multi commodity exchange of india ltd Management discussions

Among individual commodities, MCX Crude Oil Options was the most traded crude oil options worldwide, while Options on MCX Silver and MCX Natural Gas Futures were second most traded contracts in their respective categories. MCX retained its position as worlds 7^th largest Exchange by the number of commodity Futures contracts traded in 2022, indicated data from FIA.

During the year FY23, the average daily turnover in Futures (including Index Futures) on MCX registered a fall of about 10 per cent to Rs.23,514 crore in FY23 from Rs.26,178 crore in FY22. However, the average daily (notional) turnover in the Options segment jumped up manifold to Rs.33,998 crore in FY23 from Rs.7,860 crore in the previous year. The Exchange clocked its highest ever turnover on 15th March 2023 of Rs.1.68 lakh crore, which also included a record Options turnover of Rs.1.37 lakh crore.

Among the different commodity segments, Options in the Energy segment emerged as the dominant driver of growth, experiencing a substantial increase of about 327% in volume and about 365% in value terms. Average Daily Turnover (notional) in Energy Options rose from Rs. 6,856 Crore in FY22 to Rs. 31,874 Crore in FY23, while Average Daily Volume in this segment increased from 111,012 contracts in FY22 to 474,179 contracts in FY23.

Bullion options also witnessed substantial growth, rising by about 234% in volume and about 112% in value terms in FY23 over FY22. Average Daily Turnover (notional) in Bullion options rose from Rs. 1,002 Crore in FY22 to Rs. 2,122 Crore in FY23, while Average Daily Volume increased from 2,692 contracts in FY22 to 8,988 contracts in FY23.

Trends in volume and turnover in Futures and Options across various commodity segments traded on MCX are provided in Table 3 and Table 4.

Table 3: Average Daily Turnover of commodity derivatives on MCX (Rs.crore)

Table 4: Average Daily Volume of commodity derivatives on MCX (no. of contracts)

PRODUCT-WISE PERFORMANCE

Product-wise performance of your Company during FY23 is given in Annexure I.

FINANCIAL POSITION AND RESULT OF OPERATIONS Revenue:

The Company derives its revenues from transaction fees, admission fees, annual subscription fees, terminal charges, connectivity income, interest income, dividends, gains on sale of investments and other miscellaneous income.

During FY 2022-23, the Companys total income increased to Rs. 52,147 lakh from Rs. 40,323 lakh in FY 2021-22 registering an increase of 29% with a net profit margin of 29%. The operating expenses increased to Rs. 32,947 lakh from Rs. 20,143 lakh in FY 2021-22, registering an increase of 64% due to increase in software support charges, computer technology and communication expenses.

The profit before tax for FY 2022-23 increased to Rs. 17,135 lakh vis-a-vis Rs. 15,897 lakh in the last Financial Year, registering an increase of 8%. During FY 2022-23, the profit after tax increased by 10% to Rs. 12,983 lakh as against Rs. 11,846 lakh in FY 2021-22.

The Company operates in commodity derivatives market segment business. Transaction fees comprise a significant portion (approximately 95%) of the Exchanges revenue from operations. The revenue from transaction fee during FY 2022-23 was Rs. 42,636 lakh, as against Rs. 31,192 lakh in the previous year. The Company had deployed surplus funds in assets such as mutual funds, fixed deposits, perpetual bonds, Exchange traded funds, State Development Loans. The investment income was Rs. 5,963 lakh in FY 2022-23 (Previous year Rs. 5,499 lakh) including gain/(loss) on fair valuation of mutual funds and bonds (Table 5).

Table 5: MCXs Income (Rs. in lakh)

Operating revenue:

The Companys operating revenue stood at Rs. 44,922 lakh for FY 2022-23 as against Rs. 32,978 lakh for previous year. Increase in operating revenue by Rs. 11,944 lakh is due to increase in revenue from transaction fees by Rs. 11,444 lakh (Increase by 37%).

Expenses:

The Companys expenditure consists of employee benefit expenses, clearing and settlement charges, depreciation/ amortization charges, expenditure on computer technology, software support charges and other expenses (Table 6).

Table 6: MCXs expenditure (Rs. in lakh)

Operating costs:

Operating cost of the Company increased by Rs. 12,804 lakh (increase by 64%) from Rs. 20,143 lakh in FY 2021-22 to Rs. 32,947 lakh in FY 2022-23 due to increase in software support charges, computer technology and communication expenses.

Provision for taxation:

The Companys provision for tax for FY 2022-23 is Rs. 4,152 lakh (previous year Rs. 4,051 lakh).

Earnings per share (EPS):

Earnings per share stood at Rs. 25.51 per equity share (of Rs. 10/- each) for FY 2022-23 as against Rs. 23.27 per equity share (of Rs. 10/- each) for previous year. Increase in earnings per share is due to increase in transaction fees.

Profit analysis:

The net profit margin stood at 29% in FY 2022-23 (Previous year: 36%).

Financial performance and operational performance parameters:

The transaction fees has increased by 37% to Rs. 42,636 lakh in FY 2022-23 from Rs. 31,192 lakh in FY 2021-22.

Shareholders funds:

Share capital:

As on 31^st March 2023, the Companys share capital stood at Rs.5,099.84 lakh, i.e. 509.98 lakh shares of Rs.10 each. (Previous year: Rs. 5,099.84 lakh i.e., 509.98 lakh shares of Rs.10 each).

Other equity:

The Companys other equity increased to Rs. 1,54,470 lakh as on 31^st March 2023 from Rs. 1,50,430 lakh as on 31^st March 2022. The net worth of the Company as at 31^st March 2023 stood at Rs. 1,59,570 lakh as compared to Rs. 155,530 lakh as at 31^st March 2022.

Secured loans:

The Company had no secured loans in its books as on 31^st March 2023, as well as, on 31^st March 2022.

Fixed assets:

The Companys fixed assets (including capital work in progress, right of use asset, intangible assets and intangible assets under development) stood at Rs. 31,311 lakh as on 31^st March 2023, as against Rs. 24,687 lakh as on 31^st March 2022.

Investments:

As on 31^st March 2023, the Companys investments (Non-current and Current) stood at Rs. 1,21,615 lakh, as against Rs. 1,39,788 lakh as on 31^st March 2022. Decrease in investment by Rs. 18,173 lakh is mainly due to cash outflow on account of dividend payout and increase in software support charges, computer technology and communication expenses.

Current assets and current liabilities:

The current assets consisting of trade receivables, cash and cash equivalent, bank balances and other current assets is Rs. 37,286 lakh as on 31^st March 2023, as compared to Rs. 81,689 lakh as on 31^st March 2022. The above figures include current investments of Rs. 12,834 lakh as on 31^st March 2023 and Rs. 71,349 lakh as on 31^st March 2022. Decrease in current assets is due to liquidation of current investments to invest in long term investments which is shown under non-current investments.

The current liabilities consisting of creditors, security deposits and others stood at Rs. 20,763 lakh as on 31^st March 2023, as against Rs. 19,232 lakh as on 31^st March 2022.

Key Financial Indicators: For Standalone:

For Consolidated:

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Board has put in place various measures to ensure that the internal control mechanisms are adequate and effective. The Board has also put in place state-of-the-art technology and has automated most of the key areas of operations and processes, to minimize human intervention.

The design, implementation and maintenance of adequate internal financial controls are such that they operate effectively and ensure accuracy and completeness of the accounting records. Their presentation gives a true and fair view of the state of affairs of the Company and they are free from material misstatements, whether due to error or fraud.

The operational processes are comprehensively documented coupled with well-defined Standard Operating Procedures. The same includes the financial controls in the form of maker and checker.

The Board has approved a scheme of financial sub-delegation to officials of your Company for incurring expenses. The Board, with a view to ensure transparency, has also formulated various policies and has put in place appropriate internal controls for procurement of services, materials, fixed assets, monitoring income streams, investments and financial accounting.

Internal control measures includes adherence to systemic controls, information security controls, as well as, role based/ need based access controls. Further, the existing systems and controls are periodically reviewed for change management in the situations of introduction of new processes/change in processes, change in the systems, change in personnel handling the activities and other related activities.

The Audit Committee of the Company, comprising of majority Public Interest Directors, reviews and recommends the un-audited quarterly financial statements and the annual audited financial statements of your Company to the Board for approval.

Your Company has appointed a firm of Chartered Accountants to conduct independent financial and operational internal audit (pre and concurrent) in accordance with the scope as defined by the Audit Committee. The reports from the Internal Auditors are reviewed by the Audit Committee on periodic basis.

Pre-audit by the Independent Internal Audit firm is conducted for various activities including payments made by the Company.

Further, all related party transactions are placed before the Audit Committee and are approved/ratified by it after deliberations. Prior omnibus approval of the Audit Committee is obtained on annual basis for related party transactions which the Company foresees to be in the ordinary course of business and on an arms length basis.

COMPETITIVE STRENGTHS

The attributes of your Company that have made it the market leader and sustain its unique position are described in the following paragraphs:

Strong Brand Equity

MCX has remained the leading Exchange in commodity derivatives markets in India, garnering about 96.67 per cent of market share in commodity Futures turnover and nearly 99.72 per cent in case of commodity Options turnover (notional) in FY 2022-23. MCX enjoys a strong brand equity as it provides a reliable trading platform for commodity derivatives through transparent price discovery and robust risk management processes. The prices discovered on MCX platform serve as a benchmark for trades in physical markets, thereby facilitating the price discovery process in the physical market. Multi Commodity Exchange Clearing Corporation Limited (MCXCCL), a wholly owned subsidiary of MCX, provides an efficient platform for clearing and settlement of all the trades executed on MCX.

Best Practice of Corporate Governance

As an Exchange, your Company is subject to a high level of regulatory oversight. MCX is committed to working with all the stakeholders to ensure an orderly, informed, and fair market for the benefit of all concerned. It is also committed to strong and effective internal governance and regulation and believes that regulatory integrity benefits stakeholders and attracts market participants to trade on the Exchange platform. The Exchange has a dedicated Regulatory Department, which performs various functions for ensuring compliance with regulations applicable to the Exchange in terms of SEBI Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018 (SECC Regulations, 2018) as well as other regulations. The Exchange has a dispute resolution mechanism in place for redressal of disputes between Investors/ Clients and Members of the Exchange. Disputes unresolved at the first level can be referred to the Grievance Redressal Committee (GRC), Arbitration and Appellate Arbitration, subsequently.

Awards and Recognition

MCX has been the recipient of several awards over the years, in recognition of its contribution to the development of Indias commodity derivatives market. The Exchange was honoured with the Best Commodity Exchange Award at the 8^th International Convention of the Commodity Participants Association of India (CPAI) held on 28^th May 2022, at New Delhi. In July 2022, MCX was conferred the Best Commodity Exchange of the Year 2022 award at the India Gold Conference event at Chennai.

High Global Standing

MCX is ranked worlds 5^th largest Exchange by the number of commodity Options contracts traded in 2022, improving from 6^th position in 2021, as per data released by the Futures Industry Association (FIA). Among individual commodities, MCX Crude Oil Options was the most traded crude oil options worldwide, while Options on MCX Silver and MCX Natural Gas Futures were second most traded contracts in their respective categories in 2022. MCX maintained its position as worlds 7^th largest Exchange by the number of commodity Futures contracts traded in 2022.

Strong Technology Framework

Your Companys technological infrastructure is built on a robust architecture, which can cater to all market participants by virtue of being fast, secure and transparent. The Exchanges state-of-art data centre is supported by best-in- class network and security infrastructure with high availability at all levels. The Company runs Defence-in-depth strategy to ensure information security at all layers with well-defined Information Security policy and Cyber Security and Cyber Resilience policy governance measures. The Exchanges technology architecture supports multiple secured modes of connectivity such as MPLS leased line, Point-to-Point Leased Line and Over-the-Internet connectivity options built-to-scale. Currently, the Exchange handles up to 162.66 million transactions on a single day. The Exchange strives to move forward with increased footprint of web-based application, for seamless exchange of information within the organisation and with its members for early turnaround time.

The Exchange also has a comprehensive Business Continuity Plan (BCP) with efficient & seamless switch-over & restoration, of the trading operations to-&-from Disaster Recovery Site (DR Site) within stipulated timelines and has real time synchronous data replication to the Near-Online Site, to achieve near zero data loss. Besides, your Company has also implemented Security Operation Centre (SOC) for monitoring and raising alerts related to cyber-attacks and other security related incidents round the clock. The Exchange has also implemented Privilege Access Management (PAM) tool to monitor and manage the access control of the critical assets and has enhanced security by implementing 2-factor authentication (2FA) for remote users.

The Exchange, as per regulatory requirement, carries out live trading from its DR site from time-to-time, thereby demonstrating its IT resiliency and operational excellence.

These attributes of MCXs technology have enabled the Exchange to provide a robust trading platform for trade and retain its members confidence and market leadership position in commodities markets consistently.

OPPORTUNITIES

Regulatory Permission for Foreign Portfolio Investors (FPIs)

During the FY 2022-23, SEBI granted permission for Foreign Portfolio Investors (FPIs) to participate in the commodity derivatives market. This move has enabled foreign investors to trade in Exchange-traded commodity derivatives without necessarily having actual exposure to physical commodities. Subsequently, from April 2023, FPIs have started participating on the MCX platform. As of now, FPIs have been allowed to trade only in cash-settled non-agricultural commodity derivatives and select non-agricultural benchmark indices, but it is hoped that the universe of permissible products would be further widened for these participants in the near future. Entry of FPIs in the commodity derivatives market is an important development, as it is expected that their participation would promote efficient price discovery as well as enhance liquidity and market depth in the commodity derivatives contracts, especially in far month contracts.

Introduction of New Products

Following market demand and regulatory approval, your Company launched mini contracts in Base Metals (Aluminium, Zinc and Lead), Crude Oil and Natural Gas, as well as Options on Gold Mini during the FY 2022-23. Besides, regulatory approval has been received for contracts in Steel Futures and Gold Monthly Options. The Exchange shall launch these products at an opportune time. Likewise, your Company also looks forward to launching derivative products on new commodities such as Electricity, subject to regulatory permission.

Trusted Platform for Commodity Hedging

The MCX platform and its clearing arm have proven to be a trusted platform for managing risks arising from commodity price volatility. Independent assessment of the state of global commodity markets indicate that volatility in commodity prices may persist. The Financial Stability Reports released by the Reserve Bank of India, for instance, have been identifying volatile commodity prices as a source of risk in the Indian economy. Likewise, the 2022 Trends, Risks and Vulnerabilities Report from the European Securities and Markets Authority (ESMA) had underscored the mounting uncertainty in financial markets, exacerbated by the ongoing conflict between Russia and Ukraine, which is significantly impacting global commodity markets. The Elnino can have a major bearing on global agricultural production, causing increased volatility in prices - a big source of risk in the economy. Your Exchange is geared to meet the demand for risk management that stakeholders might seek from such continued price volatility in multiple commodities.

POTENTIAL THREATS

Concentration in Members and Products

Your Company has an extensive national reach with 548 registered Members as on 31^st March 2023. However, for many commodity futures and options contracts, there is concentration of risk, as major volumes are driven by few large Members. Similarly, the basket of liquid futures and options contracts on MCX is restricted to a few non-agricultural commodity derivative contracts. Such concentration in active members and liquid contracts can cause over-dependence on these Members and contracts and lead to potential business risks for your Company.

Launch of Mirror Products by Competitors

Following permissibility to all recognized Stock Exchanges to launch commodity derivative contracts, some Exchanges, which were active in other asset classes, started offering commodity futures and options contracts, albeit with little success. Nevertheless, other Exchanges have continued launching products that fully mirror MCXs most liquid contracts, which may pose a threat to the market share of your Company.

Cyber Security Management

Cyber security threat is increasingly becoming critical with new threats that seek to exploit any vulnerability in the Exchanges systems. For MCX, being a MII, providing an online trading platform, cyber security is of paramount importance for ensuring trust among the market participants, regulators and stakeholders.

In view of such threats, MCX has adopted a defence-in-depth strategy to ensure information security at all layers with well-defined Cyber Security and Cyber Resilience Policy and comprehensive Information Security policy. MCX has established onsite Next Gen Cyber Security Operations Center (C-SOC) which operated on 24/7 for continuous monitoring, detection, quick response and recovery in case of any type of cyber-attacks/incidents. Information Security team has implemented people, process and technology security controls in the form of best in class tools and technologies, processes aligned with global standards like ISO 27001:2013 and regular awareness initiates to strengthen the human firewall for protection against cyber-attacks.

Constant enhancement and continuous improvement in the Cyber Security Framework and Information Security Management System has been your Companys top priority. MCX Information Security Policy is based on the ISO 27001:2013 standard and MCX is also ISO 27001:2013 certified.

To manage cyber security risks associated with processes, information, networks, systems and applications, the Cyber Security and Cyber Resilience Policy of your Company includes the following:

i. Identify critical IT assets and risks associated with such assets;

ii. Protect assets by deploying suitable controls, tools and measures;

iii. Detect incidents, anomalies and attacks through appropriate monitoring tools/processes;

iv. Respond by taking immediate steps after identification of the incident, anomaly or attack;

v. Recover from incident through incident management, disaster recovery and business continuity framework.

The Business Continuity and Disaster Recovery Plan (BCP-DR Plan) is aiming at timely restoration of systems affected by any type of disasters, including incidents of cyber-attacks or breaches. The plan also includes live trading at DR without announcing to the members as mandated by SEBI. MCXs recovery plan is within the Recovery Time Objective (RTO) of 45 minutes and Recovery Point Objective (RPO) of 15 minutes as specified by SEBI.

RISKS AND CONCERNS

Your Companys business performance and financial position depends on various internal and external factors, some of which may give rise to risks and concerns.

Business Risks

Impact on revenue from downturn in Metals and Energy prices

Throughout the year 2022-23, global commodity markets were characterised by high volatility in commodity prices, driven mainly by the Russia-Ukraine war, aggressive rate hikes by the US Federal Reserve, and persistent worries about Chinas economy. The war in Europe caused an abrupt rise in commodity prices, as supply constraints and concerns led to record or multi-year high inflation in many countries. In the second half of the year, the US dollar, which had reached a two-decade high, and concerns over Chinas economic downturn, led to a general cooling in commodity prices.

The US Federal Reserves aggressive rate hikes, which began in the first quarter of the year 2022 after keeping rates near zero since the start of the COVID pandemic, had a direct impact on global commodity prices. The Fed raised interest rates seven times in 2022, putting downward pressure on most dollar-denominated global commodity prices. Elevated interest rates, concerns about the US economy and early forecast of global economic slowdown may continue to put downward pressure on commodity prices in the near future. As MCXs transaction fee is based on the value of commodity derivatives contracts traded on the Exchange, your Companys revenues may be affected by the value of contracts traded in the event of persistent depression in prices.

Disruption in global benchmark exchanges

Many stakeholders of MCX use prices discovered at global exchanges or international trading hubs as benchmarks for international commodities. Any disruption in such global exchanges or trading hubs, can lead to commensurate destabilisation in the local markets which use their prices for reference. In turn, the disruption can lower the confidence of market participants to trade on the Exchange, affecting its volumes.

High employee attrition

With rapid evolution of the industry, many organizations, including your Company, may face the challenge of high employee attrition. There are direct and hidden costs associated with high employee attrition, such as the cost and time expended in recruitment and training of new employees, apart from the loss of accumulated skills and knowledge of the exiting employee. Such costs can have a direct bearing on organizational productivity resulting in loss of revenue and potential opportunities.

Market Risks

Decline in Treasury Income with Interest Rates Peaking Out

The Reserve Bank of India (RBI) has been adopting a tight monetary policy during the year 2022-23, increasing policy rates as many as six times during the year, by a total of 250 basis points since 2022, in order to cool inflationary pressures in the economy. However, as inflation comes under control, the RBI may start unwinding the tightening of monetary policy, which could have a direct impact on your Companys treasury income, as the drop-in interest rates from their recent highs may dent interest income on investments in the upcoming quarters.

Macro-economic Trends and Risk

The performance of commodity derivatives markets and your Companys growth are significantly influenced by macro-economic conditions in the domestic and global economy, particularly in terms of growth, production, and consumption activities. Despite some signs of moderation in growth during FY23, Indias growth remains resilient and continues to be one of the fastest growing economies globally. However, the World Bank, in its latest (March 2023) biannual India Development Update, warns that growth may be constrained due to slower consumption growth and challenging external conditions. Private consumption growth may be impacted by rising borrowing costs and slower income growth, while government consumption may grow at a slower pace due to the withdrawal of pandemic-related fiscal support measures, mentions the World Bank. As noted above, the Reserve Bank of India has been consistently raising policy interest rates to curb inflation, which may also affect economic growth. Although Indias financial sector remains strong, spillovers from financial market developments in the US and Europe could pose a risk to short-term investment flows to emerging markets, including India. A weak external demand is also a potential downside risk to the growth outlook. A significant reduction in economic activity could result in a decrease in demand for commodities, leading to a decline in the need for commodity risk management, which could have an adverse impact on your Companys growth prospects.

Technology Risk

Migration to New Technology Platform

Your Company have engaged M/s. Tata Consultancy Services Ltd (TCS) for development and implementation of the Commodity Derivative Platform (CDP). There was a delay in implementation of the new platform. Both MCX and technology partner are taking various steps towards smooth migration to the new platform.

To ensure smooth running of the business, your company has extended the existing software support services contract with M/s. 63 moons technologies limited for the period of six months from 01^st July 2023 till 31^st December 2023. Your Company propose to implement the new technology platform and complete the migration before end of September 2023.

Upon examination of the issues relating to the contracts executed with the software vendors pertaining to the existing and new CDP software of MCX, SEBI has raised certain observations. SEBI has, inter alia, observed that the Management did not implement the SEBI outsourcing circular dated 13^th September 2017. In this regard, SEBI may initiate quasi-judicial proceedings against MCX and its officials for which show cause notice would be issued in due course. Further administrative warnings have been issued to four Key Managerial Personnel with regard to some of the above observations. In the interest of all the stakeholders, SEBI has directed the Exchange to implement the CDP project by September 30, 2023.

Vulnerability to obsolescence and cyber-attacks

The successful operations of your Companys business and operations are dependent in part on the use and deployment of technology. However, technology is susceptible to obsolescence and increasing cyber-attacks from across the globe. To continue to be the exchange of choice to its stakeholders, your Company needs to continuously invest resources to have cutting edge technological infrastructure and connectivity.

Your Company sources its core trading software platform from third party vendor. In case the third party vendor is unable to provide services, or keep pace with technological advancements, it may impact the technology operations and technology enhancements required, if any.

Financial Risk

Imposition or enhancement of statutory costs

Imposition of Commodity Transaction Tax (CTT) in July 2013 had a major negative impact in your Companys volumes. Hence, any new tax, increase in a tax like CTT or a new statutory levy may dampen volumes, thereby impacting your Companys profitability. An unexpected tax demand or levy of a fee/fine may also, likewise, affect your Companys profitability.

Regulatory Risk

Adverse Regulatory and Policy Decisions

All aspects of your Companys operations are subject to regulatory oversights. Changes in Laws, Regulations, Taxation etc., or new Rules, Regulations or Policies may necessitate the Company to allocate more resources for compliance, which may increase operational expenses. This may impede the Companys ability to operate and grow its business.

Suspension/Ban on Trading in Derivative Contracts

On 20^th December 2021, SEBI suspended derivatives trading in several commodities, including Non-Basmati Paddy, Wheat, Chana, Mustard Seeds and its derivatives, Soyabean and its derivatives, Crude Palm Oil (CPO), and Moong. Though the suspension was announced initially for a year, on 20^th December 2022, SEBI extended the suspension for one more year. CPO futures contract was one of the most actively traded contracts on MCX in the agri-commodities segment. Prior to the suspension, the contract contributed an average daily turnover of around Rs.380 crore during April-November 2021. Its suspension resulted in loss in trade volumes and income for the Exchange over the past two years.

Your Company faces risks of such abrupt suspensions/bans on commodity derivative contracts. Such suspensions can have direct and indirect consequences. Directly, they result in an unexpected and unplanned loss of transaction revenue for the Company. Indirectly, they can undermine the confidence of market participants in the continuity of other derivative contracts as well. These acts of suspension or ban may pose risks to your Companys business.

RISK MITIGATION PLAN

Your Company regularly reviews the risks it faces and takes appropriate action to minimize the likelihood of such occurrences or their impact.

Your Company, being the market leader, has been seeking to expand the overall market by introducing new products and bringing more participants. Further, your Company believes in introducing products after thorough market research and feedback and intends to capitalize on its large network and physical market connect. This gives your Company a competitive edge over others and helps to meet challenges posed by competitors. Further, your Company has been seeking to diversify its product basket, by adding more products in futures, as well as options across commodity segments. A well-diversified product basket should help the Company to counter over dependence on single product/segment in prices.

To minimize the effect of interest rate volatility on treasury income, your Company continuously monitoring its portfolio to be in line with the market trends. Your Company has adopted amortization method for investments held till maturity.

As a part of the risk mitigation and containment plan for avoiding business disruption, your Company has focused on strengthening its core technology infrastructure so that there is no single point of failure, thereby, ensuring uninterrupted trading operations. As a backup plan, your Company has a DR Site which has a robust infrastructure and accessibility.

Further, your Company has a Near Online Site (NOS) in Mumbai with data replication to achieve near zero data loss in case of any eventuality. Your Company regularly conducts mock drills to test the readiness and effectiveness of IT infrastructure at its Data Centre and DR Site as part of BCP DR preparedness. Your Company had carried out two days of unannounced live trading twice from its DR Site in FY 2022-23 as a part of regulatory compliance. All the trading & surveillance operations were carried out from the DR Site. Post live trading from DR site, your Company commenced its operations from its Primary Site smoothly.

Your Company is also certified for ISO 22301:2019, a recognized international standard for Business Continuity Management System (BCMS). This affirms MCXs ability to consistently demonstrate effective BCMS and endeavours to improve confidence in our ability to respond to incidents amongst all its stakeholders.

SETTLEMENT RISK MANAGEMENT

Subsequent to operationalization of MCXCCL in 2018, the clearing corporation is undertaking risk management, clearing and settlement, warehousing functions. MCXCCL ensures that within the regulatory framework, an efficient and effective clearing and settlement activity along with an effective funds settlement mechanism, commodities delivery mechanism are adhered to. Above all, it maintains a robust risk management system by levying margins real time and to that effect carries out daily stress tests and maintains a Settlement Guarantee Fund. Further, it has laid down various margin requirements to safeguard members and the ecosystem against adverse market movements. It has necessitated all its clearing members to have a certain minimum net worth and confirm their net worth on a half-yearly basis, which enables it to monitor and ensure their financial strength. It has also implemented additional risk mitigation measures as part of member monitoring like Margin Shortfall Block Amount, Risk Reduction Mode, Square off Mode, Exposure Free Deposit for MTM Shortage, etc.

STRATEGY

Your Company aims to further consolidate its position as the leading Exchange providing a wide array of Commodity Derivatives with increased focus on enhancing overall market size, expanding its product and service offerings and integrating exchange ecosystem with domestic physical industry. Your Company also constantly look for new product innovation and development, and offers state-of-art services to all its stakeholders. Your Company will also continue to make relentless efforts in tapping the opportunities unfolding in Indias commodity market.

Focusing on physical market integration, wider participation and in expanding product suite

In pursuit of the Atmanirbhar Bharat Mission, the Company established Good Delivery norms for BIS standard gold and embarked upon the path of recognizing domestic bullion refiners for good delivery of gold bars against Gold Mini (100 grams) contracts. The empaneled refiners includes that of MD overseas, Kundan Care Products, Augmont Enterprises, Titan Company and Sovereign Metals. Delivery of 3961 kgs of Indian refined gold valued at 2116 crore was delivered under this route during FY 2022-23 and delivery of 5633 kg valued at 2988 crore till June 2023.

Continuing the pursuit, your Company has also started recognizing domestic refined lead producers as eligible deliverable brands for good delivery on the Exchange. It has empaneled Eswari Global Metal Industries Private Ltd and Jayachandran Alloys Pvt. Ltd as good delivery brands. This takes the total count of approved domestic refined lead producers to four and the empanelment for many other domestic producers is under process. In a significant move to bring back the lost retail participation, the Exchange has relaunched Mini contracts (smaller denomination contract). 1MT contracts of Aluminium, Lead and Zinc were launched keeping intact the alignment of the trading and the delivery lot. Further, your Company continues to bring in measures for integration with physical market and to reduce regional price disparities. The Company has been working towards achieving One Nation One Price and has designated warehouses in Thane, Raipur, Chennai, Kolkata, and National Capital Region (NCR) to cater to all regions of the country. We have seen inflows of metal at various locations which reflects the industrys adaptability to the Exchange delivery mechanism.

Meanwhile, the base metal contracts have been witnessing significant deliveries since their conversion into compulsory deliveries during year 2019.

Focus on strengthening technical capabilities

Your Company is investing in innovation, next generation platform(s), building in-house solutions to be agile and self-reliant to meet the growing demands of all the stakeholders. For this, the Company is adopting new technologies for applications, solutions, reporting and analytics. The Company is strengthening its technical capabilities to develop and support these platforms with a right balance of in-house and outsourced talents.

As a part of the commitment to our stakeholders and the partner ecosystem, your Company undertakes proactive audits to strengthen its core processes, cyber security posture and adherence to regulatory guidelines.

Your Company has comprehensive Information Security (IS) policy in line with the global security standards like ISO 27001:2013, incorporating regulatory guidelines from SEBI and NCIIPC and is being adhered for Compliance. The Exchange has a Security Operations Centre (SOC) to provide 24x7x365 days vigilance against cyber threats and the SOC is being upgraded to Next Gen Cyber Security Operations Centre (CSOC) with advanced tools and professional services in a dedicated set-up built for onsite operations. Since most of the cyber incidents happen on account of human errors, IS team is taking proactive IS awareness initiatives through regular sessions and trainings, publishing awareness magazines, conducting phishing exercise and cyber drills to take care of the human element of cyber security.

Your Companys robust technology infrastructure continues to provide smooth trading experience to all members and their end-clients. Further, your Company has been actively working for development and deployment of the Commodity Derivatives Platform with M/s Tata Consultancy Services Ltd.

As part of the strategy to minimise vendor dependency and increase flexibility to implement solutions as per the business expectation and timelines, the Exchanges technology team has strengthened its capabilities to develop in-house solutions for peripheral systems, to ensure quality services for different stakeholder groups.

INITIATIVES

Your Company remains committed to strengthening its processes and creating products to uphold the trust bestowed by its stakeholders. During the FY23, your Company undertook several initiatives to remain at the forefront in product and process innovation and facilitate the development of the commodity derivatives market.

Launch of new products

On 25^th April 2022, MCX launched Gold Mini Options contract, with Gold Mini (100 Grams) Futures as the underlying. Characterised by expiries in every month and smaller denomination, and therefore, carrying lower premiums, this Options contract is ideal for small and medium-sized jewellers to hedge their bullion price risk. During the year, your Company also successfully launched mini future contracts in Zinc (on 17^th February 2023), Aluminium (on 20^th February 2023), Lead (on 22^nd February 2023), Crude Oil (on 03^rd March 2023) and Natural Gas (on 14^th March 2023).

The Base Metals mini futures contracts are of lot size of 1 MT, quotation/base value fixed at Rs.1 Kg and the tick size has been fixed at 5 paise per kg. The crude oil mini-futures contract has a lot size of 10 barrels, one-tenth of its larger counterpart, and a tick size of Rs.1. The maximum order size is 10,000 barrels or 1,000 contracts, while Natural Gas mini contract has a lot size of 250 MMBtu, which is 20 per cent of the lot size of its larger counterpart. The tick size for this contract is 10 paise and the maximum order size is 60,000 MMBtu or 240 contracts.

Mini future contracts at MCX provides an efficient and cost-effective avenue for risk management to stakeholders of the commodities value chain. They are, particularly, suitable for small stakeholders as they carry lower margin requirements.

Modification of Cotton Contract

After receiving feedback from stakeholders and market participants, the MCX Cotton Futures contract was modified and launched as a new Cotton Candy Futures Contract on 13^th February 2023. The new contracts trading unit has been changed from a bale (170 kg) to a candy (~356 kg), and the tick size has been modified from Rs.10 to Rs.20 per candy. Additionally, the near-month delivery size has been changed from 85,000 bales to 2,400 candy (5,000 bales), and more delivery centres have been added to ensure the smooth delivery of the commodity. Moreover, quality and delivery norms have also been updated in tune with market feedback.

Developing Domestic Physical Market Standards and Benchmarks

In order to develop standardization in the domestic physical commodity markets and to bring stakeholders of the commodity value chain into the Exchanges delivery mechanism, your Company had prescribed detailed guidelines on MCX Good Delivery Norms for BIS-Standard Gold/Silver in FY 2020-21 to facilitate the entry of local refiners into the Exchanges delivery process. Till 31^st March 2023, 4 domestic refiners have been empanelled as per "MCX Good Delivery Norms for BIS-Standard Gold/Silver" for delivery in the existing contract specifications of Gold Mini (100 grams) futures contract. These refiners have delivered total of 4972.1 Kg of gold amounting to Rs. 2609 crores till 31^st March 2023, under the existing contract specifications of Gold Mini (100 grams) futures contract.

Likewise, during FY 2021-22, your Company had brought domestic brands of Lead within the Exchange delivery mechanism by prescribing requisite specifications and standards for acceptance under MCX Good Delivery of the metal. As on 31^st March 2023, 4 domestic lead producer facilities have been empanelled under this initiative, a step towards creating India-based benchmark of this metal and an initiative of your Company towards achieving Atmanirbhar Bharat.

Cyber Security Awareness Month

MCX observed October 2022 as the Cyber Security Awareness Month, an initiative under the aegis of Indian Computer Emergency Response Team (CERT-In). Activities such as quizzes, poster making competition, slogan competition, hackathons, cyber games, expert sessions, etc. were conducted by the Exchange throughout the month to create awareness on cyber security and enhance preparedness among employees against cyber-attacks.

Outreach initiatives

Your Company has been proactively taking initiatives to raise awareness among diverse stakeholders about the significance and advantages of a well-operating, transparent commodity derivatives market. To promote a culture of risk management, the Company has implemented various measures to educate potential hedgers on the essentiality, benefits, and mechanisms of price risk management using exchange-traded commodity derivatives. Additionally, your Company launched multiple investor awareness campaigns to educate potential investors on investing in commodity asset class through exchange-traded derivatives. MCX conducted various awareness programmes for stakeholders in the commodity markets, collaborating with Exchange members, media, industrial associations, banks, broker associations, among others. The Exchange has also been conducting online outreach programmes to reach out to distant stakeholders who cannot attend these programmes in person to further promoting of awareness and understanding of commodity derivatives.

The details of some of such outreach initiatives are given below:

a) Your Company conducted 2452 awareness programmes across various stakeholders for commodities and products during FY 2022-23. A number of these programmes were conducted in partnership with industry associations, media and professional bodies. The Exchange partnered with industry associations like CPAI, ANMI, ASSOCHAM, India Bullion and Jewellers Association, All India Gems and Jewellery Domestic Council, India Lead Zinc Development Association, Confederation of Indian Textile Industry, Fertilizer Association of India, Institute of Company Secretaries of India, The Institute of Chartered Accountants of India, etc. with the aim to create awareness about commodity hedging/ investment among diverse stakeholder groups.

b) A variety of media activities were conducted during FY 2022-23 using different modes such as print, TV, radio, digital, OOH and social media campaigns on Youtube, Facebook, LinkedIn, Twitter and Instagram with the aim to create awareness about commodity derivatives markets among stakeholders and general investors.

c) MCX conducted 349 events during the year exclusively focused on Farmer Producer Organizations (FPOs) and farmers. This was done to spread awareness amongst the farming community about how price discovery and price dissemination by exchanges can enable them to realize better prices while selling their agricultural produce;

d) MCX observed World Investor Week during 10^th October 2022 - 16^th October 2022 spreading awareness and information about investment in safe and regulated marketplaces. To mark this occasion, MCX organised a number of events and activities, culminating in a walkathon on 16^th October 2022. The activities included 90 awareness programs across the country; a number of quizzes and crossword puzzles on commodity-related themes; Commodity Caravans that started from Mumbai and criss-crossed various towns across Maharashtra (viz. Pune, Nashik, Jalgaon. Akola, Satara, Sangli, Kolhapur, Nagpur, etc.) over seven days; apart from a Walkathon which was participated by over 300 walking enthusiasts. The week was also marked by release of the Commodity Insights Yearbook 2022, a joint initiative of MCX Investor Protection Fund and the National Institute of Securities Markets.

e) To acknowledge the contribution of various stakeholders in ensuring the growth, continuity and the development of Indias commodity derivatives market, the Exchange organized the MCX Awards Ceremony on 05th November 2022. In that event, organized after three years due to pandemic-related restrictions, the Exchange recognized the contributions of hedgers, warehouse service providers, institutional participants, mentors and member brokers.

f) Protecting investors from mis-information and fraud, especially on electronic and social media channels, is an initiative your Company has taken up on priority. The Exchange is cognizant of the ease of investors access to markets and information through digital channels, as also the fact that digital access is accompanied with challenges like online frauds, misinformation through social media and new types of scams using technological channels and behavioural techniques. To deal with these challenges, MCX has regularly been publishing alerts to caution the public of sources providing illegal trading tips or indulging in illegitimate transactions. We have taken up with concerned authorities to close down illegal websites where there was use of MCX brand.

Educational Initiatives

Your Company engaged with numerous educational institutions to spread knowledge about commodity markets among students and academicians. One of the effective initiatives to spread knowledge among the student community has been

COMQUEST - the annual commodity quiz that witnesses participation of college students from across India. COMQUEST 2023 that concluded on 10^th February 2023 witnessed an all-time high participation of 6727 students, representing 401 colleges from 152 cities and towns, with about 40% of participants being women students.

Publications

MCX publishes various articles in print media and engages with the electronic media to create awareness about the benefits of the commodity derivatives markets as well as for sensitizing policymakers about various policy changes that can further its growth. Officials of MCX write articles on issues relevant for commodity markets which are published in trade journals, newspapers, online media, and magazines with wide outreach. Awareness about commodity markets, including hedging using commodity derivatives is also created through various channels of the electronic media including regional channels.

Apart from the annual Commodity Insights Yearbook mentioned above, a monthly newsletter Commodity Connect is widely circulated and uploaded on the website, which is another effective tool used to regularly communicate with the Exchanges stakeholders.

In addition, various commodity-specific brochures providing information on hedging, investment, disclosures, etc. are published in multiple languages to spread awareness about opportunities for hedging and investment in the commodity derivatives market.

Research Studies

Your Company has undertaken four studies during the FY 2022-23 on various themes connected to commodity derivatives market. The studies were Suspension of Commodity Derivative Contracts and Impact on Price Discovery undertaken by IIM Ahmedabad; Regulatory Landscape in Equity Derivatives versus Commodity Derivatives Markets in India, undertaken by IIM Lucknow; Facilitating institutional participation in Indias commodity derivatives market; undertaken by IIM Jammu and Evaluating Risk Management Tools in Indian Commodity Derivatives Market, undertaken by Acies Consulting. The reports of the studies have been widely publicised through the Exchanges website and social media accounts. Besides, the findings of the studies are also being disseminated through articles published in the print media and also awareness events.

Further, two research studies have been initiated during the FY 2023-24, which include Analyzing Costs and Benefits of Flexibility in Contract Design on Development of Commodity Derivatives Market, being undertaken by NIT Rourkela and Hedging of Price Risks in Base Metals, being undertaken by ICFAI Business School.

OUTLOOK

The broad outlook for your Company in the near to medium term is discussed below:

Improving Growth prospects to Boost Commodity Demand

Amidst the turbulence caused by fresh headwinds from the banking sector turmoil in some advanced economies, the global economy is experiencing renewed challenges in the current year. Despite these adverse conditions globally, Indias economic outlook remains healthy. The Reserve Bank of India (RBI) has reported that economic activity in India remained resilient in FY 2022-23, and real GDP growth is expected to have been 7.0% in FY23. Looking ahead, the RBI projects a moderation in headline inflation for FY24 as the monetary policy actions taken since May 2022 take full effect. Overall, the broadening of economic activity, expected moderation in inflation, fiscal consolidation with a focus on capital spending, significant narrowing of the current account deficit to more sustainable levels, and comfortable level of foreign exchange reserves are developments that are expected to further strengthen Indias macroeconomic stability. In its April 2023 Policy Review meeting, the RBI Monetary Policy Committee projected GDP growth for FY24 at 6.5%, which, though lower than the growth rate of FY23, is slightly higher than the previous projection. With the potential boost in commodity demand following the economic upswing, there could be new opportunities for your Company to innovate and introduce new derivative products that fulfil the requirements of stakeholders in both agricultural and non-agricultural commodities. Therefore, the outlook for your Company is positive, primarily due to expanding demand from the improvement in economic activities and the increasing need for commodity price risk management.

Expansion of Product and Participant Categories

To promote institutional participation in Exchange Traded Commodity Derivatives (ETCDs), on 29^th September 2022, SEBI issued detailed guidelines to allow foreign investors to participate in Indian ETCDs through the FPI route in cash settled non-agricultural commodity derivative contracts and indices comprising such commodities. Subsequently, FPIs have started participating on the MCX platform. As evidenced in other asset classes, it is expected that FPIs would be an important category of participants in commodity derivatives market too, providing liquidity and depth in this market.

On similar lines, the opportunity before your Company is enormous, considering that multiple other financial institutions like banks, insurance companies and pension funds, etc. could also be permitted in the coming days. Financial institutions, by leveraging on their geographical reach, research expertise and capital strength can enable more efficient price discovery and take the benefits of the commodity derivatives market to more participants. Further, their long-term strategies have high potential to improve the liquidity in the farther month contracts, which will be of immense benefit to physical market participants looking forward to hedge using long-dated contracts.

Growth Opportunity at Gold Exchange at IFSC

On 29^th July 2022, Honble Prime Minister Shri Narendra Modi inaugurated the Indian International Bullion Exchange (IIBX) at Gift City, Gandhinagar, Gujarat, an initiative of MCX together with other Exchanges and Depositories. In tune with Honble Prime Ministers vision, we too hope that as it picks up volumes, the new Exchange not only internationalises Indias Bullion trade, but also emerges as an institution capable of making India a price setter in Bullion and creating a vibrant trading hub at GIFT City.

Continued Policy and Regulatory Reforms to Provide Impetus

The growth of Indias commodity derivatives market, in which your Company has a leadership position, has continuously been enabled and supported by policy and regulatory actions aimed at deepening and broadening the market. These actions have led to not only expansion of products and eligible participants in this market, but also introduction and modification of systems and processes that encourage participation. As announced in the Union Budget 2023-24, the government would introduce adoption of risk-based KYC, PAN as the common identifier for all digital systems of government agencies, unified filing process on a common portal, etc. which can streamline participation on exchange-traded markets. Likewise, it is hoped that regulatory changes that encourage institutional participants, lower the direct and indirect cost of participation and rationalise the risk management system in the commodity derivatives market, would be introduced. Such changes can enhance the ease of participation on the Exchange platform and provide an impetus for the growth of your Company.

MATERIAL DEVELOPMENTS IN HUMAN RESOURCES

As on 31^st March 2023, the Exchange has 378 employees (includes confirmed employees and trainees/management trainees). Your Company continues to attract, retain and nurture talented workforce in its endeavour to be an employer of choice.

Cultural integration being an integral part of management philosophy, the Exchange launched multiple employee initiative. The primary focus was on delivering a premium employee experience and building organisational capabilities.

Structured Internal Job Posting provides opportunities to deserving employees to be considered for lateral & hierarchical career growth within the organization. Human Resources continues to undertake staff welfare initiatives that include mandatory leave, Compensatory offs, shift allowances for those employees who work on various shifts, Birthday cakes for the employees, contests of the month, MCX Annual Event, Diwali, Ganpati, Navratri Celebration and most important is the constant review of work policies & practices in order to make the Exchange the best place to work for. The Exchange has been rewarding employees children for their exceptional efforts in passing 10^th and 12^th standard examination with excellence. The Company provides Creche facility for female employees. Company also has tie- ups with diagnostic centres and hospitals for Health screening of employees.

The policies were reviewed and HR Manual was updated. The Work from Home Policy was implemented and later tweaked to ensure the Company could facilitate staff to work from home who have genuine concerns.

An Objective appraisal system based on Key Result Areas (KRAs) and mid-term feedback to employees are in place across

all levels.

HR Continues to run online HR Portal called HR-Connect, for enhanced transparency in Employee Lifecycle Management and Performance Evaluation Systems enabling employees to receive timely feedback, chalk out personal development plan, identify training needs and decide on suitably rewarding deserving employees.

CAUTIONARY STATEMENT

In this Annual Report some future developments which are expected to be implemented have been given. This has been done with a view to help investors better understand the Companys future prospects and make informed decisions while interacting with the Exchange. This Annual Report and other written and oral statements made from time to time may contain such forward looking statements based on managements current plans and assumptions. It cannot be guaranteed that any forward-looking statement will be realised, although, we believe, we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialise, or should the underlying assumptions prove inaccurate, actual results could vary materially from those anticipated, estimated or projected. Investors should bear this in mind when they consider forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.