FMC to issue net worth, audit norms for warehouses

 

Forward Markets Commission, the commodity markets regulator, plans to issue new guidelines clearly stipulating the financial criteria including net worth for warehouses, which are recognised and used by the commodity exchanges. The issue of monitoring stock in warehouses came up after the failure of National Spot Exchange Limited (NSEL), which faced a Rs 5,574-crore payment crisis a year ago. FMC had earlier said that warehouses recognised by the commodity exchanges should be registered with the Warehouse Development and Regulatory Authority.

So far, about 350 warehouses have been registered with the warehouse regulator. Now, FMC wants sharper regulations for warehouses associated with the commodity exchanges to improve the confidence among market participants.

Ramesh Abhishek, chairman of FMC, said: “We are going to prescribe some capital adequacy norms, net worth and other criteria, for ensuring that only proper warehouse service providers enter the exchange space. We would also want to make the functioning of warehouses very transparent.”

Insisting on a third-party audit of the stock lying with warehouses is also seen as a move to impart confidence in the commodities market.

FMC will soon issue new norms for warehouses, which will also prescribe third-party audits, and some disclosures on the website of the exchanges to help participants know what commodities lie in which warehouse and in what quantity.

The net worth and other specifications for warehouses will help permit only high-class, high-tech warehouses to be part of commodity market infrastructure. FMC wants to make this foolproof so that service levels and transparency improve in warehouses, which is must for market confidence.

The regulations for warehouses are likely to have selection criteria for warehouses.

The regulator also wants to promote forward trading in commodities, which results in delivery. This will result in tremendous growth of exchanges but warehouses also need to be efficient and transparent.

The Forward Contract (Regulation) Act provides for only delivery-based forward contracts; forward contracts in the physical market are not guaranteed and there is a lot of risk for both the buyers and sellers.