‘Suspension of futures in farm produce during lean season has made life easier’

Suresh P. Iyengar
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Ramesh Abhishek, FMC Chairman
Ramesh Abhishek, FMC Chairman

It is for the concerned regulators to take a call whether to allow banks and institutions to trade in commodity market. Ramesh Abhishek, FMC Chairman

The buzz around commodity futures trading has got louder with the Union Cabinet clearing the Forward Contract Regulation (Amendment) Bill. In 2008, the Union Government attempted to empower the Forward Markets Commission through an Ordinance. But, the Ordinance lapsed, as it was not passed in the Lok Sabha before the stipulated time. The need for a standalone regulator was long felt as trade in the online commodity exchange have grown leaps and bounds in the last few years. Ramesh Abhishek, Forward Markets Commission Chairman spoke to Business Line on FCRA and various other issues relating to the commodity market.

How hopeful you are of FCRA getting passed in Parliament?

It is the prerogative of Parliament to decide on the amendment to the Forward Contract Regulation (Amendment) Bill. It has been cleared by the Cabinet and the Parliamentary Standing committee. Now, I hope it will be taken up in the winter session of Parliament for approval. I think it will be dealt with appropriately because it was long overdue and it has undergone the whole process to become a Law.

What are the regulatory changes expected after FCRA get nod?

Apart from regulating exchanges, we will get to have a say on the functioning of intermediaries including trading members and clients. We get powers to investigate insider trading and levy penalty on erring members and clients.

Powers to conduct search and seizure will also stop unofficial (dabba) trading. We can also charge a fee for the service offered to the exchanges, enhance manpower and adopt latest technology to regulate the commodity trade more efficiently. This apart, more products will also be introduced for trading.

Can we expect banks and institutional participation after FCRA?

The Forward Contract Act even in its current form does not stop anybody from trading in the futures market. It is for the concerned regulators to take a call whether to allow banks and institutions to trade in commodity market. Having said that, the passage of FCRA will enhance confidence of other regulators in this market and eventually, they will come in. This will deepen the market participation and bring in price stability.

Contrary to the international markets, why delivery is being forced in futures markets in India?

It is needed to bring a convergence to the spot and futures prices at some point of time. Moreover, the threat of delivery is must to bring in more discipline and keep unintended market participants at bay. Delivery is given importance even in the international markets.

For instance, the London Metal Exchange has delivery centres across countries, while CBoT (Chicago Board of Trade) also reports higher delivery in the near month contracts as the prices align with spot markets. In India, we have introduced a 15-day staggered delivery mechanism which has worked wonders for agriculture commodities. But it is a proven fact that futures market can never replace the spot market.

Has suspension of agriculture commodity contracts during lean period helped?

We have already done away with contracts expiring during lean season in 15 commodities. It has made life much easier. Before this measure was introduced, there was a distortion in spot and future prices during the last few days of expiry of the contract. Traders tend to buy from the spot market to give delivery on the futures exchange. This led to a scarcity, particularly, during the lean period when the arrivals are thin.

Have you received any response from the National Spot Exchange to the show cause notice issued?

I do not want to comment as the matter is being dealt by the Ministry.

Do you think the National Spot Exchange move to form a joint venture with farmers is the right way to go in for promoting aggregators in commodity trade?

Frankly, I have not gone through the details of NSEL tie- up with farmers in Kerala. At the outset, it looks good. But we have to see how it works. We will support any initiative that can fetch better price for farmers. They were not able to get better price because they were selling in without grading. Now, the newly formed company by NSEL and JV partners will do the grading and also help farmers get finance through warehouse receipts. However, any business carries a certain amount of risk. We have to see how this venture handles the risk.

(This article was published on October 20, 2012)
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