Forward the regulator

New commodity trading law should enhance regulation

By clearing the Bill to amend the 60-year-old Forward Contracts (Regulation) Act, or FCRA, the Union Cabinet has sought to rectify a past error. A strong and adequately empowered regulator for the commodity sector should actually have been put in place before allowing futures trading in commodities in 2003. The report of the Kabra Committee, which formed the basis for lifting the four-decade-long ban on this mode of marketing, had pitched strongly for strengthening the Forward Markets Commission (FMC), the commodity trade regulator, and expanding its infrastructure before permitting commodity exchanges to set up shop. The need for an effective regulator akin to the Securities and Exchange Board of India became all the more urgent when commodity prices began soaring in 2008. This was viewed by many as the consequence of futures trading. The truth is that in its present form, the FMC is virtually a toothless appendage of the consumer affairs department with little authority to take independent decisions or act effectively against speculators and market manipulators.

Unfortunately, the move to suitably alter the FCRA to make the FMC an effective watchdog for this rapidly swelling mode of commodity trading has remained in limbo for all these years. This could be due partly to the reluctance of the consumer affairs department to slacken its hold over the FMC, but largely to the resistance from some of the partners of the ruling United Progressive Alliance (UPA), notably the Left parties in its first term and the Trinamool Congress subsequently. The FCRA Bill that has finally got the Cabinet’s nod incorporates suggestions of several bodies, including a parliamentary panel, and thus has several welcome features that could bring the Indian commodity trade on a par with international practices. The freedom to the FMC to set the norms for transacting futures contracts and its enhanced powers to penalise offenders are expected to enable it to deal with unlawful “dabba trading”, where parallel transactions are conducted outside the commodity exchange platforms but using their price signals. More significantly, the amended statute will have provisions for the introduction of new products such as trading in options and intangibles like weather and freight indices. Options trading is essential to link the actual commodity producers, particularly farmers, with the commodity exchanges, and to allow them to hedge their price risks. This is because they allow access to the right, without the obligation, to sell their produce at a pre-committed price and date. Equally significant is the provision that allows financial institutions to participate in trading on the commodity bourses.

However, more will need to be done to ensure that the amended law serves its intended objectives. The rules to be framed under the altered Act will have to truly conform to the spirit of the law and minimise the scope for needless government intervention in the commodity market. Better regulation of this market will, hopefully, rid futures trading in commodities of some of the ills that have bred misgivings about it and its impact on prices.