KARACHI, Oct 31: The Ministry of Commerce has thrown a spanner in the works of the National Commodity Exchange Limited (NCEL) —country’s first computerised futures commodity market—by asking it “not to proceed further” in the matter of futures trading in cotton.

NCEL was granted approval for registration by the Securities and Exchange Commission of Pakistan (SECP) on May 16. Karachi Stock Exchange (KSE) is its main sponsor with 40 per cent stake in paid-up capital of Rs50 million. Through an advertisement in the press on September 29, NCEL had invited applications for membership for trading rights on the Exchange. The advertisement, among other things stated: “The NCEL will be involved in futures trading in commodities such as gold, cotton, cotton yarn, wheat, rice sugar etc..”.

It is to NCEL’s involvement in future trading of cotton that the Ministry of Commerce objected vide a letter dated October 17, drawing the attention of the chairman SECP, managing director KSE and the chief of operations, NCEL to “sub paragraph (1) &(2) of Paragraph 10 of Cotton Act 1957 in which it is stated that the ‘Central Government’ may prohibit any specified kind or class of contracts, such as forward contracts or hedge contracts unless such contracts are made through and under the control of an ‘association’ recognized by the Central Government under sub- section (2).”

The Ministry of Commerce went on to caution: “The above mentioned advertisement is in contravention of the Cotton Act 1957 and all concerned may be advised not to proceed further in this regard.”

Meanwhile, by Oct 15 — the last date for receipt of applications— NCEL was in receipt of 292 applications, two- thirds of which constituted those from stock brokers. NCEL said it would retain 250 and return the rest.

According to plans, NCEL proposes to begin futures trading in gold by the end of December or early January next year; the date shifted from September. Saleem Chamdia, chairman KSE, who also heads the board of NCEL had announced in June this year, that after gold, the exchange would take up forward trading in cotton and over next two to three years, more commodities such as wheat, rice, sugar, etc., would be included.

So does the Ministry of Commerce directive of October 17 put those plans in jeopardy? Saleem Chamdia is on vacations to Canada, but Mohammed Yacoob Memon, the acting managing director of NCEL told Dawn that legal experts to the Exchange were examining the Ministry’s directive. He said there were some open- ended questions which needed to be examined, such as: Could the SECP, which granted approval for registration of NCEL be construed as a part of “Central Government” and could NCEL be considered also an “association”? etc.

Market sources were assuming that the Ministry of Commerce directive had been issued under pressure from cotton dealers. Traders in cotton, spearheaded by their umbrella organisation — the Karachi Cotton Association (KCA) — had taken up cudgels against the NCEL’s attempt to ‘encroach’ upon their domain. A major player, who asked not to be named, stated that for 23 years post independence, cotton futures were traded by KCA. The cotton hedge trading was then closed, when the wave of nationalisation swept through the country under the regime of Z.A. Bhutto in 1973.

Although KSE had said it did not choose to pick up quarrel with the KCA and the bourse had even offered 15 per cent shares in the proposed Exchange to the KCA, but, according to the Chairman, they had declined to take those up. The bourse did not also agree to the KCA’s contention that it had the sole right to all matters relating to cotton, saying that KCA was dealing in ready cotton, while NCEL would be trading in the futures market.

Saleem Chamdia had clarified earlier that he did not dispute the KCA’s right to also enter futures trading in cotton, but queried, “How can KSE be stopped from conducting a futures business for which it has the best possible infrastructure in place”.

The issue looks ripe for controversy and people in both camps stand on some solid grounds. Those in favour of NCEL’s right to enter futures commodity trade including cotton point out that the NCEL would serve several useful purposes: First, it would help producers and consumers in making estimates of future commodity prices as better forecasts for future price trend would then become possible to be drawn from the futures market. Second, it would help in adjusting demand-supply gap within specific industrial sector, and last, in the long run it would serve as a hedging tool to the industrial consumer against price volatility in the commodities concerned.

But a cotton trader contended that cotton could not be sold like a scrip; there had to be a delivery contract.

He stated that 65 per cent of the country’s economy depended on cotton. “What if like they do in stocks, the brokers manipulate prices of cotton from Rs2000 a bale, to Rs10000?”

All of it now possibly boils down to the moot point of who is incharge here: The Ministry of Finance or the Ministry of Commerce? Unless the two can resolve the issue, any amount of bickering between the KSE and KCA would be pointless.