Pepper Bourse To Give Farmers A Fair Deal

The inauguration of international pepper futures exchange at Kochi has now been postponed to April 1997. Earlier, it was slated for January this year.

The government, in fact, intended to upgrade the domestic futures commodity exchange at Kochi into an international exchange during the second half of 1995.

According to informed sources, the India Pepper and Spice Trade Association (IPSTA) is opening an international commodity division to trade global pepper futures contracts.

Foreign participants can involve themselves in global pepper futures contract subject to fulfilling the capital adequacy norms, foreign exchange regulations and compliance with rules and regulations of the pepper exchange and the Forwards Market Commission (FMC).

All the participants desirous of playing in the international pepper exchange at Kochi will have to obtain registration with the FMC, the regulatory authority for forward markets in commodities in India, before they approach IPSTA to become members or registered non-members.

The registration requirement would apply to all participants, whether Indian or foreign, individual or firm or a registered organisation.

The foreign participants are required to adopt the following procedure: First, incorporate themselves as a registered company in India after obtaining clearance of the Secretariat for Industrial Approval (SIA)/Foreign Investment Promotion Board (FIPB), ministry of industry and the Reserve Bank of India (RBI) under the Foreign Exchange Regulation Act 1973 (Fera) and thereafter become member of the exchange and/or shareholder of the Clearing House; or

Second, open a branch office in India after obtaining permission from the RBI under Fera and thereafter become member of the exchange and/or shareholder of the Clearing House; or

Third, operate as a "registered non-member" through another member of the exchange after obtaining permission fron the RBI under Fera and by being registered with the exchange as a "registered non-member". Such registered non-member will be able to trade only on their own account and cannot trade on behalf of their clients, associates etc.

The international pepper exchange is expected to benefit farmers as price discovery will be open and transparent. The general experience has been that where future markets exists, there is not much disparity between the farm gate price and the terminal market price.

This means, farmers will get a fair deal. Futures contracts help farmers to lock in the prices of their produce.

Banks are generally willing to advance up to 80 to 90 per cent of the value of the produce when it is hedged against adverse price fluctuations through the instrument of futures contract.

In support of the liberalised environment, the World Bank (WB) along with the Unctad, undertook a joint mission with the object of appraising the scope and efficiency of futures markets as market-based risk instruments for managing price risks and thereby stimulate policy initiatives for the orderly establishment of a more open and liberalised agricultural sector.

This mission comprised Lamon Rutten (Unctad) and Benoit Blarel (World Bank). Benoit Blarel, accompanied by Dina Umali-Deininger who was involved in the production of the report, visited Kochi on December 17 and handed over a copy of the report to T Vidyasagar, president of India Pepper and Spice Trade Association.

In this report, it has been proposed to organise a seminar in Kochi some time next month to debate the findings of the report.

This study throws light on the steps and actions needed to ensure the orderly development of agricultural futures markets as a generic risk management tool to improve the performance of agricultural markets.

The mission has observed that while the structure of commodity exchanges and their user composition in India are similar to that of other international exchanges, their capacity to design and introduce new contracts has been limited.

The mission affirms the view that Non-Transferable Specific Delivery Contracts do not qualify as futures contracts according to international definition.

It has added that extensive regulations and controls exercised by the Forwards Market Commission (FMC) in the process of contract approval and in the fixation of prices ceilings, margins, and position limits tend to undermine the liquidity of the futures markets and thereby hamper the economic usefulness of futures trade.

The mission has drawn attention to other additional regulations that limit the access to and usefulness of futures exchange. The mission has stressed the need for a market-friendly regulatory system. To quote from the mission's report, "On the legal and regulatory front, the FMC should curb its discretionary interventions, associations should be recognised on a permanent basis, renewal of contracts should be automatic, regulatory measures standardised and price ceilings withdrawn."