Commodity futures regulation bill finally sees daylight

After 12 years of dilly-dallying, the government has finally introduced the forward contracts (regulation) amendment bill (FCRA bill) which, among other things, seeks to put in place an independent regulator on the lines of the Securities and Exchange Board of India for commodity futures, where volumes are already half the size of the equity futures market.

In a key provision, the Forward Markets Commission, which at present is part of the department of consumer affairs, will be remodelled on the lines of SEBI and given more powers to regulate exchanges and all market participants. Unlike at present, where action against an errant market player is taken under the bylaws of the exchange concerned, once the bill is approved by Parliament, the FMC will have powers to act directly.

In addition, the bill - introduced in the Lok Sabha by minister of state for food supplies K V Thomas - seeks to permit options trading, where a person who enters into a contract for a commodity transaction has the option to buy or sell the contract on a specified date at a mutually agreed price.

Further, the government has proposed that trading in derivative contracts be allowed to hedge the risks on weather, besides allowing trading in indices such as those for freight. These products are allowed to be traded in developed markets and helps companies cover their risks.

The bill also proposes to increase the monetary penalty for contravention of the legal provisions to up to Rs25 lakh from a meagre Rs1,000 at present.

That the government is keen on pushing through the bill is viewed as a sure sign that the era of banning futures trading in commodities has passed. Earlier, such a ban was justified on the ground that it encouraged speculative hoarding and unduly raised commodity prices. The ban still exists on rice, urad and toor dal. Futures trading in toor was suspended in 2007 against a backdrop of sharp rise in prices, but is expected to be resumed by this year end.