By approving the Forward Contracts (Regulation) Amendment Bill, 2010, the Union Cabinet has set the stage for much-needed reforms in the regulation of commodity exchanges. It is worth recalling that the first bid to amend the archaic Forward Contracts (Regulation) Act, 1952, was made in 2003-04 by introducing an amendment Bill in Parliament. However, the Bill could not be voted on due to dissolution of the Lok Sabha. A second attempt in January 2008, taking the ordinance route, ended in a fiasco with the government allowing the ordinance to lapse. Many in the ruling coalition held futures trading responsible for the commodity price spiral of that period. However, the situation today is different and this measure may, hopefully, get through. Even though commodity prices are still high, few blame forward trading and commodity exchanges for this anymore. Apart from the Abhijit Sen committee, set up specifically to probe this issue, a subsequent study by the Reserve Bank of India has also absolved commodity exchanges and futures trading of this charge.
However, the Forward Markets Commission (FMC), in its present avatar, is too weak to effectively regulate a mode of commodity marketing that has overtaken the equity derivatives market, in terms of volumes, in less than eight years. Being just an appendage of the consumer affairs department, the FMC is disallowed to take independent decisions and is expected to simply implement policy handed down by the parent department. The amended legislation will empower the FMC and bring it on a par with the Securities and Exchange Board of India (Sebi). To ensure effective coordination between the two, the Bill seeks to place the chairpersons of both bodies on each other’s boards. A step forward is also the introduction of new trading instruments, such as options trading in commodities and indices, and in other intangibles like weather derivatives. The lack of options trading has been one of the significant factors that has prevented farmers from hedging their price risk through commodity exchange platforms. Options trading will allow them to do so as it will give them the right, but without the obligation, of selling their produce at the exchange-discovered prices on a future date, if it suits them. Equally significantly, the amendment will open doors to institutional investors and banks into commodity futures markets. However, cautious regulation would be needed to ensure that markets are neither destabilised nor captured. The empowered FMC will have to not only weed out speculators and dabba traders (illegal operators of a parallel futures market), but also woo small, but genuine, commodity traders and commodity producers, notably farmers, to this mode of trading. The FMC should ensure that commodity exchanges perform their functions of price discovery and price stability in a fair and transparent manner.