The Hindu Business Line : Bill to allow options trade in commodities soon

THE Ministry of Consumer Affairs will re-introduce a Bill in Parliament to amend the Forward Contracts Regulation Act (FCRA) allowing options trade in commodities, a senior Government official said on Friday.

``Our Ministry had introduced a Bill to amend FCRA to permit options in commodities in the Lok Sabha in 1998. However, the Lok Sabha got dissolved and now, after the elections, we will have to introduce the Bill again," Mr C.K.G. Nair, Director in the Ministry of Consumer Affairs, said on the sidelines of the World Rubber Congress 2004.

Currently, FCRA does not allow options trade in commodities and it is necessary to amend the Act to allow the facility, which is expected to improve volumes in futures trade.

Asked if the Bill would be introduced during the Budget session, Mr Nair said it was unlikely at least during the initial part. "We are not sure if it can be introduced during the latter part of the Budget session," he added.

Before the amendment is introduced in Parliament, the Cabinet will have to approve it. The Ministry is yet to get the Cabinet's nod after the new Government has taken over.

Commodities futures exchanges in the country are eagerly looking forward to the Government allowing options. According to Mr Joseph Massey, Deputy Managing Director, Multi Commodity Exchange, options can serve as an insurance against a price rise or fall.

For example, if a person expects rubber prices to touch Rs 90 in two months time, he can go in for a put option to either buy or sell at that price. For this, he will have to pay a small premium, say, for example, Rs 5. If the price exceeds the level and in case he has a buy option, he can skip purchasing it at a higher price by foregoing the premium.

In the case of an option to sell, suppose if the price falls steeply, the person can skip sales again by foregoing the premium.

Asked on the merger of the Forward Markets Commission (FMC) and the Securities and Exchange Board of India (SEBI), Mr Nair said there was a general consensus in favour of the convergence of the two regulators. While SEBI supervises the functioning of stock exchanges, FMC, an arm of the Ministry of Consumer Affairs, keeps a tab on all commodity markets, including futures exchanges.

"But with a new Government in place, a final decision is awaited. However, it is good to have lesser number of market regulators. In the UK for instance, there is a single regulator for all, including markets and insurance," he said.

On the memorandum of understanding (MoU) signed with all single commodity exchanges to achieve a set turnover target, Mr Nair said it was only to make them more active.

Meanwhile, speakers at the Congress urged the Government to have the FCRA amendment bill ratified by Parliament soon.

"Futures, especially rubber, suffer due to poor participation from growers and users. Only traders are making use of the futures to hedge their risks. If the Government allows options, then we can expect better response," Mr C.J. George, Managing Director, Geojit Financial Services Ltd, said.

The daily turnover of rubber futures is 3,000 tonnes. Given the fact that daily production is 2,500 tonnes, the turnover should be around 20,000 tonnes, according to him.

"Options will help us immensely," he said.

Mr George also said the Government should facilitate means by which growers could make delivery to futures exchanges. "The other requirement is warehouses which can store products for at least a year," he said.

Mr Massey said commodity futures turnover could match the stock market in 2-3 years time. "One good thing that happened after the launch of futures trading is that all growing areas are being linked. This is a good sign," he said.

Mr Kailash Gupta, Managing Director, NMCE, said even latex producers could hedge their risks in rubber futures.

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