MINISTER OF THE STATE (INDEPENDENT CHARGE) IN THE MINISTRY OF CONSUMER AFFAIRS, FOOD AND PUBLIC DISTRIBUTION
(PROF. K. V. THOMAS)
(a): In a free market economy, futures trading performs two important economic functions, viz., price
discovery and price risk management. Some benefits of forward trading in operational terms based on
these twin functions are listed as below:
(i) It allows democratization of decision making in a market by allowing participation of stakeholders
from all segments of the market from the producers to the consumers and a host of intermediaries by
looking at prices of alternatives and/or by simultaneous participation in the market for those commodities
as well.
(ii) It is useful for the farmers as they could see the likely prices at a future date in the current
season coinciding with the respective harvest times of the crops and can decide upon their crop- mix
for a particular season compared with their past decision making process based on last received prices
(which may not hold true for futures).
(iii) Exporters can quote realistic prices for potential exports referencing the futures market prices
and thereby secure export contracts in the competitive global markets. It airo enables the consumers
including processors of the commodity get an idea of the price at which the commodity would be at a
future point of time and can decide on their consumption / manufacturing pattern.
(iv) It leads to price stabilization in traded commodities as the amplitude of price variation is reduced.
(v) It helps in creating integrated price structure throughout the country, thereby facilitating
price risk management in the lengthy and complex production and manufacturing activities;
(vi) The commodity futures trading helps in refining and strengthening the database, especially for
the agricultural sector, which would bring in reliable estimates and forecasts to help strengthen
the process of planning and policy making.
(vii) The online trading on the exchanges also helps in constant monitoring of the dynamic external
environment including global environment, emanating price signals from the market, and disseminating
the same to the participants in the commodity market ecosystem on a real-time basis. The futures
trading platform also acts as an alternative platform for the farmers to reach the markets rather
than following the age-old, multi-layered marketing channels.
(viii) In particular, readily available price references can benefit farmers who are otherwise disconnected
from the market and vulnerable to receiving sub-optimal prices from the better-informed and better organized
intermediaries. Information disseminated by the exchanges can therefore reduce information asymmetry vis-a-vis
the intermediaries thereby empowering commodity-sector participants including farmers to take better decisions
in the light of a more accurate understanding of market conditions and price trends and improve their
bargaining power to realize a better price.
(b): Yes Madam, The Government has received a number of requests from time to
time to discontinue forward trading to check prices.
(c): During the year 2010, the Government received complaints from sugar traders and sugar associations
(Bombay Sugar Merchants Association Ltd) to ban forward trading in sugar and from tyre manufacturers
(Automative Tyre Manufacturers Association) for banning futures trading in rubber. These requests were
duly considered on the basis of information submitted by the representatives and detailed analysis of
the market fundamentals of supply-demand and trading and price data of the commodities and it was found
that there was no correlation between price rise and futures trading. As a matter of fact, the complaint
against futures trading in sugar was received when prices had fallen by 25 to 30%. Often it was observed
that such complaints are made by trade associations who perceived the transparent price discovery happening
on a neutral third party platform like a commodity exchange as detrimental to their ability to set the prices.
Even otherwise also, 2 studies by the Abhijit Sen committee (2008) and Reserve Bank of India (2010) have found
no causal relationship between futures trading and inflation in essential commodities. Inflation is the result
of rising demand vis-a-vis structural and seasonal supply constraints.
(d) & (e): Government proposes to strengthen regulation of commodity forward market for which Forward
Contracts Regulations (Amendments) Bill, 2010 has been introduced in the Lok Sabha. The Bill inter alia,
provides for (i) `broadening the scope of forward contract; (ii) strengthening the Forward Markets Commission
by making it autonomous;(iii) to enable the Commission to levy fees; (iv) provide for stringent penalties;
(v) make provisions for registration and regulations of intermediaries; (vi) make provisions for investigation
and enforcement; and (vii) provide for appellate mechanism.
(f): A total of 27 cases were reported for violation of Forward Contracts (Regulation)
Act, 1952 (illegal trading) during last years and the action taken is as indicated below.
Year 2008-09 - 09
Year 2009-10 - 03
Year 2010-11 - 15
Action Taken
15 complaints were referred to the concerned state police authorities under Rule 13 of the Forward
Contracts (Regulation) Rules, 1954 for taking action under Section 22A of the Forward Contracts
(Regulation) Act, 1952.
# FMC has recommended prosecution in 03 cases under Section 20 aiid 21 of the FCRA, 1952
out of six cases referred to the FMC by the Police. Scrutiny of documents in respect of
the other 3 cases is in progress.
# In 4 cases, the members were suspended by the FMC under Section 12B of the FCRA, 1952 and in another
case, the concerned 2 clients were debarred from trading. One member and two clients out of them have
challenged the action before the High Court and the matter is sub-judice. Out of the 4 suspended members,
one member has finally been expelled from the Exchanges
