House panel recommends entry of banks, FIs in commodity exchanges

Highlighting the need for large players’ entry into commodity futures, Parliamentary standing committee on consumers affairs, food and public distribution has recommended banks and domestic financial institutions allowed for trade on commodity exchanges.

The committee headed by Vilas Baburao Muttemwar, a Congress MP, gave its recommendations to the ministry in the last week of December.

Muttemwar told Business Standard, “This is a part of overall recommendations we have submitted.”
 

COOKING BOWL

• Banks and institutional participation to be allowed
• Spot and futures exchanges to be treated under FMC
• Foreign institutional participation not to be allowed
• Separate investigating authority to be set up under the Commission
• One member should be represented from a farmers organisation of national level of repute
• On selection committee of FMC chairman from Planning Commission members reps Agri ministry and Ministry of Finance
• FMC chairman should be a member of planning commission and his age should not cross 60 years
• Penalty doubled for any irregularity to Rs 50 lakh

 

According to him, the committee has also recommended not to allow foreign participants on the commodity derivatives platform, fearing their large investment fund could help corner one commodity (especially the regional ones) and drive prices according to their convenience. Both spot and futures trade have been recommended to be allowed under FMC.

The committee had started consultations with the commodity markets regulator, the Forward Markets Commission (FMC) and national exchanges in mid-November after a gap of almost eight months.

It visited commodity exchanges in Mumbai, Kolkata, Chennai, Bhopal and other main cities and met various association leaders before arriving at conclusive recommendations.

The committee has suggested the government set up a separate investigating agency under the aegis of the FMC to probe irregularities on the exchange platform.

The major objective of this committee, however, was to recommend whether or not the Forward Contracts (Regulation) Act (FCRA) could be amended for allowing financial institutions to trade in commodities and FMC can be strengthened with powers in line with Securities and Exchange Board of India (SEBI).

The FCRA amendment will also grant permission other instruments like options and futures trading in other tangible and intangible contracts, etc. The committee was also required to opine on the relation between agri commodities trade on futures platforms and inflation. Muttemwar did not find any link.

The Forward Contracts (Regulation) Bill was first introduced in the Lok Sabha on March 21, 2006, which was referred to the standing committee. The committee gave its report on December 19, 2006. After an examination of its recommendations, a note for the Cabinet for official amendments was prepared.

The Cabinet, in a meeting on May 3, 2007, advised wider consultations with all stakeholders including political parties. After compliance of the instructions, a fresh note was submitted on January 11, 2008.

Later, to give autonomy to the FMC and to amend the FCR Act, 1952, the Cabinet approved a proposal to promulgate an ordinance to meet the requirement. In addition, the Cabinet approved the proposal to withdraw the FCR Amendment Bill, 2006 and to introduce a fresh Bill to replace the said ordinance in Parliament.

In its report, the committee also recommended that one member of FMC, be from a farmers’ organisation of national repute for representation of farmers’ views on the futures market.

The committee also recommended allowing instruments like options and increasing penalty 100 per cent to Rs 50 lakh from the existing Rs 25 lakh stipulated in the FCRA.