Commodity Transaction Tax A Possible Overhang On MCX IPO

The much-awaited IPO offer of Multi-Commodity Exchange of India (MCX) is open for subscription today. As per the latest media reports, the anchor book of the offer has been fully subscribed as MCX allotted 9.25 lakh shares to the likes of BlackRock Global Funds, ICICI Prudential, Kuwait Investment Authority and Credit Suisse at Rs 1,032 per share. On the grey market the IPO is commanding a premium of Rs 220-230 per share on listing.

While the fundamental prowess of India’s premier exchange house is indisputable, we at DSIJ advise our investors and readers to be cautious while applying for the offer. The MCX business model is a novel idea for the domestic markets but compared to matured international peers, its valuations seem higher. Our suggestion to investors is to subscribe to the IPO of MCX for listing day gains but tread cautiously thereafter as clarity is awaited about the long-term sustainability of its business model. To read more on our IPO analysis refer to previous article (MCX IPO: If Novelty Excites, Go For It! Or Else, Avoid! dated February 21, 2012).

While the chief concerns over the long-term sustainability of MCX’s business model were widely mentioned in out previous article, we would also like to bring to the notice of our readers the implications of the commodity transaction tax (CTT) that could possibly hamper the trading volumes on commodity exchanges.

It is believed that the government is planning to levy transaction charge on every trade done on the commodity exchanges in the forthcoming Union Budget. The government is of the opinion that since the transaction charge is a well established levy system in the equity market, the same should be replicated in commodity futures’ trading too. If CTT is imposed, the volume from arbitrageurs might come down and could possibly reduce the liquidity and consequently the exchange’s profitability.

However, the authenticity of such a move cannot be immediately verified as of now as the Commerce Affairs Ministry was recently quoted in the media opposing any such move saying it would distort the nascent market. The ministry is of the idea that a CTT on commodities derivatives in the line of security transaction tax (STT) will affect the growth of the organised commodity market. They added that the commodity derivatives markets were set up for price discovery and should not be compared with the stock markets.

In conclusion, keeping in mind the government’s divergent views we at DSIJ believe that the CTT would create an overhang on the shares of MCX on the bourses post its listing. With the Union Budget just around the corner, the counter would witness heavy volatility in price movements post the listing.