regulatons in cm

8/12/2019 Regulatons in Cm

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Regulations in commodity market


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history

Cotton trade association started future trading in1875.

Derivatives trading started in oilseeds inBombay(1900),raw jute and jute goods inCalcutta(1912),wheat in hapur(1913) and inBullion in Bombay(1920).

The government of Bombay prohibited optionsbusiness in cotton in 1939

In 1943,forward trading was prohibited inoilseeds and some other commodities includingfood-grains,spices,vegietable oils,sugar and cloth.


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After independence

The parliament passed Forward Contracts(regulation)Act,1952.

The Act envisages three-tier regulation:

The exchange which organizes forward trading incommodities can regulate on day-to day basis;

FMC provides regulatory oversight under thepowers delegated to it by the central

government; and Central government-department of consumer

affairs,ministry of consumer affairs, food andpublic distribution is ulimate authority


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In 1960s,following several years of severe

draughts that forced many farmers to default

on forward contracts(and even caused some

suicides),forward trading was banned in many

commodities considered primary or essential


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Policy shift-Kabra Committe

Government set up a committee in 1993 to

examine the role of futures trading.The kabra

committee recommended allowing futures

trading in 17 commodity groups.

IT recommended certain amendments

(regulation) Act 1952,particularly allowing

options in goods and registration of brokerswith forward markets commission


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After effects

The government accepted most of these

recommendations and future trading was

permitted in all recommended commodities.

Derivatives do perform a role in risk

management led the government to change

its stance

Liberalization facilitates market forces to act

freely.


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FCRA AMENDMENTS BILL, 2010

New products like 'options and indices will

be allowed in the commodity market,"

Bill allowed to levy fee for generating revenue

and hire professionals to strengthen its human

resource.

The other salient features of the Bill include

setting up of an Appellate Authority to guard

against arbitrary regulatory decisions and

penalty hike on defaulters to Rs 50 lakh from

the existing Rs 25 lakh.


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FCRA AMENDMENTS BILL, 2010

The Bill also seeks to increase number of

members of the Commission from four to nine

and also raises the term of members and

chairman from 60 years to 65 years.

The FMC recently approved the Universal

Commodity Exchange to operate as a national

bourse.


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FDI in agricultural sector

circular by the Department of Industrial Policy

and Promotion released on "Consolidated FDI

Policy -- Circular 1 of 2011", 100 per cent FDI

has been now allowed in development and

production of seeds and planting material,

floriculture, horticulture, and cultivation of

vegetables and mushrooms under controlledconditions.


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FDI in agricultural sector

Besides, animal husbandry (including of

breeding of dogs), pisciculture, aquaculture

under controlled conditions and services

related to agro and allied sectors have also

been brought under the 100 per cent FDI

norm. Similarly, the tea sector has also been

brought under the 100 per cent norm.


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APMC

(Agricultural Produce Market Committees)

Marketing board established by a state governments of India.

Manage the markets to achieve an efficient system of buying

and selling of agricultural commodities.

Most of the State Governments and Union Territories enactedlegislations (APMC Act) to provide for regulation of

agricultural produce markets.

With growing agricultural production, the number of

regulated markets has also been increasing in the country.

While, there were 286 regulated markets in the country at the

end of 1950, their number has increased to 7157 by 2010.


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Warehouse Receipts made

NegotiableWarehouse receipts are made negotiable under the

Warehouse (Development and Regulation) Act, 2007 and

regulated by the Warehousing Development and Regulatory

Authority (WDRA).

The government launched negotiable warehouse receipts

system, which will help farmers gain access to loans from

banks and avoid distress sale of agricultural commodities.

Negotiable warehouse receipts allow transfer of ownership

of that commodity stored in a warehouse without having to

deliver the physical commodity. These receipts are issued in

negotiable form, making them eligible as collateral for loans.


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Banks will have more faith in such negotiable

warehouse receipts and farmers would be

able to seek loans easily against these

receipts.


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Should Banks Be Allowed In

Commodity Futures Trading?

The banks are allowed to trade in financial

instruments (such as shares, bonds and

currencies) in securities market but theBanking Regulation Act of 1949 strictly

prohibits banks (both domestic and foreign)

from trading in goods and therefore they are

not allowed to trade in commodity futures

market.


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The Section 8 of Banking Regulation Act clearly

states that no bank shall directly or indirectlydeal in the buying or selling or bartering of goods,except in connection with the realisation ofsecurity given to or held by it.

However, banks are allowed to financecommodity business and provide fund and non-fund-based facilities to commodity traders tomeet their working capital requirements.

Banks also provide clearing and settlementservices for commodities derivatives transactions.But banks cannot trade in commoditiesthemselves.


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The Growing Pressure

With the rapid liberalisation of Indian securities markets,

pressure is exerted by big foreign banks who have

considerable international experience and expertise in

commodity derivatives trading to allow their entry in the

commodity markets.

In the aftermath of the global financial crisis, the push for

amending the Banking Regulation Act has gained new

direction. In a post-crisis world, big international banks are

shifting their focus to Asian markets (such as India and China)which are considered to be the new engines of economic

growth. For these banks, a largely untapped Indian

commodity futures market offer enormous profit-making

potential.


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In 2009, Bank of Nova Scotia sought permission to setup a wholly-owned subsidiary to trade agriculturalgoods and metals on the MCX and NationalCommodities and Derivative Exchange (NCDEX).

But the proposal was rejected by the Reserve Bank ofIndia (countrys central bank) as per the provisions ofthe Banking Regulation Act.

Since January 2012, New Delhi is considering anamendment in the Banking Regulation Act so as toallow banks entry into commodity futures besidesproviding similar access to mutual funds, pension

funds, insurance companies and foreign institutionalinvestors (FIIs) to participate in the commoditymarkets.


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Challenges

1. The Lack of Domain Knowledge

Indian banks (both public and private) lack

market knowledge and expertise to benefit

from trading in commodity futures. The RBIhas also expressed concern on the risks posed

by domestic banks that lack expertise and

skilled manpower to deal with such riskytrading instruments.


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2. The Current Regulatory Framework

The commodity futures market in India is still

in its nascent stage of development and

therefore the existing regulatory environment

cannot handle the sudden entry of big

financial players such as banks.

The commodity trade regulator (Forward

Markets Commission - FMC) is toothless and

has weak regulatory powers to ensure fairtrading in commodity exchanges.


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3. Inflationary Concerns

Even though there are various causes of high food inflation in

India, the role of futures trading has remained contentious.

In 2007, New Delhi had suspended the futures trading in key

agricultural commodities due to their alleged role in triggering

rapid price hike.

Participation of banks, MFs and FIIs can potentially distort the

market instead of advancing it, as too much money would

start chasing commodities in short supplies and result in

inflation. By allowing more money to flow into commodity market,

there is the danger of rising prices without corresponding

benefits flowing back to those in the farm sector.


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