- what we have expected. We expected something around [ 33% ] that we can get it out of options. But we could get close to around [ 14% ] of which is I think a good realization that we got it from the options. So now our focus is more on options. In fact, we are very keen to go ahead with more products. So we are mainly primarily now focusing on the tech migration. Once that migration is completed, we will be rolling out some more options product, mainly the shorter-duration option contracts in the gold as well as silver. What happened to the bimonthly contracts as of today? So we wanted to come out with monthly contracts. So that can reduce the value of the option premiums. So we can expect more participation in the options contract in bullions.

That's -- you're targeting retail participation there? Or is that participation...

Institution participation. If you take only the mutual funds or in foreign participation, that is very limited. So what we get is mainly from the corporates and the individuals. And the class who are participating in our market is not -- definitely not comparable to that of equity market. So the contract sizes are different, and it is pretty big as compared to what you could see in the equity market. Say, if you take a gold contract, the gold contract itself is about a 50 lakh contract. Of course, we have the different variant -- contract variants available. But the main contracts are the main drivers of the volume. And they are the -- that is -- the size of the contract is much bigger compared to the equity markets. So our idea is to come out with the shorter duration contract. And maybe we wanted to come out with some more new products. But electricity is one thing that has been in that pipeline. But because of the regulatory approvals, it is being pending. So once we get that approval, we can go ahead with the contract. Besides electricity, you can see some metal contracts, like aluminum alloy and zinc. So some are in the [ mine ], but the primary now is mainly on options because we wanted to tap the potential of the options.

But when you say electricity, are you -- I'm not aware of this. Are you trying to sort of compete with an IEX or...

Those -- they are into day-ahead market. In fact, we're taking their prices, day-ahead prices. And that, those prices will be used for [ spot ] agreement purposes and [ all that ]. So what we'll be offering to the market is derivative contracts, options and futures. So that -- we feel like -- we already have signed the agreement, licensing agreement, with IEX.

Why wouldn't someone like an IEX want to do it themselves instead of...

Different regulatory.

Okay.

They now come under the CEO or CFO. And if at all they wanted to offer us a product, they have to -- themselves, they have to set up an exchange, stock exchange. And they come under that without the SEBI.

And I think the last time when we discussed, one of the things that we spoke about was FI participation because of regulatory issues. So where are we with that? What is it...

Interestingly -- recently, there is an interesting development happen. SEBI allowed the foreign institutional participation like portfolio investment, they are now allowed. But they are allowed in a limited way. What they have said, the regulations are -- so the current regulations. FPIs are allowed cash settled products, okay? And if FPIs happen to be corporates and individuals and certain category of people, they are allowed only to take provisions up to 20% of the current client limits of the product. That means, for some people, they're allowed, fully 100% of the client limit. For some category of FPIs, they have allowed only up to 20%. So I -- they are allowed only in the cash settled products. So today, we have 2 capital contracts: the energy, that is crude oil; and natural gas. The rest of them are all compulsory delivery contracts in our market. So that we can see that, okay, those people can only participate in these products, and you all know that the same products are traded in the global market now. Because we, ourselves, we take the price of CME and we adhere to this, but we still see an opportunity in the form of arbitrage that can -- the market participants can find between the different markets. And because many of these strategies, they already have the tools to look for arbitrage strategies or arbitrage opportunities that is dwelling in different markets. So since these are strategies and other things they can dwell in the market also because for an arbitrage, it doesn't matter, whether it is paid for that -- what product is getting paid. It is more about we have to come out with some strategy around it. And then if we find some opportunity, automatically, the system will be able to find -- take the opportunity, available opportunity. So that kind of business, we see that definitely, people can start looking at it. And if somebody today, it is like -- earlier, it is like they have to set up an entity here to trade here. And they will not be able to take a consolidated book of what happens here and in the global market. But now it is allowed. So they can be able to take and they can look, they can balance their own internal market and domestic market. So that way they still -- this can open up a lot of opportunities for the FPIs in particular. And once it's opened up beyond the cash settled products, I think definitely, there are some incremental opportunities that can exist that can -- the market participants can see in the form of like cash and carry arbitrage. But they have to go through certain things here, maybe requiring GST registration and others. But once allowed, I think they can explore those opportunities because the interest rates in India is certainly different from what you see in the global market. So that way, it's like it can open up some more opportunities to the market participants.

And on the gold exchange front, could you give some color?

So you have -- talking about -- you already, it is like a [ rent like ]. And it is often in the hands of our [ friends ]. Now I think it's gaining momentum. I think we have to see how it will shape up over a period of time. Other business has been started and there are some agreements that are getting signed between the government and [ U.A.E. ] government. So certain things are opening up. Like with what our [ main ] gold have to be imported. If it is imported through this portal or channel, certain concessions will be given to those importers. So that way, it will promote the opportunities. Government, definitely -- is definitely in favor of making that exchange, a very robust exchange because they wanted to make it a conduit for getting gold -- imported gold come through this particular channel. So we see a lot of potential in that market, but I think it may -- we have to see that how it will take place.

But what will give you the right to win in a business like that? I would say one of the key aspects of an exchange is to be the right platform for price discovery. But if the price discovery is not happening, you're essentially an entity which is facilitating a trade, essentially a trade anyway.

But when you see the market, our prices always happen to be slightly different from what you witness in the international market because then you actually import more into the market. So those prices happen. That is where even we see the opportunity. And somebody can able to partake in that particular waltz, in that -- within that new city. And when they find the opportunity, they can bring it into the country. So it is more convenient for them. India happened to be around a major consumer and mainly a big importer of gold, that way even -- if you say it looks like it is one country, but it itself consumes a big quantity of gold. That's where we see a very good market for this one. And not only import, import is one. And besides import, it also gives -- creating opportunities in that location. Today, in the local market, you have the CTT, you have other taxation, like a stamp duty. All those things come into the picture. And it is also driven by -- totally driven by your domestic supply and demand trend. So there, if at all you find an opportunity, it is up to you to really be able to move the gold around and you've been able to tap the potential.

So have you seen some of the Indian jewelry companies?

Yes, some already have. And many of them have already registered themselves as -- they're called by some name like a registered...

[ Jewelers ].

Qualified jewelers, qualified jewelers. So they have already been listed with that related authority, [ IFSCA ]. So under them, these people have registered. Now they can import directly. They do not have to go through this channelized [ agents ]. So directly, they can import the gold now.

So they don't need to even go through you to import?

Not through us. It is like earlier, there used to be a panel of people. So only gold, if I wanted to import, I have to import only through the bank. Let's say a bank -- generally, the bank used to act as this kind of [ authority ]. Now as a jeweler, I can go on directly. I can import myself [ directly ]. I do not have to go through this. So what these people wanted to do, they have themselves registered with the exchange and the regulator. Now they are directly importing it. So that way, now it feels like they may not -- and they can save a lot of money now to operate. And also, they can -- conveniently, they can do the trading cost.

It's cheaper.

Cheaper.

And to what extent is it cheaper roughly?

It's very difficult to quantify, but I think $2, $3 maybe. But that itself is big on the volume.

This is whole 20% stake?

Yes. Yes.

And the advantage is that it's one exchange, and they're not fighting amongst themselves.

Yes. Everybody has sort of a stake in it and skin in the game.

Yes.

Are there any other incremental opportunities that you're seeing apart from new products that you spoke about, commodities that you're seeing, where you can create or you can play the role of an exchange? So white spaces to you.

In part, we are looking at it, like the gold exchange. And also like EGRs is one thing because they are also -- I think, once the migration happens, I think we'll look for that opportunity because we have come up with the regulation for the electronic gold in the domestic market. Actually, this is a spot market but domestic market. So there, we definitely could see that opportunity. But more than that, we see a lot of opportunity in the existing physical market. Like we wanted to better integrate ourselves with the physical market. Like we have done the [ panel ] last time. Already, we have 4 or 5 now being a [ panel ] there...

Including titles.

Including titles. Then metals, we already started in that kind of investment. This is one step for greater integration with the physical market. Second opportunity we see, if we can be able to bring down the margins where -- we made our presentation to the regulator to rationalize the contribution to the SGL in the form of making SGL a 2-way traffic rather than 1-way. So that it is like, as and when needed, we can be able to infuse the capital and we can take it out. So that will help us to bring down the margins in our crude oil contract and also in gold. So this, I think -- because today, you saw some drop in futures contract. But that drop also can be minimized. We can be able to put some growth to the futures by bringing down the margin in futures.

And the drop in this -- last quarter, we saw a drop in your UCCs. Is that a function of...

Not really. There is no drop in the UCC. If you compare the -- what do you say, both options and futures together, then, in fact, we have done better than the previous corresponding period. Like I'll give you the number year-to-date. We have done something around -- like we have traded UCCs about 3.74 lakhs compared to 3.13 lakhs the previous year of the same period. So that means, both we have seen...

But on a sequential basis, because historically, sir, it has been -- the last few quarters, sequentially, it's been improving.

Even for -- in fact, maybe I can share it to you what I have. There's like I have -- for 2 immediate quarters, if you take immediate quarters like Q2, we have 1.79. If you take only the futures, it's also 1.79. Against the previous quarter, April to June quarter, it was 1.61 lakhs. And the corresponding quarter, it was 1.92. But if you look at the holistic level, like both futures and options, both, then the Q2 -- current quarter, the Q2 is 2.91 lakhs compared to 2.19 lakhs to corresponding quarter 2, okay? So that is -- in fact, there is an increase. That is what we have seen. Maybe there is a marginal drop that happens in futures, but not in options.

This is one of the broker reports that I have been referring to.

They are -- in fact, what they are looking at is the registered UCC, okay? So this registered UCC may not be a fair comparison. What we have to look at is the trader [ indices ]. Because after the integration of this intermediary in Indian market, now, today, the same broker can be able to offer the commodities as well as they can offer the equity market. As client, as and when they get registered, you make them to register across all the asset classes. So then it depends on the client where you would like to trade. And many of these clients, like for any IPO accounts or any other offer comes, they come and get registered. But it's not necessary that they come on trade on the exchange. Okay. So it may not be a right comparison. So that number happened. But when you look at the traded UCC, traded UCCs are in the range of 4.5 lakhs to 5 lakhs. So it is in that range. So there, if you do a comparison, in fact we have grown better compared to the previous quarter, especially the contribution that comes from options.

Okay. And again, as we discussed the last time, what would it really take from a structural point of view for Indian corporates to start using our own exchange a lot more than relying on the foreign ones?

Today, steps have been taken by our regulator also. And what your -- regulations have been amended to say that all the listed companies today, they are supposed to make necessary disclosure with respect to the commodity price risk. We have made it just to sensitize the corporate and the shareholders of all the risk element that is in lieu of the commodity price. And even today, at least in some private, but when you come into the public sector, their mindset is still -- they feel that, okay, a lot in futures, they look at independently and they compare it with -- to the top there [indiscernible] because you have to take both books together, you cannot take one book and do a comparison. So while a CFO and other people may be knowing that, but they find it very difficult to go and convince their Board about it, like, okay, I want to go on [ Kolkata ] because the loss is treated as a big loss. That is what he has made to the company. So still, I think that is -- I think it would take some time to change those mindset, but what -- from what -- we have been consistently putting our efforts to make necessary education for the corporates as well. So that should be...

A continuous effort.

A continuous effort. It's a chicken-and-egg problem.

Yes. The bullion statement, well, I mean, RBI has taken an issue with the regulatory mandate. So I mean, it's happening to other segments, yes.

So I think challenges we have, like if you take guaranteed products, some energy companies, they would prefer to go on trade in the overseas market because the trading cost is substantially low compared to the Indian market. And the broker may offer with a complete leverage. They may not have to put any money. But here, our regulations won't allow them to do that because now, after this peak budget reporting, they have to bring even the upfront margin.

So it's not really convenient.

Operationally, there are certain challenges.

So in -- I mean, what you're also telling me is that the regulatory environment does not -- doesn't allow them to get adequate benefits for them to switch.

The bigger ones.

Yes.

So the problem is some people, they find that -- it's like -- rightly, you said it is a chicken-and-egg problem. Like some say -- bigger companies say you don't have enough liquidity. But unless all market participants come here and the markets become bigger, then you will not find that kind of liquidity in the Indian market compared to that -- what you see in the international market. And the trading cost is substantially higher as compared to the global markets. We have CTT. We have stamp duty. [ We have fees ]. And what we get is only a fraction.

The government earns much more than -- on CTT.

But there is also -- I mean, maybe it's not applicable to all corporates, but there's also an element of you being able to sort of do the transaction into [indiscernible]. So you don't have to then hedge for currency.

I agree.

Yes.

Okay. So effectively, sir, global commodities exchange landscape, some exchanges have sort of created a niche for themselves in 1 or 2 specific commodities. I mean they are probably just known for those commodities, like I think Bursa Malaysia for [ Rabo ] and then for Andorra, I think there is St. Petersburg. Is there an opportunity for India to create something like that? I mean for certain commodities, for example, like gold, we are a dominant market.

I think we have created already for some products. Like if you take menthol, it is mint so it is on the exchange where the mint is getting traded. It is...

In the world?

Yes. Similarly, earlier, we used to have a market for cardamom, but maybe for different reasons, we had to discontinue cardamom. So I think that we have created it sounds like -- even in gold, like 1 gram gold is getting traded in India, which is traded and also getting delivered, which is nowhere for that kind of product you'll find that. So in India, that may be -- somewhat it is unique compared to the global market.

So we have tied up with -- what we are seeing is that we are also tied up with the world players for them to deliver to the client, ultimate client, 1 gram or whatever, at a secured [ 2-day ] delivery.

So they can locate their buyer, it can be from any location. We can use the logistics and we can be able to take the delivery at the stores. That kind of facility we have facilitated.

And all of the back end is your responsibility, the delivery, the logistics, once...

See, if logistic means [ till the award, it is still ] the responsibility of the action. But beyond that one, it is like a...

Other word for...

Between the [ award ] and the buyer because delivery is being made in advance. But you are in Hyderabad. Somebody will have to take from here to there and get it delivered. So that is going to be provided. That service is going to be provided. First of all, who are regularly doing that particular service? Not like [ Pune ]. But what we have facilitated is we made the charges standardized. We made that access very easy to maybe the market participants. So given this logistics facility is already in place, we started the approval of exchange providing that particular services. But ultimately, it is a responsibility of the [ award ] and the buyer to take it because our role ends here on the delivery has been marked and the delivery is being made.

Okay. In Europe, and now I think incrementally, even in India, ESG is becoming quite a dominant thing. How does that sort of work for commodities? Now we -- for example, in hydrogen, now we already have a gray and a green hydrogen. A, are you seeing new categories for yourself potentially emerging as a business case? And b, for the existing set of commodities, is there a way to sort of distinguish between the ones that are sustainably produced versus the ones that are not? Is there a way to sort of go about doing that?

Today, carbon market, even now India, is a signatory to the Paris treaty. But that market is yet to emerge in Indian market in that particular case. So the trading platform, similar to what you would have seen in the ETF market in Europe, I think that may take time really to come out with that kind of trading for, say, carbon and any other kind of thing. But we are in discussion with the different global exchanges seeing that how -- like in U.S., you have a voluntary system [ in place ] compared in Europe, at least it is a mandated region, but in Europe, [ U.S. cities ] are warranted. So we are -- we are seeing that if there is a feasibility in that, but immediately, we do not expect -- that kind of product will not be able to roll out.

Not immediately, but I'm just saying conceptually, in a few years' time, it also takes time to sort of conceptualize.

In a really long time, but actually we could be able to come out and launch the product. Carbon trading, we have launched that here in 2005 or '06, we launched. But that time, a lot of restrictions, like foreign participation was not allowed in Indian market. So while you could have buyers that is sellers, but the buyers are not able to come and participate in the Indian market. And the registry also was not that. National registry was not there. So that time, because of that, we could not be able to make much progress, and eventually, we had to discontinue those ForEx for a decade back. But now I think, again, if things focuses here, definitely we'll look for the opportunity there.

And for the existing commodities like, for example, base metals, for example, in equities, different companies have different sustainability score based on...

I think, currently -- I know where you're coming from. But currently, what we are doing is we are more or less accepting only the LME-registered brands, nothing better. And the few entities in panels, maybe you can look at it later in other cases. Those, we look into all the various parameters, like whatever standards are applicable to Indian markets, in India country, in Indian companies. We look in the audit and then we consider them that way. So strictly, you cannot say that you'll leave it to whatever is the rules and relations applicable to the Indian market. Those things we definitely look at.

Yes. And ESG for yourself?

ESG, for ourself, I think, we are now -- we are making the necessary disclosures to our shareholders. We, in fact, on a voluntary basis, we have come out with a report this year. Actually, that is -- from next year, it is going to become a mandatory feature, but we're one step ahead, and we made that disclosure for the last 2 years, financial year. And we have several policies we have introduced towards ESG. You can have a look at it. If you want to look at our BRF report, I think [ you will get it ].

Are you a signatory to the UN SDGs?

No, we are not.

Okay. Any specific reason? Or is it bandwidth issue at this point in time to dwell into all this?

We are looking like -- because it is being taken one step after step after step. So we have taken -- we are [ assessing what are the right steps ], our first step. After this one, we are seeing -- we are also seeing all the [ CP ]. I think another one, I think -- so our team is working at it as well, looking at it for...

So you have a sustainability team dedicated.

We have -- our enterprise risk management team is there, which also looks into CSR related -- sorry, not CSR, ESG-related matter.

Sure. And are you also looking on that side, on yourself using more renewables energy?

We look at it.

And you have targets on that?

Definitely. In that report, we have clearly published.

Okay. So are you going at Scope 2 already? Or at this point in time, it is just Scope 1?

They have started it. I mean, for example, all our lighting and all, they try to use the latest LED. So we are at the basic.

Okay. Okay. And final question on ESG. Is the senior management or anybody from senior management's compensation linked or is part of the [ KRA ] which is eventually -- to which composition is eventually linked to with regard to ESG, apart from business and financial targets?

No. That way, directly, it is not. Maybe indirectly, we can't say one way or another because somebody is looking at [ RMS ] total portfolio. It is like you will have to look at what is your score in terms of -- because many rating agencies nowadays they are doing ESG and other things. I think the consciousness is there, and we are looking. But I don't -- I can't say that definitely the salary is directly linked to it...

Part of?

Yes.

Okay. So not at this point in time. Definitely not at the CEO level, right? Great. Could you talk a little bit about your balance sheet, cash position and trade [ receivables ].

Yes. Presently, we have around INR 150 crores in cash. As per dividend policy, we paid 75% as a payout, which we did last time. I think we paid around [ INR 17.40 ] dividend for March '22. And so yes, so as and when our CDP project gets over and the Board will take an appropriate stance what to do with any excess cash at that point of time.

Any investment plans? And these products that you're talking about, will it require a meaningful investment from your side?

From the product side, I don't think so.

From the technology side?

From the technology, we are already invested, so we'll have to capitalize this once the project goes live and then monetize it. And also, we will need some money for the gold exchange to capitalize if and when we get regulatory approvals to set up a gold exchange. We need some network for that so we'll have to capitalize that. Also, if the regulator allows us to set up a colocation, we will need some capital for that. And we need some excess cash that we have either to transfer money in and out. At least to transfer money into the settlement guarantee fund, we need some liquidity.

Sure. Can the gold exchange follow a similar big city kind of model? Because again, it's a global commodity. We also import a lot of gold. I mean I know you can't say it in big cities...

Yes, yes. I agree with you. But at this point in time, it is still at the initial stage. So we have to get regulatory approvals and all that. We're still at the initial stage.

Okay. And I think I probably know the answer already for this, but the deposit that you received from -- for the terminals, that is generally used for -- partly into banks.

So basically, that is -- so the margins you -- the margin that we get, so that is -- it is collected by a clearing corporation, a wholly owned subsidiary. And then there's an investment policy as per SEBI where you can deploy it to big cities and put it in government securities or in liquid or overnight schemes of mutual funds or in bank deposits. So it's kept accordingly.

Yes, we'll end the questions from my end. Unless there is something that is important that we haven't discussed, I'll be happy to cover it.

We've been tracking everything, nothing much to say around this.

Yes. I would really hope that someday, commodities trading in India sort of really takes off. India is a large commodity producer.