FMC tightens overseas norms for India-based traders

Minimum net worth of Rs 5 crore prescribed.

The Forward Markets Commission (FMC) has tightened norms for members of commodity exchanges to invest abroad for trading in overseas commodity exchanges and to undertake related activities.

The members interested in forming joint ventures (JVs) or wholly-owned subsidiaries (WoS) abroad for commodity-related activities must have a minimum net worth of Rs 5 crore for the preceding three consecutive financial years, says FMC, the regulator for commodity exchanges and markets in India.

This net worth of Rs 5 crore is to be independent of the net worth the applicant maintains as part of its membership of the domestic exchange. However, FMC might relax the net worth criteria on a case to case basis, purely on merit, for a JV/WoS proposal , said an official.

Earlier rules lenient
Prior to this, the Reserve Bank of India and FMC allowed members of commodity exchanges to invest abroad. But the guidelines neither had any net worth criteria nor any stringent reporting rules.

In 2006, RBI, as part of liberalisation of overseas direct investment norms, allowed trading on commodity exchanges abroad and setting up of JV/WoS for trading in such exchanges as financial services.

The applicant member would require a no-objection certificate from FMC for its overseas operations, to be valid for a period of six months. Besides, it will need a certificate from the commodity exchange it is a member of, stating that no serious irregularities in its activities have been detected for the preceding three financial years.

The applicant should have a proven record in respect of redressal of complains/grievances. It should also give a declaration that neither it, nor its proprietor, nor any of its promoters, directors, partners, have been convicted by a court for any offence anywhere in the world.

The overseas subsidiary shall be incorporated as a separate legal entity and need approvals from respective overseas regulators for trading in commodities and commodity derivatives abroad.

Besides, the member should maintain an arms-length distance between its domestic and foreign activities in terms of key personnel, infrastructure, books, records, regulatory control and supervisory mechanism, to avoid any conflict of interest with its Indian operations.

Report card, too
To ensure reporting to Indian regulators, the guidelines have made it mandatory for the applicant member operating abroad to inform the Indian regulator (FMC) of any adverse developments, such as action by an overseas regulator against it or its subsidiaries, especially any event that may impact the solvency of the member.

Annually, the applicant member is bound by law to furnish the annual report of the JV/WoS, besides a self-attested copy of the registration certificate of the JV/WoS and the statement of all financial transactions with the JV/ WoS.

Besides, the overseas regulator with whom the subsidiary of the applicant member intends to enter into a JV should be a signatory of the IOSCO (International Organisations of Securities Commissions) multilateral memorandum of understanding to ensure cross-border co-operation and information sharing between FMC and the other regulatory body. This was intended as an anti-money laundering measure, said officials.