FCRA Amendment Bill delay holding up commodity reforms

The Bill, which has been hanging fire for 3 years, is expected to define commodity derivatives & futures contracts, as well as remove prohibition on options

Crucial reforms are being held up in the commodities trading segment as the government has been unable to push through the Amendment Bill of the Forward Contracts (Regulation) Act, 1952. The proposed Bill which seeks to strengthen the commodities regulator Forward Market Commission (FMC) has been hanging fire for the last three years, forcing the government to come out with an ordinance early this year.

However, this ordinance is set to lapse in the second week of April. As the government won’t be able to reissue the ordinance when the parliament is in session, the regulatory framework in the commodities markets will take three steps backward if the Bill is not passed in the Budget session. “The proposed Bill is crucial for the commodities segment as many reforms hinge on this. FMC will be able to take more effective steps to improve the systems, transparency and efficiency,” BC Khatua, chairman, FMC, told The Indian Express in an interview.

The Bill is expected to define commodity derivatives and futures contracts and remove the prohibition on options. “FMC can function as a proper regulatory body once the amendment is passed. We know that India has a tradition of grey market and people trade outside the exchanges… problems like these can be addressed once we have the powers to take actions directly instead of routing the directives through the exchanges,” Khatua said.

According to the FMC chief, many plans including the ownership pattern of commodity exchanges can be finalised only after the passage of the Bill. Though the government has restricted individual holding in commodity exchanges at five per cent, some investment firms hold higher stakes in major commodity exchanges.

In a setback to futures trading last week, it was held responsible for the spurt in prices. Though the finance minister later asserted that high inflation figures were a result of supply side constraints, the commodity market was blamed for it. The FMC chairman seconds the FM’s opinion and says that traders in future contracts should not be blamed for rising prices. “Commodity markets only reflect what has been happening globally. It is like calling the mirror defective for showing you the true picture. The recent spurt in prices is a result of lack of supply in the essential commodities,” said Khatua.

“Time and again it has been observed that futures market have no role to play in inflation,” says Khatua attributing a study conducted by the Indian Institute of Management-Bangalore. “Even a study by the National Commodity and Derivatives Exchange shows that in the last 3 months, the prices of items that are not traded on the exchanges rose by 9 per cent as compared to the 6 per cent increase in prices of commodities that are traded,” he added.

The high price issue boils down to the fundamental problem of greater demand and insufficient supply, say market experts too. “We are not the culprits, the commodity markets in India is evolving, it is just about 5 years old. The govt should take more proactive steps to check physical price rises. Prices of oil, wheat, soyabean have gone up globally so the scenario is bound to be reflected internally,” said MAPE ADVISI head of commodities Suresh Nair.

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The Parliament has already passed the Warehouse (Development &Regulation) Bill, another major component of the commodities market reforms. This enables farmers to pledge their warehouse receipts to secure working capital while waiting for better prices to prevail as well as trade in the receipts. In short, this will help farmers get better prices when they take out their stock at later dates and have the benefit of selling when prices are high. “But we need more warehouses, assayers and experts to handle the storage part,” said a market source.