Boost for commodities trade

The much-awaited Bill to amend the Forward Contracts (Regulation) Act of 1952, and thereby to strengthen the commodity futures regulator, has been pending introduction in Parliament for nearly two years. So it may seem inappropriate that what the government has not been able to get approved by Parliament, for whatever reason, has been brought in through the backdoor by issuing a presidential ordinance. The justification would be that an ordinance is called for because it may not otherwise have found its way through even the Budget session, due to start next month. With an ordinance issued, however, it is now mandatory that the government not only introduce the Bill in the forthcoming Budget session, but also that it get parliamentary approval without delay, as otherwise the ordinance will lapse. The more substantive justification is that the delay in amending the archaic law on forward contracts has been coming in the way of empowering the Forward Markets Commission (FMC) to launch options trading as also to ensure transparent, orderly trading in the commodity exchanges. With the ordinance, the FMC has a level of autonomy and power which puts it at par with the equity market regulator, the Securities and Exchange Board of India (Sebi). The new statute also provides for setting up an appellate tribunal for hearing complaints against the commodities trade regulator, on the same lines as for the capital market regulator.

The amended statute has several significant provisions that were urgently called for, especially because the futures market in commodities has grown 60-fold in barely five years. Yet, the FMC has so far had neither the authority nor the network and wherewithal to oversee and regulate such a huge and rapidly expanding market. Nor was it able to introduce options trading, which alone can help farmers hedge their price risks through futures trading and protect themselves against speculators. Options trading will give farmers the right, but not the obligation, to sell their produce at quoted prices. For this purpose, the FMC in its new avatar will have to take measures aimed especially at ensuring greater participation by farmers "" which is possible only through aggregators and other collective bodies of farmers. Individually, farmers are mostly small commodity producers and will be unable to get any of the expected benefits from this market.

Options trading is not the only new product that the ordinance will allow the FMC to introduce, for it also paves the way for launching futures and options trading in indices and even derivative contracts for intangible products like the weather, carbon credits and energy "" by expanding the definition of goods. Equally significantly, the regulator will henceforth be in a better position to tame violators through the imposition of stringent penalties which, at present, are too meagre to serve as an effective deterrent.

Meanwhile, the government has been sending out signals that it is considering allowing banks, financial institutions and mutual funds to participate in commodity futures. This will require amendment of the Banking Regulations Act of 1949. But there is as yet no certainty on this issue "" because the government is dependent for its survival on the Left parties, who look askance at new trading options in agricultural products. Nevertheless, the government can "" indeed, should "" give effect to its proposal to permit 100 per cent foreign direct investment in warehousing and cold storage facilities. Such a step would facilitate expansion of the warehousing infrastructure, which is central to a successful trading superstructure for agricultural commodities.