The Hindu Business Line : Caution on commodities

The Government is finalising the norms for allowing Foreign Direct Investments in commodity futures exchanges. Last December, foreign investments up to 49 per cent were allowed in infrastructure companies in the securities market — that is, stock exchanges, depositories and clearing corporations — with separate FDI and foreign institutional investment caps of 26 per cent and 23 per cent respectively. FDI is subject to specific approval of the Foreign Investment Promotion Board and FIIs can buy only in the secondary market. With the opening up of the economy, Indian entities will attract investments, domestic or foreign. FDI usually brings with it the latest technology and innovative products for the evolving market.

As many Indian commodity exchanges are demutualised entities not averse to making profits and because of the immense growth prospects offered by commodity derivatives trading, it is natural for the exchanges to seek, and for foreign investors to offer to take, a stake in them. While foreign participation is welcome, the government and the market regulator must clearly understand the implications. It would be naïve to expect FDI to transform wholesale the marketplace. Though stock and commodity exchanges, by and large, serve a similar purpose — of providing market participants a platform to transact — the nature and number of players are vastly different between the two. This a major reason why an attempt to merge the two regulators — the Securities and Exchange Board of India and the Forward Markets Commission — a couple of years ago did not happen. Commodity markets, especially agricultural markets, are by their very nature sensitive, given the socio-economic profile of the stakeholders involved. And the question that must be answered is whether the markets are mature enough.

The fact remains that there are infirmities in the market — both physical and derivatives — that have to be dealt with. Enhancing the participation of hedgers — those with genuine interest in the underlying commodity — is absolutely essential. Introduction of delivery-based forward trading would help small and medium producers and traders in the physical market besides providing a transparent reference price for the futures market. Granting financial and operational autonomy to the regulator brooks no delay. The sequencing of the agricultural reforms process has unfortunately been faulty. Attention must be paid to strengthening the `real economy', including agricultural production and remunerative farmgate prices, as brought out recently by a Parliamentary Committee. Else, the market will continue to face political risks as at present; and running of exchanges will willy-nilly become a game of valuation, which is best avoided.

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