INAUGURAL SPEECH OF PROF. K.V. THOMAS, MINISTER OF STATE (I/C) OF CONSUMER AFFAIRS, FOOD & PUBLIC DISTRIBUTION AT THE SEMINAR ON “INDIAN COMMODITY MARKETS AND FCRA AMENDMENT BILL, 2010” ORGANISED BY FEDERATION OF INDIAN CHAMBERS OF COMMERCE AND INDUSTRY (FICCI) AT NEW DELHI ON 4TH JULY, 2012:
Shri Rajiv Agarwal, Secretary, Department of Consumer Affairs, Shri Ramesh Abhishek, Chairman, Forward Markets Commission, Dr. Arbind Prasad, Director General, FICCI, Shri Venkat Chary, Chairman, MCX, Mr. Nick Ronalds, Executive Director, FIA Asia, President, Asia Markets, friends from the media, ladies and gentlemen:
I am happy to be here today amongst you at the Seminar organized by the Federation of Indian Chambers of Commerce and Industry (FICCI) under the title of “Indian Commodity Markets and FCRA Amendment Bill 2010.” This is indeed a very welcome initiative of FICCI. I congratulate FICCI on their pro-active efforts in organizing such an event as they help in generating a healthy debate on a crucial subject of commodity futures trading and its contributions to the economy.
The commodity futures markets in India have come a long way since 2003, the year when three on-line electronic trading exchanges came into existence and futures-trading in over 100 commodities was allowed. It is a matter of great satisfaction that over the years, the volume of trade has increased considerably with the number of members and clients and contracts traded on the exchanges having increased significantly.
While there is an understandable excitement regarding the significant growth of this market, it cannot be denied that there are also apprehensions in equal measure among some quarters whether the market is truly achieving its objective of price discovery and price risk management and helping farmers and hedgers. We need to take a balanced view and address the apprehensions as well as the challenges before us to enable the market to live up to the expectations of farmers and hedgers. It is well known that hedgers transfer their risk in this market which is assumed by the speculators who bring in the liquidity and that greater participation and volumes lead to a more efficient price discovery, thereby reducing the possibility of price manipulation. An analysis of the trade volumes on futures market indicates that in case of some commodities, the volumes are much higher than the open interest, thereby indicating that the extent of hedging is much less than the speculative volumes generated. It is also seen that in respect of a number of commodities, the volume of participants is not very significant. It is a matter of concern for us, as this will result in poor quality of price discovery in such contracts. There are also apprehensions in some quarters that these markets are contributing to, if not leading to, price rise and price volatility of commodities.
A number of studies and reports do indicate that futures trading in commodities cannot be said to be responsible for price rise. It is, however, possible that if futures-market is not aligned properly with the physical market, price discovery in the futures platform may become distorted which may be misused by vested interests. Such a situation can only be avoided when hedgers and potential hedgers are encouraged to participate in this market in large number.
The Forward Markets Commission (FMC) has been taking a number of initiatives to address the above challenges. To improve hedging which is reflected in higher open interest, the Commission has asked all the commodity exchanges to prepare a road map for improving the volume open interest ratio by increasing hedgers’ participation. We need to create awareness among the hedgers and industry associations about these critical issues – it is here that I would expect and request industrial bodies such as FICCI to play their important role in creating such awareness among the potential hedgers for using the commodity futures market as an effective tool to manage their commodity price risk.
I am told that the FMC has also started a comprehensive exercise for alignment of futures market with the physical market. A staggered delivery system has been introduced in a number of agricultural commodities. This has already resulted in significant reduction in excessive speculation in the near month and in reduced price volatility in these commodities. The FMC is also reviewing all the futures contracts traded in the market to examine if those are suited to the needs of the physical market participants. The feedback of physical market participants and other stakeholders has been sought and it is proposed to review these contracts and make suitable modifications as required.
The Government is also considering constituting an Advisory Committee to provide an institutional mechanism for the Government and the Commission to consult all the stakeholders regarding the regulation of commodity futures market. I have no doubt that these measures are bound to bring about much needed changes in the working of these markets by bringing down excessive speculation, improving hedging and better aligning with the physical market.
One of the primary objectives of Commodity Markets is to help farmers to get best possible price for their produce. The farmers, especially small and marginal, are not able to participate in the market directly. They do so through aggregators. Therefore, the FMC has asked the exchanges to promote aggregators on a pilot basis in the agricultural commodities so that the market benefits the farmers much more. The Price Dissemination Project of the Commission is being implemented across the country with 1400 ticker boards already have been installed and 7500 proposed to be installed during the next 5 years. The price signals coming from futures market also help farmers to take important sowing and marketing decisions. Farmers would be benefited far more by introduction of options which would be possible after the amendment of the FCR Act.
The participation of institutions such as Banks is also necessary to bring adequate liquidity to this market. Introduction of investor protection measures will instill a sense of confidence in the retail clients encouraging them to participate in large number. Investor Protection Fund has been set up in each exchange with over Rs. 65 crores and a trust is being set up to operate the fund. The clients are now getting SMS and Email alerts every day regarding the trade done in their account. A uniform KYC norm has been introduced and quarterly settlement by members with clients has also been done. In the last one year FMC has proactively taken several such measures. There is also a need to undertake a major media campaign in collaboration with the Exchanges to increase investor education in all the States on a sustained basis.
The need for strengthening regulatory mechanism through Amendment of FCR Act has been discussed over the years and it is certainly necessary to strengthen this mechanism. The proposed amendment of FCRA would enable the FMC to play a more effective role in regulation of these markets. The amendment would also bring in much-needed new products such as options. However, there is also a need that all the stakeholders appreciate the need to take this market to a new level where the hedgers and farmers would be the primary beneficiaries and this market would play its rightful role of providing price discovery and price risk management functions to the physical market participants. This would provide necessary confidence to the policy makers as well as law makers to bring about the necessary changes in the legislative structure of the commodity futures market.
With these words, I have great pleasure in inaugurating this Seminar.
