Finance Ministry to abolish exemption under Section 27 to spot exchanges

Proposes to cancel existing exemptions, pursue investigation to laundering of funds

The ministry of finance proposes to abolish the system of granting exemption to the spot exchanges under section 27 of the Forward Contracts Regulation Act (FCRA) to carry on one day futures and intraday trading.

According to sources close to the development, the proposal is not only to do away with the system but cancel the existing exemptions and pursue investigation into the transactions done under such exemptions  as these are cash based settlement and not through delivery of goods.  Sources said, such investigations are intended to check diversion of funds from money laundering angle for which detailed norms is to be worked out.

According to official sources, the ministry and the commodity market regulator – Forward Markets Commission (FMC) is well equipped to take action o the defaulters who have misused the exemption under the provisions of the current notification but the problem is that investigations could not be done to check laundering of funds by commodities market regulator. Currently, any investigation pertaining to money laundering has to be referred to Enforcement directorate (ED). However the current move is to empower the commodities market regulator   with powers to deal with such diversion of funds, to probe the aspect of money laundering. They elaborated that the probe as and when empowered will be to check commodity market transactions on spot exchanges done by using these one day cash settled trades without underlying of goods through exemption under section 27 of FCRA.

Sources explained that through these exemptions, many transactions are not only not delivery based but   such transactions are speculative without any underlying of desired commodity.   For one day genuine trades, sources said, the parties interested in such one day trades could get into bilateral deals and route the deals under forward market or futures market mechanism be it one day or multiple days.  They cannot be trading on spot exchanges  and getting into partly into future dated trade, they said.   

The ministry took a view to do away with such exemptions after much deliberation as  there was an interim view taken to modify the exemption clause.  However no such interim relief was favoured and the decision was taken to do away with such an exemption altogether.  

A spot exchange is where actual commodities are traded at current prices. While at APMC markets, only licensed traders could trade, on spot exchanges any farmer or any trader or any corporate house could trade. Spot exchanges sought exemption under Section 27 of the FCRA to undertake one-day futures and intra-day netting. Usually, spot exchanges are governed by the state government or a state government-run Agricultural Produce Marketing Committee (APMC), where trades expire followed by delivery of the commodity. The commodity market regulator – Forward Markets Regulator (FMC) comes in when these exchanges need an exemption to conduct trading of contracts with one-day expiry, which results in intra-day netting (settlement during the day). This settlement does not necessitate delivery of goods but is netted through cash. Whenever a contract is settled in cash, it attracts the provision of FCRA, explained sources.

Way back in 2012, the FMC had provided a reporting format  wherein spot exchanges are required give fortnightly details to FMC showing stock limit of a certain commodity, open positions, margins, risk management procedures and clearing and settlement, etc. While seeking exemption under FCRA, exchanges were advised to file a detailed report on corporate governance to the FMC.