The permission granted by the Forward Markets Commission (FMC) to co-operative societies to trade on the commodity exchanges is a welcome move — and one that has been demanded since futures trading was resurrected in 2002-03, after a hiatus that lasted over four decades. At that point, one of the reasons for its reintroduction was to enable farmers to hedge their price risk, which was not protected by typical hazard-mitigating instruments like insurance. However, this objective remained unmet. First, farmers could not afford to pay the exchanges’ membership fees, which were high; the other requirements for access, including the payment of margins, were also onerous. Further, the minimum lot size that was stipulated for trading in the futures market is much larger than the marketable produce of most medium and large farmers. Naturally, small cultivators, who need risk coverage the most, are totally excluded. Moreover, such transactions were novel for most farmers, and they lacked the skills needed for trading on electronic exchanges.
However, by opening commodity exchanges to co-operative societies and federations, the FMC has now paved the way for farmers to be collectively linked through these bodies to the commodity exchanges. These co-operatives, in turn, can act as aggregators for the farmers’ small produce. They can also acquire, or even hire, the expertise that is needed to trade on the futures exchanges on the farmers’ behalf. That being so, it is now for the government to ensure that the futures market regulator, the FMC, is well equipped to ensure free, fair and transparent trading on futures exchanges. Speculation, which will be particularly sensitive politically in this sector, must be carefully regulated. What should be of concern is that the FMC, in its present form as an appendage of the consumer affairs department, may be too weak to do justice to this formidable task. It is worth recalling that the report of the K N Kabra committee, which formed the basis for lifting the protracted embargo on futures trading, had also warned that the FMC would have to be suitably strengthened if the commodity exchanges were not to become rich persons’ casinos. The government’s continued inaction on this front is, therefore, worrisome.
Curiously, a Bill to empower the FMC by amending the Forward Contract (Regulation) Act, drafted during the first term of the United Progressive Alliance, is still in limbo — despite it having been scrutinised by parliamentary panels. The legislation seeks to provide adequate powers to the FMC to enable it to keep speculation to a minimum, and also to deal effectively with other problematic practices like “dabba” trading (parallel futures trading outside the exchanges, which is illegal). More importantly, it provides for the launch of options trading in commodities, which is not yet allowed. For farmers, options trading is a far better hedging tool than futures trading, since it gives them the right but not the obligation to sell their produce at the committed price. Now that the government has recognised the need to open commodity exchanges to India’s farmers, it should move forward forthwith with this essential legislation.