Interview

Exploring opportunities to create awareness in the market

Most of India's leading pharmaceutical companies have suffered badly in the last quarter due to forex exchange losses. Being just nine months old currency derivatives MCX Stock Exchange, a new financial product in the Indian capital market is the new mantra to manage forex losses through hedging. Sanjit Prasad, Chief Business Officer, MCX' SX shares profitability tips with Usha Sharma

Please brief us on overview and importance of currency trading activities in India?

Currency futures is the latest product introduced in Indian securities' market. As currency futures are exchange-traded, the trading platform is more transparent and offers enhanced liquidity, easy accessibility and eliminates counterparty default risk. Worldwide, trading in currency futures is a huge market and given the rapid growth of economy and finance in India, it is poised to assume a significant role in the growth of Indian securities markets, further maturing and deepening the financial markets.

Overall, how many trading bodies are available and what guidelines do they follow? Currently, in India there are three exchanges that are operating - BSE (Bombay Stock Exchange), NSE (National Stock Exchange), and MCX Stock Exchange. The currency derivatives market is governed by the regulatory framework of the Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI). The foreign exchange (Forex) is under the regulatory control of RBI under Foreign Exchange Management Act, 1999 (FEMA), and currency futures is under the regulatory control of SEBI. To encourage healthy business regulators' goals are designed to achieve precise and well-defined objectives that contribute towards positive regulation for the development of the market.

Current trading scenario in India allows any Indian resident or company including banks and financial institutions to participate in the currency futures market. However, right now in India foreign institutional investors and non-resident Indians are not permitted to participate in it.

Could you please highlight the MCX Stock Exchange role in pharma trading?

For any business involved in foreign trade or using raw materials whose prices are globally benchmarked, the fluctuations in the currency markets have a strong impact on any outgoing import payments and/or incoming export funds. MCX Stock Exchange platform helps companies from various sectors including pharma companies to hedge their risk on the exchange traded currency derivatives and minimising risk against the price movements of the currencies.

What is the importance of hedging on the currency futures platform?

Typically, strengthening of the domestic currency hurts exporters as it makes his products or services costlier and therefore, uncompetitive; at the same time weakening of the domestic currency makes the imports costlier and impacting their bottom-lines. As long as the extent of fluctuation remains minimal and predictable, it could be well managed by firms themselves with appropriate business strategy. However, if the amount is bigger, then companies can minimise the risk by hedging on exchange traded

currency futures platform to cover up the risk faced in the physical market. Even if the risk associated with the fluctuation of the rupee prices can not be eradicated, it can be minimised. In the global foreign exchange market, currencies are traded simultaneously in many financial centres on essentially the same terms.

Currently, in India only US $/ INR contract is available for trading. Other currencies such as Euro, Yen, Pound and Swiss France would be introduced as and when the regulator feels the need for the same to be introduced. One of the major initiatives for the development of the market can be extension of trading hours to cover the time zones of London and New York currency markets. Also, to bring in participation from across sectors, launch of multiple contract sizes should be considered. These advancements will not only benefit the participants but also create the depth in the currency market.

How have pharma companies performed in the last quarter?

Almost all sectors have faced global slowdown during global economy crisis. More like other global industries Indian pharma industry also tried to maintain its top line as well as bottom line result but very few of them have succeed in their struggle. It has been observed that looses during the latest quarter were mainly due to the forex loss. The latest quarter results of many pharma companies like Wockhardt, Aventis Pharma, GlaxoSmithKline Pharmaceuticals, Piramal Healthcare, Cipla, Dr Reddy's Laboratories and many others have taken a hit largely on account of forex losses. With the rupee depreciating by 6.5 percent in the quarter-on-quarter comparison, many pharma companies have faced mark-to-market transactional forex loss.

Indian pharma segment has witnessed great volatility in recent times and comes across as an ideal platform for importers, exporters and SMEs to hedge their global currency risks. Since, a currency future trading is in early stages of development in India and we are exploring opportunities to create awareness in the market.

Why it is beneficial to trade on exchange rather than the traditional practice of trading on the OTC counter?

Earlier, the exporters and importers used the institutionalised Over the Counter (OTC) forward markets operated by banks to manage their foreign exchange. Being transparent platforms with equal access to every one in the market, exchange traded currency futures not only help in efficient discovery of exchange rates but also helps non-participants to take note of the same in their OTC transactions. Transparency also makes a corporate to obtain the best quotes and to stay focused on other aspects of currency risk management. Exchange being the counterparty to all trades done on its platform, it also removes the counterparty risk that would otherwise exist in an OTC product to some extent.

Would you like to give some tips to Indian pharma companies for better forex trading or any warning signals that they can look out for to signal currency fluctuations?

The currency derivatives market is a hedging platform for minimising the currency risk against fluctuating prices. Hence, this would be useful for the corporate whose major business comprises of importing and exporting. They can hedge their positions by taking required positions on the exchange. Currency derivative is a new financial product in the Indian capital market. There are various factors that contribute to volatility in the market, so corporate or individuals should enter the market under supervision and guidance of forex market experts and professionals.

How can SME pharma players rescue themselves from forex losses?

As the price discovery that happens on Indian commodity exchanges already factors in the forex rate, the participants can simultaneously hedge against both commodity price risk and forex risk that they would otherwise be facing in their physical imports or exports. Indian mid size enterprises played a very crucial part in the Indian growth story in the past. Their role is indispensable and their growth is essential in order to have a balanced development in the country. Volatility under all the situations has one thing in common for the firms ie it affects their decision making in terms of raw material procurement, production scheduling, entering into sales agreements, etc. Simply put, Indian manufacturing and services sector would now have to face the risk monster with twin heads once representing commodity price risk and the other standing for the forex risk.

Could you please comment on future prospect of Indian pharma companies in terms of hedging and Forex loss and profit?

Though rupee has remained steady with respect to some currencies, off late, it has seen a sharp depreciation against dollar in the last few months. This has impacted numerous classes of society including small and large corporates, importers, exporters, as well as individuals. With many large corporates having started currency hedging, thus reduces the impact to that extent. Until recently they had no tool to safeguard themselves from currency fluctuations, now with the availability of currency derivatives platform they have a risk management tool to hedge forex risk.

u.sharma@expressindia.com