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NSE-NCDEX Merger

Clear picture on NSE valuations awaited as SEBI likely clear merger with NCDEX
Capital markets regulator Securities and Exchange Board of India (SEBI) may approve the proposed merger of National Commodity and Derivatives Exchange Limited (NCDEX) with the National Stock Exchange (NSE) this week.

According to a report of Zee Business, “In-principal approval of merger of NCDEX-NSE may come at any point of time.”

Both the exchanges have applied with the markets regulator for the merger. Earlier, NCDEX mulled the IPO plans, which were later shunned and NSE intended the proposed merger. Currently, NSE holds about 15 percent stake in the NCDEX.

If the merger is approved by SEBI, the deal will be done on share swap ratio. Both the parties will have to move to National Company Law Tribunal (NCLT) for the merger after the approval from the SEBI.

Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and Indian Farmers Fertiliser Cooperative Limited (IFFCO) hold 11.1 percent stake each in NCDEX.

Punjab National Bank (PNB), Canara Bank and Shree Renuka Sugars hold 5 percent stake each and CRISIL holds 3.7 percent stake in NCDEX. All the stakeholders will be allotted shares of NSE, once the share swap ratio is agreed.

The merger will unlock the real valuations of National Stock Exchange, which is in the pipeline of its initial stake sale. The is likely to rotate the NSE valuations in the unlisted market, ahead of the much awaited mega IPO.

Also, NSE, prior to its initial public offering, will strengthen its agri-commodity business, where it was lagging behind, to become a multi-dimensional trading platform.

NSE is already the market leader in the equity segment and world’s largest derivative exchange. NCDEX has the highest market share in the agri commodities and their merger can turn the tides for the agri-commodity business.

After the proposed merger, NCDEX is likely to emerge as a strong player in the agri-commodity segment, where FPI will soon get the entry to trade. Mutual Funds are already a player in the segment, and banks too may get a chance to play the game.

Following the footsteps of Multi Commodity Exchange (MCX), NCDEX was the second exchange which allowed the commodity derivative change platform in 2003. MCX started its operations a month earlier, compared to NCDEX.

However, MCX planned to move out of the business and made the exit strategically as the agri-commodity business is highly sensitive. MCX focussed more on non-agri commodities, especially base metals and bullions including precious ones.

NCDEX was highly focussed on agri-commodities and many of them directly affected the domestic household and inflation status in the nation. So, it was inclined to politically sensitive business as the government could directly impact and intervene in the business.

Currently, majorly NCDEX volume is contributed by thin base commodities. Like Guar Seed or Guar Gum which produce only in three states Rajasthan, Haryana and Gujarat. Similarly with castor seed mainly in Gujarat, Rajasthan and Andhra Pradesh.

Those commodities which have pan India production or consumption are either banned by the government or not traded on NCDEX.

Recently, Sebi has banned future and option trading of Chana and Mustard after consultation with the government. Both commodities are volume generators for this exchange.

After the Forward Market Commission merger with Sebi most of the things were at par with the equity market. However, participation of domestic institutional investors is lacking on agri commodities.

NSE-NCDEX merger talks were going on for more than two years. In between NCDEX tried to launch Initial Public Offer also which was scrapped as the coronavirus pandemic hit the markets badly.

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