NCDEX’s Equities Foray May Diversify Markets but Imperils Agri-Futures

The Securities and Exchange Board of India’s decision to allow the National Commodities and Derivatives Exchange into equities is not a routine announcement. It signals not only an attempt to counter the duopoly of National Stock Exchange-BSE, but also the effective end of India’s agricultural commodities futures market. 

NCDEX has been synonymous with agricultural contracts, while equity trading has been the preserve of the NSE and BSE. With this recent move, SEBI is not just adding another competitor. It is reshaping the country’s market structure, with consequences that extend well beyond the realm of capital allocation. 

Fractured Duopoly
For nearly three decades, the NSE has towered over India’s capital markets, a dominance challenged only by the older BSE. Yet its rise has not been without blemish. From the co-location scandal and dubious data-sharing practices to bizarre tales of yogis whispering advice to top executives, the exchange has accumulated a reputation for poor governance.

Unsurprisingly, this strained its relationship with SEBI, which has repeatedly withheld permission for an IPO, even as the exchange circumvented the process by selling unlisted shares to a wide investor base. The effect was almost farcical: the IPO had, for all practical purposes, already occurred. It was an audacious display of independence that could not have pleased the regulator.

Nor has the BSE escaped censure. From fines for unequal access to disclosures to a protracted dispute over underpaid regulatory fees on options trading, the exchange has found itself under the regulator’s gaze. In this light, SEBI’s move to bring NCDEX, and even perhaps, MSEIL, into equities looks less like routine housekeeping and more like an attempt to dilute entrenched power. 

Liquidity Trap
The trouble is that more competition in equities does not automatically mean better outcomes. Liquidity is everything in markets: the ease and cost of entering and exiting positions. Equity markets thrive when buyers and sellers congregate in a single venue, thickening order books and reducing spreads. Fragment that liquidity across multiple exchanges, and everyone pays more.

Consider a security listed only on the NSE. Buyers and sellers converge in one place, producing a thick order book and efficient pricing. Add three more venues, and the book fractures into thinner slices. Spreads widen, execution costs rise, and large trades become harder to manage. Instead of benefiting from competition, investors end up navigating a  more costly marketplace.

Worse, fragmentation invites arbitrage. A share trading marginally cheaper on one platform than another is an invitation for high-frequency traders to exploit. Differing technology architectures and latency across venues deepen these inefficiencies. For SEBI, which has long argued for protecting retail investors from predatory practices, this is a paradoxical step. Far from levelling the playing field, more exchanges could tilt it towards the fastest and the most technologically adept. 

And then there is the gravitational pull of the liquidity itself. Traders flock to the deepest pool, not the shallow ones. Unless the NSE stumbles dramatically, it is difficult to see why participants would forsake its unparalleled liquidity for new “me-too” offerings. Incentives may attract opportunistic volume for a while, but history shows that once subsidies fade, liquidity evaporates. The experience of MSEIL—launched with fanfare, sustained with incentives, yet languishing at the margins—is proof enough.

The deeper tragedy lies in what this move means for agricultural commodity futures. NCDEX has long been the largest exchange in this space, hosting contracts that allow farmers, producer organisations, and processors to hedge price risk. These markets are not easy to operate. Physical delivery requirements demand warehousing networks, quality assaying, and constant surveillance. Regulation is equally fraught, since the cash markets remain fragmented and opaque. 

And yet, for all their flaws, agricultural futures serve a critical economic function. In theory, they are among the few tools available to shield farmers and agri-businesses from the vagaries of weather, speculation, and global price swings. 

Instead of strengthening those mechanisms, SEBI appears to have chipped away at them. Since 2021, it has banned several major contracts like soybean and derivatives, chana and rapeseed ostensibly to contain inflation and speculation. But in doing so, it has undermined the very utility of agricultural futures. A market stripped of its key contracts is no market at all. 

Seen in this light, NCDEX’s diversification into equities is less a bold expansion and more an act of survival. Confronted with regulatory hostility and shrinking volumes in agri-futures, the exchange has sought a more lucrative domain. SEBI, by granting permission, has effectively sanctioned this pivot. 

The consequence is grim. Faced with the relative simplicity and popularity of equities, NCDEX is unlikely to continue investing in the arduous business of agricultural futures. Capital, technology, and management attention will inevitably shift away. The last institutional mechanism for farmers to hedge against price risks is being nudged towards extinction; not by market failure, but by regulatory apathy. 

RIP agri-commodity derivatives. They were necessary, and they will be missed.