The need for a commodity repository and its benefits
The rise in the number of retail investors in the Indian market has been unprecedented. Technological advancement made its march in stock trading making the process absolutely convenient for people where they could register themselves for trading in the capital market from the convenience of their respective homes. Then, the financial challenges brought onto people by the pandemic pushed the number further up as people looked for alternate avenues to enhance their financial security. The increase in the number of the retail investors has not only boosted the market confidence but also has brought different segments of market to the investor’s attention. One such segment of the market is commodity market.
Commodities market is similar to capital market where in place of trading company shares, warehouse receipts representing ownership of commodities, such as metal, gold, silver, agriculture products, are bought and sold. Commodities market trades in the primary economic market rather than manufactured goods. This part of financial market helps producers, manufacturers and wholesale traders in price-discovery for various goods and commodities. Same as the stock market, there are three dedicated commodity exchanges in commodity market for buying and selling – Multi Commodity Exchange (MCX), Indian Commodity Exchange (ICEX) and National Commodity and Derivatives Exchange (NCDEX).
, however, is the leading commodity exchange in India, with the highest daily turnover.
What Depositories are to securities markets, Repositories are to commodities markets. Repositories facilitate ownership and transfers of commodity-assets electronically. Towards this demat accounts are opened for various customer groups like farmers, Farmers Producer Organizations (FPOs), processors, manufacturers, traders etc. to obtain electronic Negotiable Warehouse receipts (eNWRs) or electronic Non-negotiable Warehouse Receipts (eNNWRs). Issuance of electronic Negotiable Warehouse Receipt (eNWRs) under commodity repository is highly regulated which protects customers from risks such as fraudulent issuance of warehouse receipts without receipt of goods, over-statement of value or quality of goods, or tampering or fudging of information in warehouse receipts, which are generally associated with traditional physical warehouse receipts and so on. All the transactions made on the repository platform are electronic and secured with ‘authorization code’ which rules out any chances of transaction happening without customer’s knowledge. There are instant e-mail and SMS sent to the customer to keep them informed with every update. The eNWRs are stored in digital form away from any human human intervention which eliminates any chance of manipulation. It helps depositors to have access to a large number of buyers nationwide and have an easy online stock transfers. Repositories are also connected to all leading commercial banks to facilitate seamless pledge-finance on the back of eNWRs.
Investing in commodities can be a way to achieve diversification of one’s investment-portfolio. Given the inverse relationship of commodities with bonds and equities’ prices, it can safeguard the investor’s capital in case equities and bond market falls. Commodity investment can also be a hedge against inflation. However, there are risks associated with investing in the commodities as well on the same line of volatility and change in the global situations which an investor needs to be well-aware of.
(The author is MD & CEO, CDSL Commodity Repository)