Feb 15: Vijay K Aggarwal, 49, has been at the helm of the Forward Markets Commission (FMC) since December 1995. An IAS officer with a track record of more than 25 years, Aggarwal has put in service at the centre (ministry of steel) and state-level entities (MSEB, Meltron, State Textile Corporation). As FMC chairman, Aggarwal bailiwick extends over 25 commodity exchanges. He is currently involved in doing a balancing act between the central government's push for quick reform in the commodity exchanges so that futures trading can begin, and the pull of traditionally reform-resistant comexes, which are only now beginning to see the benefits of modern trading practices and systems.In an interview to The Financial Express, Aggarwal speaks about various aspects relating to commodity exchanges, their current problems, and their potential to benefit all sections of the people--growers, traders an consumers. Excerpts:
On the role of futures trading in commodities.
Futures tradingperforms two important economic functions, namely, price discovery and price risk management. Also, futures trading reduces the amplitude of fluctuation in the prices of the concerned commodity though variations in prices continue. It is useful for all segments of the economy, directly or indirectly.
For the producer, the exporter, the importer and the processor it is directly useful. They can take decisions based on prevailing futures prices and, thereafter, cover their risks by hedging in the futures markets. For a small grower/producer, even if he does not wish to hedge his risks, the futures markets give an idea of the price likely to prevail and he can make his decisions accordingly. This is borne out by the experience of small cultivators enquiring about futures and ready prices of trading in recognised exchanges when they bring their produce for marketing to the agricultural markets.
On the number of commodity exchanges (comexes) in the country and their current state of affairs.
There are25 commodity exchanges in the country which are recognised for forward trading by the Forward Markets Commission. There is a general feeling that the commodity exchanges are not functioning properly. Also, there is general ignorance about their working. The feeling is not entirely unfounded.
There are some exchanges which are working well, but some do need to improve their working. But the fact that there has been a prolonged prohibition on futures trading in a majority of agricultural commodities cannot be overlooked. The prohibition of futures trading in most of the agricultural commodities has both been the cause and the effect of the current state of affairs of the commodity exchanges.
Also, this prohibition led to reduced volumes of trading on these commodity exchanges. Consequently, this resulted in the poor financial position of these exchanges and poor service to members. It has also led to arguments that as the exchanges are not strong and self-supporting, futures trading should not be resumed inmore commodities.
But it is important that this deadlock be broken. The lead, however, has to be taken by both the commodity exchanges (in improving their working conditions) and by the government (by liberalising its policy regarding permitting futures trading in additional commodities).
The government has, in the last two years, already taken some steps in the area of permitting futures trading in additional commodities. The exchanges are also making attempts to improve their working. Both these steps should lead to greater confidence about the role of futures trading and the capabilities of commodity exchanges to conduct such trading.
On what needs to be done to improve comexes.
FMC has been emphasising upon the commodity exchanges the need to improve their working. We have been working in this direction jointly with the authorities of the commodity exchanges for the last two years. With this, the crucial areas in the working of exchanges are: 1) improving the trading conditions, 2) ensuringsecurity of contracts, 3) improving the financial position of the exchanges, 4) strengthening the administrative structure, and 5) reactivating arbitration and quality assurance mechanisms so that the exchanges become vibrant self-regulatory organisations.
Also, the comexes are taking their own steps, though the pace may differ from one exchange to the other. Improved working would be the best way to promote business and create increased and wider awareness about futures trading.
One area of development would be to have a common set of bylaws for all the exchanges so that a member of one exchange can trade on other exchanges. It may be worthwhile for commodity exchanges to take up trading in more than one commodity and develop themselves as institutions for futures trading in several commodities. This will be possible when futures trading in additional commodities is permitted and after the exchanges have improved their working. However, for this they need to first improve their functioning.
Onwhether comexes face closure with non-renewal of their registration, if the functioning is not improved.
There may not be an occasion to close down any commodity exchange, though in the normal course it is likely that some exchanges may not be able to improve their working and may become inoperative or close down on their own. Apart from periodic reviews of the working of exchanges, at the time of renewal of recognition, the performance of commodity exchanges is reviewed and this practice will continue. If it is found that any exchange has not performed properly, its recognition may not be renewed.
On the current market turnover of India's commodity exchanges.
Even though there are 25 comexes in the country, futures trading is permitted (since 1980) for only six commodities. These six commodities are: pepper, turmeric, castorseed, gur (jaggery), potato and hessian. The total annual volume of trading in these six commodities is about Rs 27,000 crore, while the annual value of production of thesix commodities is about Rs 12,500 crore per annum. Thus, the volume of trading is slightly more than twice the annual production. However, there are variations from commodity to commodity: in the case of hessian the volume of trading is 14 times the production whereas in the case of potatoes the volume of trading is insignificant compared to the production of more than Rs 5,000 crore.
On various type of contracts permitted on the comexes.
Of the 25 commodity exchanges, eight are dealing exclusively with non-transferable specific delivery contracts in cotton. The largest number of exchanges -- 10 -- are organising futures trading in gur. Three of these exchanges are also recognised for conducting futures trading in potato. Three exchanges are organising futures trading in castorseed (Ahmedabad, Rajkot and Mumbai).
There is only one exchange (each) for trading in futures contracts in pepper (Kochi), turmeric (Sangli) and hessian (Calcutta). The exchange organising futures trading in hessian isalso organising trading in transferable and non-transferable specific delivery contracts in raw jute and jute goods.
Till the early 1960s, futures trading was permitted in a number of commodities, including edible as well as non-edible oilseeds/oils/oilcakes, raw jute, jute goods, cotton, spices, etc.
From the mid-1960s onwards futures trading in a number of commodities came to be prohibited, leading ultimately to a situation where futures were permitted in only two commodities -- pepper and turmeric.
In addition, non-transferable specific delivery (NTSD) contracts are allowed in cotton; and transferable specific delivery contracts and also NTSD contracts are allowed in raw jute, jute goods and hessian.
On how comexes/members get FMC recognition.
For organising futures trading, the exchanges have to seek recognition under the Forward Contracts (Regulation) Act, 1952, from the central government. The concerned exchanges have to have their own rules and regulations for membership, conduct oftrading, etc. These rules and regulations require approval of either the central government or the FMC.
While membership of the exchange is in terms of the approved rules and regulations, there is no approval required from either the central government or the FMC to become a member of any commodity exchange.
The criteria for membership varies from exchange-to-exchange. It could include payment of admission fees and security deposit and the intending member has to agree to abide by the rules and regulations of the exchange and pay annual subscription and other charges as prescribed from time to time.
Only in the case of the International Pepper Futures Exchange at Kochi is registration of participants with the FMC required. The fee to be paid is Rs 7,500. In addition those intending members who wish to trade and/or clear trades on behalf of foreign participants have to obtain permission from the Reserve Bank of India under Fera, 1973.
For registration with FMC and permission under Fera, a singlewindow system of approval is in place and has been working satisfactorily.
On the Kabra committee's recommendations for improving comexes.
The Kabra committee appointed by the government of India to suggest improvements in commodity markets gave its support in September, 1994.
The report inter-alia suggested strengthening of the commodity markets, strengthening the regulatory body -- the FMC -- certain amendments to the Forward Contracts (Regulation) Act, 1952, resumption of futures trading in a number of commodities, setting up of international exchanges for futures trading in pepper and castor oil, and the resumption of futures trading in jute goods and cotton. It examined proposals for amendments to the Forward Contracts (Regulation) Act, 1952. The recommendations of the Kabra committee that are not yet implemented are under examination.
The international exchange for futures trading of pepper has already become operational at Kochi.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
