The Union Cabinet on Thursday approved long-pending amendments to the Forward Contracts (Regulation) Act. This is a prelude to seeking parliamentary approval to make the Forward Markets Commission (FMC) an independent regulator and allow the launch of options in the commodity market, among a host of other changes.
The amendments will also pave the way for the entry of institutional investors such as banks into the commodity derivatives market. However, the details will be finalised by sectoral regulators once Parliament clears the Bill.
In a statement, the government said that the proposed amendments would benefit various stakeholders. Farmers will also benefit from price discovery and price risk management.
One of the most crucial aspects of the legislation is to strengthen FMC, the Mumbai-based regulatory body that is part of the department of consumer affairs. The statement said changes were proposed in provisions relating to the composition and functioning of the agency. It will be able to recruit staff on the basis of domain knowledge, instead of the government appointing employees. FMC officials complain that it does not have enough officers to undertake surveillance.
In addition, the government proposes to enhance the powers of FMC. The powers would be akin to those of the Securities and Exchange Board of India. At present, FMC does not have sufficient penal powers; it has to ask exchanges to use their by-laws to penalise errant members. Also, FMC will be able to levy a transaction charge in addition to monetary penalty.
| TIMELINE |
| 2003: Three nationwide online multi-commodity exchanges are launched |
| 2007: Futures trading in some commodities banned, speculation blamed for prices |
| 2008: Ordinance passed amending FCR Act in lieu of parliamentary nod |
| 2009: Wheat futures restored, futures trading banned in sugar |
| Sep 2010: Union Cabinet clears amendments to FCR Act |
An official statement said there is a provision to designate the Securities Appellate Tribunal (SAT) as an appellate tribunal for purposes of the FCR Act, including that of levying a fee. The Bill will also confer the Centre powers, including those to issue directions to the FMC on matters of policy and supersede the regulatory body.
The FCR Act provides for the regulation of commodity futures markets in India and the establishment of the Forward Markets Commission (FMC). While the markets have been liberalised from April 2003, FMC has been largely toothless.
The government had sought to undertake these amendments in 2006 through the introduction of a Bill, which was also considered by a Parliamentary Standing Committee. Subsequently, because of opposition to futures trading in commodities, which was said to be driving up commodity prices, the government did not introduce the amended Bill.
It even had to let an ordinance lapse, as it could not generate political consensus to push through the Bill that only sought to strengthen the market and protect the various stakeholders, including investors. There was also a debate on having FMC as the regulator. But later, it was decided to designate it as the regulator.
