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Commodities' futures market regulator, the Forward Market Commission (FMC), on Thursday gave its approval in principle to ACE's proposal to launch nationwide operations with Kotak Mahindra Bank and expand the futures business in the multi-commodity segment.
Indiabulls has already got similar approval in principle for opening an exchange with the public sector trading firm, Minerals and Metals Trading Corporation (MMTC), and is expected to start operations in June.
The Multi Commodity Exchange (MCX), the National Commodities and Derivatives Exchange (NCDEX) and the National Multi Commodity Exchange (NMCE) are the three existing national commodity exchanges.
Annual trading volumes in Indian commodity futures grew to Rs 52 lakh crore in 2008-09 and have been growing at over 20 per cent annually.
ACE had entered into an arrangement with Kotak Mahindra Bank to sell a 51 per cent stake to the latter. The application was with the FMC since February 2008. The regulator, which has been awaiting an amendment in the Forward Contract Regulation Act, finally cleared it as a one-off case.
The FMC has prescribed some conditions, understood to be commensurate with the conditions for demutualisation of regional exchanges that would be incorporated in the Act as and when it is passed by Parliament.
Sources said the proposed national exchange would trade in both agriculture and non-agriculture commodities. Initially, futures contract will be launched in at least 10 commodities, including bullion, metals and energy, as well as some agriculture commodities.
Kotak Mahindra Bank Thursday informed the stock exchange that "the bank is in receipt of an intimation dated May 14, 2009, from the Ahmedabad Commodity Exchange Ltd (ACE) of its receiving an in-principle approval letter from FMC for its proposal to upgrade and transform into a nationwide multi-commodity exchange and induct the Kotak Mahindra Group, being Kotak Mahindra Bank Ltd and its affiliates, as an anchor investor. The in-principle approval from FMC is subject to ACE complying with the conditions stipulated therein."
FMC sources said "the broad conditions would include separate valuation of goodwill of the regional exchange, in this case ACE, as the exchange is over 50 year old". Using part of the reserve and surplus for the investor protection fund is another condition. It is learnt that Haribhakti & Co has done the valuation of the exchange.
Though the valuation is not known, Kotak will have to pay a huge premium for a majority stake. The FMC is understood to be working on separate divestment norms for Kotak, though those would be more liberal from what they are Thursday.
T Raghunath, head of group strategy for Kotak, noted the FMC's approval to ACE was only in-principle and the exchange would have to secure a licence for a national exchange within a year.
Pravinbhai Thakkar, president of ACE, said this was an important milestone in the history of the exchange. Currently, ACE has permission to trade in castor seeds and cotton seed.
The price discovery is carried out through physical "open outcry" system. ACE proposed to take various steps to upgrade and scale up the business, including replacing the open outcry system with online screen based trading, said Pravinbhai.