Rising inflation all set to render FMC toothless

Govt to let the Ordinance - that gives it autonomy - lapse.

In the wake of rising inflation, political opposition to futures trading in commodities has meant that the Forward Markets Commission's (FMC's) autonomy is a short-lived one.

Anticipating opposition to the passage of the Bill to amend the Forward Contracts Act, the government is letting the Ordinance, issued this January, lapse.

The ordinance had elevated the FMC from being a government department with all the attached inadequacies to an independent regulatory agency such as the Securities and Exchange Board of India (Sebi) or the Telecom Regulatory Authority of India (Trai).

Officials told Business Standard that the Ordinance will lapse on April 7. According to law, every Ordinance is valid only for six weeks from the date of the beginning of a Parliamentary session, and not from the date of the promulgation of the Ordinance, said constitutional expert G C Malhotra.

In this case, the Budget Session 2008 of Parliament (13th Session of the 14th Lok Sabha and the 213th Session of the Rajya Sabha) commenced on February 25 and is slated to conclude on May 9, 2008.

The two Houses adjourned for a recess of 25 days on March 20, and are slated to reassemble on April 15. The six-week validity period of an Ordinance includes all holidays and the recess period also.

Officials said that while the Ordinance will lapse, the government remains hopeful that the Forward Contracts (Regulation) Amendment Bill, 2008 "" introduced to replace the Ordinance "" will be passed by Parliament.

"The Ordinance is lapsing, but we are hopeful that the Bill would be passed in coming months," they added.

The issue of forward trading in commodities is a politically sensitive one, especially at a time when inflation is at a 13-month high of 6.68 per cent.

Sources said the government did not want to be seen as favouring commodities trading, which has often been cited as one of the major reasons for the rising commodity prices in the domestic market.

While the consumer affairs ministry was keen that the Bill be discussed before Parliament went into recess, there seemed to be a lack of political support for the move after the parties cited futures trading as one of the reasons for the spurt in farm prices in recent weeks, a source said.

Certain UPA constituents, including a key ally, had questioned the need for the Ordinance even when it was circulated for comments. The government had introduced Forward Contracts (Regulation) Amendment Bill a couple of years ago.

While observing that the futures trading had not benefited small farmers, the parliamentary panel had suggested restrictions on trading by institutional players.

In addition, last February, the government banned futures trading in several commodities, including wheat, as prices in the domestic markets hit all-time highs.

The Ordinance, among other things, had empowered FMC to levy penalties of up to Rs 25,000. Earlier, only commodity exchanges had the power to levy penalties, while the regulator could suspend errant players.

The regulator was given powers for demutualisation of regional exchanges and also permit trade by foreign institutional investors (FIIs), mutual funds and banks. Participation of banks hinges on the Banking Regulation Act, which is being amended.

National Commodities and Derivatives Exchange MD and CEO P H Ravikumar said he is in favour of autonomy for the regulator.

"Autonomy is extremely important for the development of the market. The Ordinance gives more powers to the regulator, brings in greater credibility and it provides confidence, which will result in participation from banks, FIIs and mutual funds."