States set to control functioning of spot commodity markets

State Governments will now have total control over the functioning of spot commodity markets with the Centre withdrawing its exemption to one-day forward trading it granted to four spot exchanges.

The Centre had on June 5, 2007, exempted all one-day forward contracts of the National Spot Exchange Ltd (NSEL) from the provisions of the Forward Contracts (Regulation) Act, 1952 (FCRA), to facilitate electronic spot trading in commodities, which falls under the ambit of State Governments.

The exemption was given with riders that there would be no short sales and the exchanges will provide all information sought by the Centre.

Basically, the exemption, under Section 27 of the FCRA, was seen as a move to help NSEL to launch electronic spot trading across the country in the garb of one-day forward trading. However, NSEL was to follow spot trading regulations of the place where it took place.

All settlements were to be made within a day and outstanding positions were to result in mandatory delivery.

“The exemption was a temporary measure and it had to go one day. Thanks to NSEL fiasco, it has gone now,” said an official of a commodity exchange not wishing to identify. While spot markets will be under the control of State Governments, electronic trading will be closely monitored by the Union Government,” he said.

Spot markets in the country are controlled by the State Governments through the Agricultural Produce Marketing Committee Act.

Each APMC yard is, in turn, governed by rules framed by the respective board. The exemption granted by the erstwhile United Progressive Alliance helped NSEL to bypass these norms. The exemption also prevented the Forward Markets Commission, which regulates commodity markets across the country, from probing into the functioning of NSEL.

A Government notification issued on September 29 said that the Government is of the view that entities which were granted exemption, which facilitated unregulated forward trading on their platform, had failed to serve the purpose for which they were created. Therefore, it had veered around the view that one-day forward trading in such unregulated entities is not in public interest.

Besides NSEL, NCDEX Spot Exchange, Reliance and National APMC had also got permission to hold one-day forward trading.

“NCDEX had got the permission in 2008 but it did not start one-day forward.

Since it was of no use to the exchange, it had told Government last year that it wouldn’t be affected if the exemption was withdrawn,” said a commodity exchange source.

Reliance and National APMC never got going. In fact, Neptune Overseas Ltd, which got permission to launch National APMC, got into trouble with the Forward Markets Commission over the issue of transfer of National Multi Commodity Exchange stake.

The ₹5,600-crore NSEL scandal last year is the main reason for the withdrawal of the exemption.

Following the scam, the Centre, earlier this month, ordered the merger of NSEL with its promoting firm Financial Technologies (India) Ltd. “The withdrawal of exemption also stems from the Government order to merge NSEL with FTIL,” the source said.