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Our Bureau

NOC for domestic brokerage firms to set up arm abroad

Chennai , Nov. 3

If the Forward Markets Commission has its way, then the Foreign Investment Promotion Board (FIPB) could give automatic approval to foreign institutional investors' participation in the domestic commodity futures market.

"We have recommended to the Union Government to give automatic approval for FII participation in commodity futures by FIPB.

We hope it will come through soon," the FMC Chairman, Mr S. Sundareshan, told a press conference here.

Foreign brokers

According to players in the commodity market, such a move will help foreign brokerage firms such as J.P. Morgan, Morgan Stanley, Merrill Lynch and others to take part in Indian commodity futures market directly.

Currently, these brokerage firms take part in domestic futures market through their Indian arms. "It can bring in more liquidity to the commodity market, which is already showing signs of rapid expansion," a commodity exchange official said.

However, the participation of FIIs in the commodity markets will be limited to bullion, metals and crude going by FMC's recommendation. According to commodity trading sources, some of the commodity exchanges have got in touch with these foreign brokerage firms and are waiting for the approval to rope them in. "We expect the green signal for FII participation in domestic commodity futures once the Forward Contract Regulation Act, 1952 is amended by Parliament," they said.

Higher volumes

According to Mr Sundareshan, a bill to amend the Act has been introduced in Parliament in the last session and "it is likely to be passed either in the coming session or the next".

As regards the commodity market, the volume of the turnover at the different exchanges has increased by over 100 times in the last six years, according to the FMC Chairman.

During 2004-05, the turnover of the commodity exchanges was Rs 5.71 lakh crore and in the last fiscal, it was Rs 21 lakh crore.

"During April-October of the current fiscal, the turnover has already crossed Rs 20 lakh crore," Mr Sundareshan said.

Mr Sundareshan said FMC was also in favour of banks and mutual funds taking part in bullion futures. "We don't need a separate body to supervise the mutual funds activities in commodity markets.

While SEBI will take care of their role in the equities market, FMC will monitor their role in the commodity markets," he said, adding that small investors' interest in bullion could well be protected by participation of mutual funds.

NOCs

FMC had also given no-objection certificates (NOC) to the setting up of overseas offices by a few commodity brokerages in the country.

"While RBI gives them the permission to invest, our role is to give the NOC for participation in commodity markets abroad.

The NOC is given based on their track record here and performance," he said.

According to commodity players, firms that have got permission to open brokerage offices abroad are Geojit Securities and JRG besides four others.

Heavy selling

Asked on some of the agri-commodity futures contract hitting the lower circuit on National Commodity and Derivatives Exchange on October 28 and allegation of heavy selling by some players, Mr Sundareshan said a probe had been ordered. "An external auditor will go into all the trading that was done that day, while we have also ordered a detailed probe into the technical glitch reported by the exchange. On the other hand, we have also asked all the commodity exchanges to have a contingency plan ready to meet such emergencies," he said.

He said there was no evidence of circular trading on the commodity exchanges and FMC "is not against speculation but manipulation".

Meanwhile, the Multi-Commodity Exchange has emerged, as the second largest exchange in terms of trade volume during April-September, after the National Stock Exchange, while the NCDEX is the third, according to the FMC.

Volume on MCX during the period was Rs 10.81 lakh crore, while on NCDEX it was Rs 6.86 crore.

Earlier addressing a meeting organised by Dun & Bradstreet in association with the Multi commodities Exchange of India Ltd, Mr Sundareshan said the issue of permitting banks and mutual funds in the commodity market was yet to be resolved. FMC was of the view that they could be allowed into bullion, metal and crude. Permitting mutual funds would be "simple, elegant and extant avenue" of allowing small investors access to this investment. "I hope the Government accepts FMC's recommendation," he said.

He said the commodity futures market had been largely neglected by Chennai and South India, except Kerala, in terms of participation. In fact, most of the protests against online trading had been from Tamil Nadu, he said.

Mr Joseph Massey, Deputy Managing Director, MCX, said the Indian market with its unique time zone between that of Stockholm and London was contributing to the continuity in price discovery of bullion. Investors were increasingly shifting from jewellery to bullion. While the shift had started in 2004-05, it was this year that the change was noticeable in terms of increasing inventories in the vaults of MCX and RBI. But investments in jewellery itself were not expected to drop because of cultural reasons, he said.

More Stories on : Commodity Markets | Foreign Institutional Investors | Commodity Exchanges | Regulatory Bodies & Rulings

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