Forward Contract Act revamp kicked off

The government has begun the process of introducing a revamped Forward Contract (Regulation) Act.

The changed law would address issues like options trading in commodities and will change the definition of commodities to include energy and weather, Consumer Affairs Secretary Labanyendu Mansingh said.

The crucial issue of making the commodities market regulator""Forward Markets Commission""an independent body would also be taken care of in the overhauled Act, Mansingh said. Currently, the Forward Markets Commission is an arm of the agriculture ministry.

A separate revenue model for the Commission would help the regulator become independent and the new revenue model would be put in place after the amendment, he said.

The revenue model followed by the capital market regulator, the Securities and Exchange Board of India, could be replicated in the case of the Forward Markets Commission, he said. With the new income model, the Commission would not depend on the government for financial support.

"We are of the view that FMC should be made fully independent so that it can keep a strict vigil on the commodities market as risk management is the crux of the whole exercise. Risk is inherent in trading, especially when quantities are going up," Mansingh said.

Both the government and the industry have called for giving the regulator more teeth as trading volumes have soared in recent months.

Commodities futures trading volume has risen to 35 billion rupees a day, which is more than half the traded volume in the cash segment of the stock market.

He said strengthening the Commission is important as trading in commodities is growing at a "phenomenal pace". "When the commodities market was opened up for futures, no one thought the trading volume will gather such momentum," he said.

Asked if there is any plan to merge the Forward Markets Commission with Sebi, Mansingh said: "That is just an idea."

The definition of commodities has to be changed in the 53-year-old law so that trading in power and weather can be brought under the ambit of the new classification, Mansingh said. The Union Cabinet is likely to soon take up the issue of the revamped Act.

"We can see the change. India is likely to emerge as a global trading hub for commodities. In that case, the Act needs to be overhauled. The new legislation will be based on best international practices," he said.

The government had allowed futures in about 94 major agricultural commodities in 2003.

An independent regulator would more effectively look into the operations of commodity exchanges.

Currently, these exchanges seek approval for some issues""such as starting trading in new commodities""from the consumer affairs ministry, he said.

Mansingh said his ministry has also started the process to overhaul the 50-year-old Essential Commodities Act to align agricultural trade with the rest of the economy and to facilitate inter-state trading.