Bonds, Currencies & Commodities
FMC gets more power to handle NSEL settlement issue

Forward Markets Commission has been given more powers to handle the NSEL settlement issue worth Rs5,600 crore

The union government on Wednesday said that it has issued a notification giving more power to commodities market regulator Forward Markets Commission (FMC) to ensure that National Spot Exchange Ltd (NSEL) settles its Rs5,600-crore dues to investors.


Financial Technologies India Ltd-promoted NSEL is facing an issue of settlement after it suspended trade in one-day forward contracts on 31st July following the government direction. On Tuesday, it also stopped trading in e-series contracts in gold in anticipation of the notification to this effect.


KV Thomas, minister for food and consumer affairs, told reporters, “We have given more powers to FMC to handle the NSEL settlement issue. The situation is under control”.


According to the notification, settlement of all one-day forward contracts at NSEL shall be done under the supervision of FMC and any order or direction issued by the regulator in this regard shall be binding on NSEL.


Under the notification, the government has also barred NSEL from offering any contracts, including e-series for trading at its platform. The e-series products are banned as they are forward contracts. “Right now, we want NSEL to concentrate on settlement. We do not want to complicate the issue,” Consumer Affairs secretary Pankaj Agrawala said.


Asked if small investors would be given priority during settlement, he said that the Ministry is waiting for inputs from the FMC on this issue.


The exchange, which is promoted by Financial Technologies, plans to submit its settlement plan to FMC by 14th August.


At present, FMC does not regulate spot exchanges. Amid NSEL crisis, the government is seriously working on new regulations for spot exchanges.


HDFC Bank raises benchmark lending rate to 9.8%

HDFC Bank becomes the second lender after YES Bank to hike its lending rate to 9.8% after the RBI's status-quo over monetary policy last week

HDFC Bank, the country’s second largest private sector lender raised its benchmark lending rate by 20 basis points to 9.80%. This would auto, corporate and other loans linked with base rate or the minimum lending rate costlier for borrowers of the Bank.


Base rate is dependent on cost of deposit, which have gone up in the recent past both on account of RBI measures and increase in short term deposit rates, the lender said.


Earlier, in March, HDFC Bank reduced its benchmark lending rate to 9.60% from 9.7%  after the Reserve Bank of India (RBI) cut its repo rate by 0.25%.


HDFC Bank becomes the second lender after YES Bank to hike lending rate after the status-quo monetary policy review of RBI last week.


Last month, HDFC Bank had raised fixed deposit rates by 1% for maturities between 15 days to 6 months and one day effective 27th July. The bank increased the interest rate by 0.75% for maturity buckets less than one year but over 6 months one day.


Urea shortage and the need to build capacity in home or abroad

The fertilizer industry is at cross roads, particularly due to inadequate supply of gas and the shortages in urea. The latest move by the Government withdrawing its guarantee to ‘buy-back’ entire production of the new units has become the fly in the ointment

In response to the government's initiative notified in January this year under the new investment policy, fifteen applicants came forward to participate, either by expansion of the existing units or putting up new greenfield units to set up urea plants to meet the national demand.


The present production of 22 million tonnes (MT), against the annual estimated need of 29 MT, necessitates importing 7-8MT. The Department of Fertilizer, which anticipated four or five applications for new investment proposals, is overwhelmed by this response from 15 companies - purely because of the guaranteed buyback assurance given by the government.


The existing subsidy doled out by the government, as a sequel to protecting the farmer, has reached staggering proportions. The sliding rupee will make it even higher, since re-gasified liquefied natural gas-LNG (based on imported gas) will cost $20 a unit (million metric British thermal units-mmBtu). This will take indigenously produced urea to $550 per tonne as against $310 for imported urea.  I have deliberately kept out the rupee conversion component here.


The estimated demand for urea by 2017 is projected at 34MT, while the installed indigenous capacity will remain at 22MT, leaving a shortfall of 12MT, if no new plants come up or no expansion takes place. If all the 15 applicants are given a go-ahead but asked not to depend upon supply of domestic gas or a buy-back, chances are, many will automatically withdraw from the scene.


However, if four or five applicants are given the green signal, with an estimated capacity of 1.3 to 1.5MT per unit, we would still struggle to reach 27-28MT and would still fall short of our projected requirement.  Hence, it would be good if the Department of Fertilizer considers licensing at least eight units, and, at the same time, look at the overseas markets for plant and expansions.


Ten days ago, the government restored fertilizer price controls, effectively through backdoor, seeking manufacturing units to fix reasonable maximum retail price-MRP, except for urea. Secondly, the government has now withdrawn the buy-back guarantee for the new capacities (it does not matter if these are brownfield or greenfield units). It remains to be seen, how many of the 15 applicants plan to actually proceed to obtain the licence.


In the meantime, Zuari Industries, which had signed a Memorandum of Understanding (MoU) with the Karnataka government in 2010 to set up a urea plant near Belgaum, has shelved its Rs5,000 crore project due to land acquisition issues.


The situation, as we see it now, is grim.  For the next few years, continued dependence on imported urea is inescapable, assuming that even the government expeditiously handled the licensing part.  This, in our opinion, should be the first step.


The second step, which we had proposed, is to directly approach the Qatar government for a joint venture facility to be set up in their country.  This will eliminate the worries on gas supplies and environmental issues will not be subject to inordinate delays, which we experience in India.


Simultaneously, the next step should be to open discussions with the Myanmar government to set up a TWIN urea plant in their country. We shall revert on this a little later in the story.


It may be recalled that India's GAIL was one of the sub-contractors, in a six-company consortium that laid a 800km long gas pipe line to transport 12 billion cubic metres annually from Kyaukpu to Ruili in Yunan province in China. Thus, natural gas from Myanmar will be going all the way to China, while India has been unsuccessful to get a piece of the action!


According to the present estimates, Myanmar holds 7.8 trillion cubic feet (tcf) of gas. The government is in the process of calling for bids to cover some 18 shore blocks.  In effect, Myanmar is a virgin territory where proper exploration with western technology has not taken place so far. They need investment and expertise, both of which, India can afford to give.


Also, the Myanmar government has shown interest in using its natural resources to the benefit of its 60 million people.  This is why we suggest that enterprising Indian companies, such as Tata Chemicals must explore joint venture possibilities. The idea of twin urea plant comes from this concept!


India's trade balance with Myanmar is only $2 billion. But here is a neighbour who has many close cultural, historical and even religious relations with India, which, in the recent past have been neglected due to political mismatches.


It is time India took greater interest in improving its trade relations with Myanmar and offered to set up urea plants there on a turn-key basis. This would firmly establish our credentials.


We must remember that China is already getting gas from Myanmar!


You may also want to read…

How to reduce the demand-supply gap in urea


Urea subsidy: Why not set up joint venture plants in the Gulf?


(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)



Sanjay Jain

4 years ago

There is ample Urea capacity available in the world and there exists robust trade in them. With 21 mt capacity and another 2mt assrued of OMIFCO, India remains secured with almost 80% of its consumption. Self Sufficiency argument is fallacious in urea manufacture as 80% of urea cost is gas, which is imported. One must not also forget that in case Urea was to become part of NBS and the farmgate prices are freed the lopsided demand in its favor could get corrected, in which case there may actually be some correction in actual demand for urea.

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