India’s first gas exchange — the Indian Gas Exchange (IGX) — was launched on Monday, September 28, 2020. The exchange is expected to facilitate transparent price discovery in natural gas, and enable the growth of the share of natural gas in India’s energy basket. The IGX is a digital trading platform that will allow buyers and sellers of natural gas to trade both in the spot market and in the forward market for imported natural gas across three hubs —Dahej and Hazira in Gujarat, and Kakinada in Andhra Pradesh.
Imported Liquified Natural Gas (LNG) will be regasified and sold to buyers through the exchange, removing the requirement for buyers and sellers to find each other.
How does the exchange allow the contracts?
The exchange does the following activities.
The exchange also allows much shorter contracts
– for delivery on the next day, and up to a month
– while ordinarily contracts for natural gas supply are as long as six months to a year.
This, experts say, will allow buyers and sellers greater flexibility. The buyer does not run around to get new dealers to get a fair price.
It is also interesting to know that detailed guidelines for the functioning of gas exchange have already been released. Let us also learn this new economic horizon opening up new frontiers for energy industries to expand. Most of us are also aware that the price of domestically produced natural gas is always decided by the government and local producers always complain of its falling price and there is a feeling that new imports will sustain the industry.
Now over to detailed gas exchange guidelines.
The web site containing the guidelines is as under:
Extended over 63 pages, they contain 9 chapters, Format B-1, B-2, B-3, B-4, Format C-1, C-2, C-3, Schedule1, Form A, Form b, Schedule 2, Part- A, B, C, and D.
Chapter 1, Preliminary
Chapter 2, Market structure
Chapter 3, Authorization of gas exchange and a clearing corporation.
Chapter 4, Net worth of gas exchange and a clearing corporation.
Chapter 5, Ownership of gas exchange and clearing corporation
Chapter 6, the Governance structure of gas exchange and clearing corporation
Chapter 7, General obligations of gas exchange and clearing corporation
Chapter 8, Inspection, inquiries and enforcement
Chapter 9, Miscellaneous.
Salient features from the guidelines:
Some of these words do carry special meaning as under;
The regulations are applicable in case of delivery- based contracts transacted on Exchange, Pipeline -based contracts, any new contract linked with natural gas transacted on the Exchange, or any new contract in pipeline capacity trading, forwards, futures, gas price indexing, gas balancing and other areas.
What about derivative contracts?
These regulations may apply to derivate contracts for natural gas, as and when the Board is empowered either through the provisions of the Act or by any empowerment by the Central Government through relevant sections of the Act or any other means through which the Board is empowered thereof, to regulate by regulations licensing of derivative contract exchanges.
It is equally important to know to whom these regulations are used.
These regulations shall apply to all market participants including a. Any entity authorized by the Board to lay, build, operate or expand a natural gas pipeline under the Petroleum and Natural Gas Regulatory Board (Authorizing Entities to Lay, Build, Operate or Expand Natural Gas Pipeline) Regulations, 2008 or authorized to do so by the Central Government before the appointed day, b. Gas Marketer c. NGGMS d. Gas Shipper; e. Intermediaries like brokers/traders f. gas exchange and the respective clearing corporations authorized by the Board; g. Members of gas exchange; h. Members of clearing corporation; i. Other Exchanges j. Any other party transacting at either the gas exchange or Other Exchanges.
The Board may, on an application made in this behalf, permit any gas exchange to introduce such contracts as specified in Regulation 3, for transacting on the Exchange.
What is the objective of gas exchange?
A gas exchange shall function with the following objectives: a. Ensure fair, neutral, efficient, and robust price discovery; b. Provide extensive and quick price dissemination; c. Design contracts to increase liquidity.
The membership of the exchange consists of trading members, clearing members, trading and clearing members, and proprietary members.
For organizing any gas exchange or clearing corporation any applicant needs authorization from the Board.
Documents to be submitted for authorization have been detailed on pages 12-14.
The Board offers authorization to any gas exchange and every authorized gas exchange or clearing corporation shall have a minimum net worth of twenty-five (25) crore rupees at all times.
Shareholding Pattern of Gas Exchange;
At no time all the members of an authorized gas exchange shall in the aggregate, directly or indirectly through associates, together with persons acting in concert for any of them, acquire or hold more than forty-nine (49) percent of the paid-up equity share capital in authorized gas exchange.
Shareholding Pattern of Clearing Corporation
The capital structure in an authorized clearing corporation shall be such that at least fifty-one (51) percent of its paid up equity share capital shall always be held by one or more authorized gas exchange(s).
Composition of the board of directors:
The formation of committees takes an important position in the guidelines.
Statutory Committees (1) Every authorized gas exchange and authorized clearing corporation shall constitute the committees as per sub-regulations (2) and (3).
(2) Functional committees, comprising of a. Member selection committee; b. Investor grievance redressal committee; and c. Nomination and remuneration committee.
(3) Oversight committees, comprising of a. Standing committee on technology; b. Advisory committee; c. Regulatory oversight committee; and d. Risk management committee.
Constitution of Risk Management Committee (1) The authorized gas exchange and the authorized clearing corporation shall constitute a Risk Management Committee (RMC) headed by an independent director and shall stipulate risk containment measures and monitor adherence of the same.
With fire hazard among the most prominent risk in establishing of a Gas exchange and a clearing corporation, the following matters gather the most important decision making of gas exchange.
Constitution of Risk Management Committee
(1) The authorized gas exchange and the authorized clearing corporation shall constitute a Risk Management Committee (RMC) headed by an independent director and shall stipulate risk containment measures and monitor adherence of the same.
(2) The authorized gas exchange shall constitute a Market Surveillance committee headed by an independent director and having members from the executive team of the gas exchange. No member of this committee shall be a member of the gas exchange.
(3) The authorized gas exchange and the authorized clearing corporation shall constitute an SGF (Settlement Guarantee Fund) management committee headed by an independent director. This committee shall be responsible for overseeing the management of SGF.
Not a day passes when gas burning is not reported in any part of the nation and attempts to reduce the hazards take a long time. An unbiased risk management committee without any corner-cutting in the introduction of all precautions of the world standard is a must action on the part of the gas exchange.
Only an unbiased and the most competent independent director will fulfill the requirements of this onerous job.
This is an appreciable notification of the guidelines.
Let us narrate as to go about risk management with operational aspects?
Risk Management by Gas Exchange
Some of the guidelines on this subject take extra monitoring at various levels to avoid risks.
1) The gas exchange shall adopt best practices while formulating prudent and dynamic risk management processes based on the changing risk profiles of the market.
(2) The Risk Management Committee (RMC) shall review the risk management framework and process of the gas exchange on a six-monthly basis in January and July every year. The RMC report shall be submitted to the board of directors. The decision of the board of directors on the subject along with the RMC report shall be submitted to the Board within one month of the risk management review process and not later than the end of February and August respectively.
(3) The members’ risk shall be monitored constantly and margins shall be collected at an appropriate time for the efficacy of risk management.
(4) Members shall be subject to margins on a net basis across clients by the gas exchange. There shall be no offsetting of positions of different clients of a member in the same market.
With scant regard for fire hazards and regular avoidance of safety guidelines, India is losing huge materials in fire-related accidents. Hence this path making guidelines for strict implementation.
A member may be declared a defaulter by direction or circular of the gas exchange or clearing corporation if the member is unable to fulfill his clearing or settlement obligations.
The other most important aspect of any exchange is nowadays related to its IT structure to face day to day operational issues.
Information Technology Infrastructure and Trading System
(1) The gas exchange shall comply with the following:
Some more important instructions
The scheduling and delivery of contracts on gas exchange shall be in accordance with the Access Code;
Clearing and Settlement of Trades Every authorized gas exchange shall, with effect from the date specified by the Board in this behalf, use the services of authorized clearing corporation(s) for clearing and settlement of its trades.
Agreement between Gas Exchange and Clearing Corporation (1) Subject to provisions of sub-regulation (2), an authorized gas exchange shall avail the service of an authorized clearing corporation pursuant to an agreement in writing between them stipulating their rights and obligations, the conditions for admission of gas volumes for clearing and settlement, risk management measures, charges for clearing and settlement and other incidental and consequential matters.
The guidelines give at the end M.I.S. on gas exchange for submission to Board, Application for authorization/ renewal of authorization of Gas Exchange/ Clearing Corporation under regulation 8/ 14 of the Petroleum and Natural Gas Regulatory Board (Gas Exchange) Regulations, 2020, Code of Conduct for the directors on the board of directors of Gas Exchanges or Clearing Corporations, and Code of Ethics for directors and key management personnel of Gas Exchanges or Clearing Corporations.
The purpose of this article to announce the arrival of guidelines for natural gas exchange, a logical step to liberalize the trade between buyers and sellers of imported natural gas, and evolving the ways for improving the ease of doing business in India. The days of the controlled economy has started leaving India due to enormous interest shown by foreign institutional/individual investors who want to invest in India for optimum return of capital.
The objective of Indian government efforts started yielding results with the establishment of the Indian Gas Exchange, the first of its kind in India. Let us hope for the best day to come in near future in the energy field.
Disclaimer: The whole purpose of the collection of viewpoints by myself is purely academic and with an intention to teach the young professionals. Neither taxguru.in nor any agency is responsible for my views. Obviously, any serious-minded investor would go for professional guidance.