Passage of FCRA Bill will boost economic growth

Written by Sandip Das | Updated: Jun 21 2012, 07:24am hrs
The proposed legislation to empower the commodity market regulator, Forward Markets Commission (FMC), has been pending before Parliament for discussion. Nilanjan Ghosh, chief economist and head research & strategy, of the biggest commodity exchange, MCX, spoke to FEs Sandip Das, on the need to strengthen the commodity market for boosting economic growth.

Your take on the pending FCRA Bill, 2010 ....

In an environment of economic uncertainty and decelerating growth, policy impetus is being sought to kick-start the Indian economy that grew at its slowest pace in nine years during the quarter ended March 2012. In this context, the early passage of the proposed Bill to amend the Forward Contract (Regulation) Act, 1952, or FCRA, holds the key to not only strengthen the commodity derivatives market in India, but also to provide the much-needed growth impetus to the entire commodity market and thereby to the economy as a whole.

The government has placed the FCRA Amendment Bill, 2010, in Parliament to make suitable changes to the Forward Contracts (Regulation) Act, 1952. The Bill was referred to the standing committee of Parliament, which has since recommended its passage. This Act regulates the functioning of commodities futures markets in India and vests the regulator, the Forward Markets Commission (FMC), with powers and functions for regulation and development of the commodity derivatives market.

How have commodities exchanges performed in the last few years

Over the last eight years, collective turnover of national commodity exchanges has grown by a compound annual growth rate of 44%. With significant spurt in commodity price volatility in the last few years, efficient and transparent mechanism of commodity exchange platform is enabling its stakeholders to seek a much-needed protection from such volatility, resulting in such high volumes.

Numerous studies by institutions like IIM as well as international bodies such as UNCTAD have recorded the tangible benefits reaped by Indian farmers from futures market, such as avoidance of distress sale, reduction of intermediaries in the value chain, reduction in price volatility, etc. It has provided for a risk-management platform to various segments of traders, small and medium enterprises, and other stakeholders, who are exposed to the vagaries of ruthless market forces in the physical segment. However, it is well recognised that the existing law in the form of the FCRA (enacted way back in 1952 and never amended thereafter) is grossly inadequate to either properly regulate this fast-growing market or to take its benefits to its intended user base.

Empowering commodity market regulator .

Under the existing FCRA, hedging products like options, indices and weather derivatives, which can be tailored to the risk appetite of hedgers, are currently not permissible. This leaves less scope for innovation. On the regulatory front, the current law leaves the market regulator, FMC, dependent on the government financially and for day-to-day operations. This lack of autonomy does not render enough teeth to the regulator of the commodity derivatives markets a phenomenon quite unlike than that of the regulators of the equity markets (Sebi) or insurance (Irda).

As is evident in the rapid growth and overall size of the commodity derivatives market in India, participants use sophisticated trading systems and world-class technology. In this context, the regulatory system too needs a major upgrade to keep up with its regulated entities. Thus, a stronger and autonomous regulatory body is required to properly to develop strong monitoring systems to oversee the regulated entities on a real-time basis. FMC is short on human and technological resources, and needs to ramp up its capacity. It needs powers and autonomy equivalent to its capital market counterpart, the Sebi, to fulfill this role.

Such empowerment of the regulator is provided for in the FCRA Amendment Bill, placing powers and resources at the disposal of FMC. The FCRA Amendment Bill was first placed on the floor of Parliament in 2006.

The need for regulatory empowerment and new derivative products has increased manifold since then. Thus, there is an immediate need for the government to ensure passage of the Bill.