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In India, Spot Exchanges refer to electronic trading platforms which facilitate purchase and sale of specified commodities, including agricultural commodities, metals and bullion by providing spot delivery contracts in these commodities.
This market segment functions like the equity segment in the main stock exchanges. Alternatively, this can be considered as a guaranteed direct marketing by sellers of the commodities. Spot Exchanges leverage on the latest technology available in the stock exchange framework for the trading of goods. This is an innovative Indian experiment in the trading of goods and is distinct from what is commonly known as ‘commodity exchanges’ which trade in futures contracts in commodities.
Spot exchange has been defined by the Warehousing Development and Regulatory Authority (Electronic Warehouse Receipts) Regulations, 2011 as “a body corporate incorporated under the Companies Act, 1956 and engaged in assisting, regulating or controlling the business of trading in electronic warehouse receipts.” However, present day spot exchange deals not just with warehouse receipts—this is an electronic market where a farmer or a trader can discover the prices of commodities on a national level and can buy or sell goods immediately (i.e., on the ‘spot’) to anyone across the country. All contracts on the exchange are compulsory delivery contracts—it means that all outstanding positions at the end of the day are marked for delivery, which implies that seller has to give delivery and buyer has to take the delivery.
The facilities provided by the spot exchange, like a normal stock exchange, include clearing and settlement of trades. Trades are settled on guaranteed basis (i.e., in case of default by any person exchange arranges for the payment of money/good) and the exchange collects various margin payments, to ensure this. The exchange also offers various other services, such as, quality certification, warehousing, warehouse receipt financing, etc.
At present, there are four spot exchanges operating in the country:
(i) The National Spot Exchange Ltd. (NSEL), set up in 2008, is a national level commodity spot exchange promoted by the Financial Technologies India Ltd (FTIL) and National Agricultural Cooperative Marketing
Federation of India Limited (NAFED). After the FTIL was found involved in irregularities, the FMC (Forward Market Commission), by end-March 2014 asked it to exit the spot exchange.
(ii) NCDEX Spot Exchange Ltd (established in October 2006 by NSE).
(iii) Reliance Spot Exchange Ltd. (R-Next).
(iv) Indian Bullion Spot Exchange Ltd. (an online over the counter spot exchange).
Spot exchange provides various advantages over the traditional way of trading in commodities:
(i) Efficient price determination as price is determined by a wider cross- section of people from across the country, unlike the traditional ‘mandis’ where price discovery for commodities used to happen only through local participation.
(ii) Ensures transparency in price discovery—anonymity ensures convergence of different price perceptions, as the buyer or seller merely expresses their desire to trade without even meeting directly.
(iii) Ensures participation in large numbers by farmers, traders and processors across the country and eliminate the possibility of cartelisation and other such unhealthy practices prevalent in the commodity markets.
(iv) It brings in some best practices in commodity trading like, system of grading for quality, creating network of warehouses with assaying facilities, facilitating trading in relatively smaller quantities, lower transaction cost, etc.
(v) Bank finance available against the goods in the warehouse on easier terms improves holding capacity and can actually incentivise farm production and hence reduce rural poverty.
(vi) Since the trades are guaranteed (by the exchange), counter party risk is avoided.
Raising Capital in the Primary Market
There are three ways in which a company raises capital in the primary market.