It’s been more than a year since a draconian clamp-down on the trading of commodity futures hobbled one of India’s great success stories (see “Do chickpeas have a future?” April 2007), but in January the government announced the long-awaited overhaul of the 1952 Forward Contracts Regulation Act (FCRA), opening the door to a new wave of products in the second half of 2008.
“The preamble to the 1952 act actually states that this act exists to prevent options from being written on commodities,” says P. H. Ravikumar, managing director and chief executive of the National Commodity and Derivative Exchange (NCDEX). “After eight years of lobbying and debate, we finally have an act that is more reasonably close to reality.”
Volumes on existing commodity contracts have already soared more than 70% since exchanges were allowed to set their own margins in December, and Forward Markets Commission (FMC) Chairman B.C. Khatua says the new rules will give his agency the authority to approve new products, as well as to investigate and prosecute shady futures operations, which should give banking and securities regulators more confidence in recognizing the futures sector.
“Under the 1952 Act, the penalties were so small that people didn’t mind committing infractions and then just paying them,” says Ravikumar. “It was like having a fine of $1 for going through a red light.”
The new reforms also will free the FMC from the kind of political interference that led to the banning of the tur, urad, rice, and wheat early last year. The lifting of that ban is still contingent on the release of a report by the Abhijit Sen Committee, which was set up to review the role of futures in the commodities industry. The report is more than six months overdue, and Khatua says he has submitted a request to expedite it.
Meanwhile, the government is reviewing the laws covering the ownership of futures exchanges. In January, it ruled that non-Indian owners could total 50%, up from 49%, but that no single owner could hold more than 5% as foreign direct investment (FDI) – a quandary, because Goldman Sachs, ICE, and Fidelity each hold stakes higher than that in either NCDEX or its rival, the Multi-Commodity Exchange (MCX). Also to be resolved is the issue of whether non-Indian firms can trade on Indian exchanges, and whether Indian citizens can trade abroad. Under current law, a non-Indian firm can only access Indian exchanges if it owns a stake in a domestic trading house, and that stake cannot be more than 49%.
