North Block objects to consumer affairs ministry’s broad definiton of derivatives.
The finance ministry has raised concerns over a catch-all definition of commodity derivatives on the grounds that it will lead to problems in regulating currency, interest rate and credit derivatives.
If its objections find favour with the Union Cabinet, which is slated to discuss amendments to the Forward Contracts Regulation Act (FCRA), commodity exchanges, which want to launch contracts for trading in weather or rainfall, may have to shelve their plans to do so.
While futures trading in wheat or soyoil may be okay, there are questions over trading in the metal or energy index, which do not have any underlyings. At least, a couple of brokerages are in talks with commodity exchanges to launch their own indices based on prices of underlyings on these bourses and their plans too may need to be reworked.
Taking objection to “a very wide-ranging definition” inserted by the consumer affairs ministry, the North Block wants the scope limited to derivatives that are based on underlying goods or prices of goods.
A clause in the Forward Contracts (Regulation) Amendment Bill, 2008, which is proposed to be introduced in the Lok Sabha in the next session, empowers the government to permit trading in any forward contracts or options in goods.
The finance ministry has partly objected to the definition, saying that the government should not have the power to allow trading in every conceivable contract. But sources said the bigger worry is that trading in foreign exchange, interest rate and credit derivatives — which fall within the Reserve Bank of India’s (RBI) regulatory domain — have not been explicitly excluded from the definition. The move will create a regulatory overlap, a source associated with the amendment said.
TRADING CHARGES
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The FCRA Bill is aimed at turning the regulator, the Forward Markets Commission, into an independent entity like the Securities and Exchange Board of India (Sebi), in addition to allowing options trading and institutional players like banks, financial institutional investors and mutual funds to enter the commodity derivatives market.
Sources pointed out that the draft report of the Raghuram Rajan Committee had suggested that Sebi — and not FMC — be the regulator for the sector. Even the Abhijit Sen committee, whose recommendations have not been incorporated into the Bill, has raised questions over FMC’s ability in approving the contracts.
Sources said the Bill was listed for discussion by the Union Cabinet two weeks ago, but no decision was taken.
When the amendments were first proposed in February 2005, the consumer affairs ministry, which is piloting the Bill, had defined commodity derivatives to mean “a contract which derives its value from the prices or indices of prices of the underlying goods and shall include forward contracts or options in goods or any other contract as may be defined”.
After the finance ministry objected to the definition, the consumer affairs ministry decided to change the definition in December 2005 and a Bill was tabled in the Parliament, on which the standing committee has also given its report.
In December, the government defined commodity derivatives to mean “a contract for delivery of goods that is not a ready contract” or “a contract for differences that derives its value prices of such underlying goods or activities, services, rights, interests and events, as may be defined in consultation with the Commission (FMC) by the central government, but does not include securities”.
But when an Ordinance was promulgated in January this year, the consumer affairs ministry went back to the original definition, a development that came to the notice of the finance ministry only recently. On its part, the consumer affairs ministry, which, sources said, acted at the behest of the FMC, is defending the definition and has said the objections should have been raised when the Cabinet discussed the Ordinance.
