1

FORWARD CONTRACTS (REGULATION) ACT, 1952 AND REGULATION OF

COMMODITY FUTURES MARKETS: ISSUES AND PRIORITIES

K.G. Sahadevan
f



Abstract

In spite of having credited with more than a centurv long experience in commoditv futures trade,
India still continues with a nascent market in terms of its phvsical infrastructure for regulation,
trading and deliverv. The present studv examines the Forward Contracts (Regulation) Act, 1952
and identifies the gaps in this old legislation which continues to govern futures trading in
commodities in India. The legislation in its present form raises serious doubts about
preparedness of our countrv to handle growing and complex requirements of the markets. A
close scrutinv of the present role of the futures markets regulator and its organi:ational setup
reveals manv inadequacies which call for revamp of the existing regulatorv set up especiallv in
the fast changing futures market scenario.

*
This paper is extracted Irom a broader study entitled 'Commodity Derivatives and Futures Trading: A Study oI the
Sources oI Market Failure and the Policy Options Ior its Revival carried out by the author Ior Forward Markets
Commission, Mumbai in 2004. An earlier version oI this paper has been presented at the 2006 Applied Business
Research ConIerence held at Cancun, Mexico during 20 24 March, 2006.
f
Associate ProIessor, Indian Institute oI Management, Prabandh Nagar, OII Sitapur Road, Lucknow 226 013,
India, Phone: 0522-2736658, e-mail: devaniiml.ac.in

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1. Introduction

Under entry 48 oI the Union List in Schedule VII oI the Indian Constitution, Iorward and Iutures
trading and stock and commodity exchanges involved in such trading have been retained within
the regulatory domain oI the Central Government. While industry and service sectors witnessed
massive deregulation during the last IiIteen years oI economic reIorm, the agricultural sector in
general and the domestic supply, distribution and trade in commodities in particular continued to
remain under government control. The Forward Contracts (Regulation) Act (FCRA) was passed
in 1952 Ior the purpose oI regulating Iorward markets in commodities. Later, legislations like
Essential Commodities Act, 1955 and Prevention oI Blackmarketing and Maintenance oI
Supplies oI Commodities Act, 1980 have been enacted Ior the purpose oI controlling production,
supply, distribution and trade oI essential commodities so as to ensure their availability to the
consumers and to protect them Irom unscrupulous traders.

Government has initiated the process oI deregulation oI domestic trade in commodities in 1997
by liIting prohibition oI Iutures trade in a large number oI commodities and Iacilitating setting up
oI national multi-commodity exchanges. Subsequently, the government has abolished
prohibition oI Iorward trading on all the remaining banned commodities in April 2003. These
two initiatives have triggered massive growth oI Iutures markets in India. By the end oI 2003,
three on-line corporatised multi-commodity Iutures exchanges became operational. Currently
there are 24 exchanges in India with derivative contracts on more than 120 commodities
available Ior trade. The aggregate turnover oI all the exchanges has shot up Irom Rs. 28419
crore in 1998-99 to Rs. 129364 crore in 2003-04 and Iurther to Rs. 571760 crore in 2004-05
(Forward Markets Commission, 2005). The total value oI trade during 2005-06 has crossed Rs.
1000000 crore. Simultaneously, both market participation and trading practices underwent
revolutionary changes. The new generation exchanges brought in technology and world`s best
trading systems and practices which helped them garner more than 90 per cent oI the total
volume in less than two years. The traditional and localized commodity exchanges, in spite oI
some oI them introducing on-line trading, are struggling to retain their supremacy in their
speciIic commodity domain. The international pepper exchange located in Kochi which has the
reputation oI being the only pepper Iutures exchange in the world has already lost substantial
portion oI their business to the new multi-commodity exchanges. The writing on the wall is
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clear to other localized exchanges as well. Indications are that many oI them may eventually
give way to the on-line multi-commodity exchanges and Iace closure.

The other side oI the market is the relatively underdeveloped institutional inIrastructure to meet
the requirements oI the Iast growing markets. The most immediate concern has been lack oI a
suitable legislation to replace the existing outdated FCRA, 1952 and a powerIul and statutory
regulatory body to guide the markets. These are the prerequisites Ior an orderly growth oI any
market. However, the Iutures markets in India have grown Iar beyond the size that could be
taken care oI by the existing legislation and the regulatory capacities available in the hands oI the
present regulatory body i.e., Forward Markets Commission (henceIorth reIerred to as the
Commission). There is a growing Ieeling within the Commission and among the market players
that enough regulatory capacity is not created Ior meeting the emerging needs oI the Iast growing
markets (Sahadevan, 2004). The deIiciencies oI the powers oI the regulator and its regulatory
set-up have raised concerns especially aIter the launch oI hi-tech national level multi-commodity
exchanges. As happened never beIore, the market players including the new breed oI national
multi-commodity exchanges started comparing the inIrastructure and regulatory capacity with
that prevailing in the capital markets. Comparison is oIten made between the 53 year old
Commission and 13 year old Securities and Exchange Board oI India (SEBI). While SEBI is a
statutory body set up by a comprehensive SEBI Act, 1992, the Commission is only a small body
attached to the Department oI Consumer AIIairs in the Union Ministry oI Consumer AIIairs,
Food and Public Distribution. The FCRA, 1952 has not created a powerIul regulatory body. It
has vested most oI the regulatory powers with the Government. Most oI the powers currently
being exercised by the Commission are delegated by the Government. It is being argued that as
long as the Commission is not transIormed into a powerIul statutory organization through a
comprehensive legislation, it is improper to compare the regulatory capacities in the commodity
markets with that oI the capital markets.

The objective oI the study is to critically examine FCRA, 1952 and its relevant provisions
governing Iutures trading in commodities and to identiIy its major areas oI deIiciencies. The
study identiIies the areas oI immediate concern oI the markets and suggests suitable amendments
to the existing legislation. It examines the present role oI the Commission and its organizational
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setup in the light oI Iast changing Iutures market scenario under the new liberalized environment.
Recently, the Government was considering restructuring oI the regulatory body as the priority
rather than putting in place necessary legislation. Discussions in the policy making circle were
leading towards the initiatives Ior merger oI the Commission with SEBI as a workable solution
to the regulatory capacity building in the country. The choice between single and multiple
institutional and legal Iramework Ior market regulation is oI crucial importance to a country like
India which relies heavily on agriculture. In view oI this, the paper also addresses the issues
relating to regulatory convergence in the Indian context.

2. Forward Contracts (Regulation) Act, 1952

All types oI Iorward contracts in commodities are governed by the Forward Contract
(Regulation) Act (FCRA), 1952. The preamble oI the Act lists its objectives as regulation oI
certain matters relating to Iorward contracts, the prohibition oI options in goods and Ior matters
connected therewith (Forward Markets Commission, 1999). The Act has provided Ior a three-tier
regulatory system: (a) an association (exchange) recognized by the Government oI India on the
recommendation oI Forward Market Commission, (b) the Forward Markets Commission and (c)
the Central Government. Between the Central Government and exchanges recognized by the
Government oI India on the recommendation oI the Commission, the role oI the Commission is
that oI an advisor and supervisor. The Act, Sections 5 through 14, entrusts the Central
Government with wide ranging regulatory powers, in addition to which the section 28 oI the Act
empowers the Central Government to make rules on many aspects covering the Iunctioning oI
exchanges. The Department oI Consumer AIIairs which has been empowered by the Act is
however not Iunctionally activated enough to IulIill its regulatory responsibilities. To cop up
with the increased pressure the Department has delegated many oI its powers to the Commission.
ThereIore, the Commission in its present Iorm is not practically an autonomous regulator vested
with the sole responsibility oI market regulation.

There are certain ambiguities in the Act with regard to the derivatives markets. It has neither
deIined in clear terms the ready delivery and Iorward contracts or distinguished Iutures contracts
Irom Iorward contracts. The clarity in identiIying the boundaries oI markets is essential Ior
making distinction between a physical market and its derivatives markets and also to deIine the
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purview oI the Act to derivatives markets. The ready delivery contract as deIined by the Act is
the one which provides Ior the delivery oI goods and payment oI a price thereIore, either
immediately or within a period not exceeding 11 days aIter the date oI the contract. The
amendment made in 1971 has Iurther provided that any such ready delivery contract is
perIormed either wholly or in part by tendering oI the documents oI title to the goods covered by
the contract by any party thereto who has acquired ownership oI the said documents by purchase,
exchange or otherwise to any other person; or by the realization oI any sum oI money being the
diIIerence between the contract rate and the settlement rate or clearing rate or the rate oI any
oIIsetting contract; or by any other means whatsoever, and as a result oI which the actual
tendering oI the goods covered by the contract or payment oI the Iull-price thereIore is dispensed
with; then such contract shall not be deemed to be a ready delivery contract. This amendment
not only makes the ready delivery contract more restrictive but also brings it under the regulatory
ambit oI the Act.

The Act makes it necessary that the seller must be in the physical possession oI the actual goods
which alone one can tender by such documents oI title to goods as a warehouse receipt or a
railway receipt within 11 days in perIormance oI the sale by a ready delivery contract, and the
buyer, in turn, must also pay the Iull price contracted thereIore within the same stipulated period.
All ready delivery contracts where the delivery oI goods and/or payment Ior goods is not
completed within eleven days Irom the date oI the contract are treated as Iorward contracts. This
regulation limits the legitimate business activity. In a large country like India where
commodities especially grains move Irom one end to the other it would be practically diIIicult to
give delivery oI goods within the stipulated time Ior a ready sale (Sahadevan, 2002). ThereIore,
the period oI 11 days which is the time limit Ior a ready delivery contract under section 2(i) oI
the Act needs to be suitably amended to reIlect the reality.

The Act deIines goods as any movable property other than actionable claims, currency and
securities. A broader deIinition is necessary Ior broadening the market by introducing Iutures in
intangibles and services like commodity price index, weather, electricity, etc. The Securities
Contract (Regulation) Act, (SCRA), 1956 has recently amended to take care oI derivatives
trading in securities. The term, securities`, has now been redeIined so as to include derivatives
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in it. The derivatives, in turn, have been deIined to include a contract which derives its value
Irom the index oI prices oI underlying securities. The advocates oI a common regulator Ior both
securities and commodities markets recommend that the SCRA, 1956 has to be amended Iurther
and securities to be redeIined so as to include derivatives contracts in commodities. Yet another
deIiciency oI the Act is that it has not provisioned Ior the registration oI brokers, clearing
agencies, collateral service providers and other intermediaries with the Commission. This limits
the Commission Irom exercising its comprehensive control on the entire markets Ior an
integrated regulation. On the contrary, the Securities and Exchange Board oI India (SEBI) Act,
1992 has provided Ior registration oI brokers, merchant bankers, registrars to issues, depository
participants etc. with SEBI which has provided the capital markets regulator all powers to ensure
regulation oI the entire markets.

3. The Regulator and its 1urisdiction

The section 3 chapter 2 oI the Act has provided Ior establishment oI a Commission with the
scope oI its Iunctions enumerated in section 4. The Forward Markets Commission which was set
up in 1953 has been regulating the activities oI commodity exchanges in India since its inception.
The Commission consists oI not more than Iour members including a Chairman appointed by the
Central Government. The Chairman and members need to have shown capacity in dealing with
problems relating to commerce or commodity markets and are in the rank oI additional secretary
and joint secretary respectively. The Iunctions oI the Commission speciIied under section 4 oI
the Act are: (a) acts as advisor to the Central Government on matters relating to recognition or
withdrawal oI recognition oI exchanges which are engaged in trading Iorward and Iutures
contracts; (b) acts as observer oI the Iorward market and takes necessary action whenever
required; (c) collects and publishes inIormation regarding the trading conditions in Iorward
markets and submits to the Central Government periodical reports on the operation oI the Act
and the working oI Iorward markets; (c) makes recommendations Ior improving the organization
and working oI Iorward markets; (d) undertakes inspection oI the accounts and other documents
oI exchanges and its members whenever it considers necessary and, (e) perIorms such other
duties and exercises such other powers as may be assigned to the Commission by or under the
Act, or as may be prescribed.

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The Iunctions oI the Commission as laid down by the Act clearly indicate that it is primarily an
advisory and recommendatory body. The Act has vested most oI the regulatory powers with the
Central Government. The Department oI Consumer AIIairs in the Union Ministry oI Consumer
AIIairs, Food and Public Distribution retains major powers. The Commission is considered only
as a consultative and recommendatory body Iunctioning under the Department. Many oI the
regulatory powers exercised by the Commission are delegated by the Ministry. As table-1
shows, crucial regulatory powers including grant and withdrawal oI recognition to exchanges,
approval oI bye-laws oI exchanges, suspension oI business oI recognized exchanges, etc., are
retained by the Department and the Ministry. Ideally, the Commission should have complete
authority Ior regulation oI commodity derivatives trading with the superseding powers vested
with the Ministry. The multi-agency regulation should converge to a single level state
regulation. ThereIore, it is necessary to pass a comprehensive legislation replacing the existing
Forward Contracts (Regulation) Act, 1952 providing the Commission autonomous status with
statutory powers to regulate the commodity derivatives markets.

The creation oI disciplined and eIIicient marketplace is the responsibility oI any market
regulator. Nevertheless, such market environment can never be put in place solely by a
government regulator howsoever strong, transparent and market Iriendly it is. OIten comparison
is made between Securities and Exchange Board oI India (SEBI) which is the capital market
regulator and the Commission. SEBI being a statutory body with Iunctional autonomy has
created necessary institutional capacity Ior market regulation and monitoring. It is unIair to
judge and compare the capabilities oI the Commission in its present Iorm with that oI SEBI. A
comprehensive legislation similar to SEBI Act 1992 providing ample powers and Ireedom to
exercise those powers can only make the Commission comparable with SEBI (Forward Markets
Commission, 2001).

SelI regulation plays a vital role in creating a conducive and healthy market Ior its various stake
holders. For example, the Commodity Futures Trading Commission (CFTC) which is the
regulator oI commodity Iutures and options markets in the US established in 1974 has proved to
be a most successIul regulator. This was made possible not just because oI its wide powers and
stringent regulatory provisions provided Ior by Commodity Futures Trading Commission Act,
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1974 and the latest Commodity Futures Modernization Act, 2000. The major strength oI the
Iutures industry in the US relies on the conIidence oI the investing public in the integrity oI the
marketplace. The National Futures Association (NFA) registered with CFTC as an industry-
wide selI regulatory organization (SRO) established in 1982 has played a vital role in developing
marketplaces which Iollow high level oI business ethics and Iinancial integrity. As a visionary
SRO, NFA ensures that all exchanges across the country adhere to the set standards and
practices.

During the past ten years, customer complaints in the US have decreased by 60 per cent, while
the volume oI Iutures trading has almost doubled. NFA`s responsibilities include screening,
testing and registering persons applying to conduct business in the Iutures industry. It has
developed a wide range oI investor protection rules and monitors all members Ior compliance.
NFA and the exchanges have responsibility Ior auditing and enIorcing compliance with industry
rules. These rules encompass Iinancial requirements, segregation oI customers` Iunds,
accounting procedures, sales activities and, in the case oI exchanges, Iloor trading practices. In
addition to this, CFTC has transIerred many responsibilities to NFA which include: registration
oI Iloor brokers, Iloor traders, commission merchants, commodity trading advisors, commodity
pool operators and their associated persons, withdrawal oI registration oI market intermediaries
and conduct oI initial review oI disclosure documents. The role played by National Futures
Association (NFA) in promoting the spirit oI selI-regulation Ior ensuring total conIidence oI the
investing public in the integrity oI the marketplace. It has been experienced internationally that
wherever selI-regulation Iailed, the state regulator has played only a nominal role as a market
spectator.

It was observed during the visit to many oI the regional exchanges as part oI the study that the
selI-regulatory system in some oI them has almost disintegrated. Gross indiscipline in the
trading ring, illegal trade within and outside the premises oI exchanges with the knowledge oI
exchange authorities, intervention oI the Board oI the concerned exchanges on the administration
oI their exchanges, etc are indications oI the break-down oI the primary level regulation. The
Commission cannot escape Irom the Iact that it Iailed to pay due attention to these unscrupulous
practices which have spurned the selI-regulation (Sahadevan, 2004). The Commission may take
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lessons Irom the experience oI CFTC in enIorcing high standards oI business conduct through
selI-regulation. The time is ripe Ior the Commission to minimize regulation which requires its
direct intervention in many operational aspects oI the markets. Instead, it needs to develop and
nurture the culture oI selI-regulation. This in turn, over a period oI time, will pave the way Ior
credible selI-regulation supported by the advisory role oI the Commission. This calls Ior the
initiative oI the Commission to register and to work in conjunction with a SRO which represents
the interests oI exchanges. The existing industry association (viz., Federation oI Indian
Commodity Exchanges) is a non-starter yet. The task oI industry association is not to regulate
exchanges but to promote selI-regulation among exchanges. At the same time, the objectives oI
the SRO have to be rightly understood by all member exchanges and other intermediaries that it
is not just another new addition in the regulatory hierarchy.

The comparison between CFTC and Forward Markets Commission in terms oI their
eIIectiveness in bringing the market into order is however not justiIiable Ior the reason that the
Iormer is an independent and statutory Iederal agency with exclusive jurisdiction over
derivatives markets while the later is operating as a subordinate entity under a department in the
Union Ministry.

The whole issue oI eIIective regulation revolves around two major aspects viz., the institutional
capacity created Ior regulation and the powers entrusted with the regulatory agency to exercise
control on the market place. Any assessment oI the adequacy or inadequacy oI regulation would
be premature without proper evaluation oI the existing regulatory set-up in terms oI these two
aspects. Regulation oI any market needs to be developed on the basis oI a simple principle that
the regulator eIIectively plays market enabling and oversight role. These two roles should be
sequenced in such a Iashion that the Iormer gets the thrust during the initial stage and the later
role becomes active thereaIter. The regulator enables the market by providing necessary legal
and regulatory Iramework Ior the smooth Iunctioning oI the system, while by oversight role it
disciplines those who try to manipulate the markets Ior their own beneIit, and ensures the
sanctity oI contracts. The regulatory intervention should be most active at the time oI
establishment oI the exchange and oI contracts. II the contracts are well Iormulated, and
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delivery modalities provide eIIective line oI deIense against attempts at manipulation, the
regulator has to only act as a watchdog intervening only when necessary (ibid).

4. Organizational Constraints of the Regulator

The Act has provided Ior the appointment oI Iour members on the Commission who are persons
oI shown capacity in dealing with problems relating to commerce or commodity markets or in
administration or who have relevant knowledge and practical experience. However, iI the
current composition oI the Commission is oI any indication, the appointment oI members has
become a routine bureaucratic aIIair. Many a times the appointment oI members is based
neither on their proven capabilities in the Iield nor on the basis oI the interest shown by them.
The main problem that haunts the Commission has been its inadequate proIile to match the
career aspirations oI the chairman/members who are additional/joint secretary level oIIicers Irom
civil service. This is the outcome oI the government policy oI appointing civil servants as
chairman/member oI the Commission. It is worth mentioning that the Act does not prevent
potential candidates Irom markets or academia Irom assuming positions on the Commission.

The Commission is headquartered in Mumbai with a regional oIIice in Kolkata. All members oI
the Commission are placed in Mumbai. The oIIice oI the Commission has a sanctioned strength
oI 138 (including a Chairman and 3 members) out oI which 55 proIessionals constitute the core
strength oI the Commission. The remaining 80 plus staII are to help the Commission in its day-
to-day administration. The regional oIIice oI the Commission is headed by a deputy director.

The Commission has been divided into three operating units, viz., Commodity Division,
EnIorcement Division and Administrative Division. Commodity Division is the most important
arm which provides necessary inputs Ior policy decisions. In addition to market intelligence, it
conducts market studies and creates domain knowledge pertaining to commodities and markets,
monitoring and analysis oI price trends and tracking oI the price discovery process in each
exchange. This division is headed by a Director and assisted by Deputy Directors, research and
other staII. The EnIorcement Division collects inIormation relating to contravention oI
provisions oI the Act and assists the state police in raids and searches. The division also
scrutinizes the documents seized during raids, gives their expert opinion on the seized documents
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and appears beIore the Court oI Law as a prosecution witness. This division is headed by a
Director and assisted by a Deputy Director, enIorcement oIIicer and research staII. The
administrative division which is relatively stronger now in terms oI number oI staII is to provide
secretarial assistance to the commodity and enIorcement divisions and to look aIter the
establishment oI the Commission. It is headed by a Secretary and assisted by Assistant Secretary
and staII.

The set-up oI the Commission has to be reoriented towards making it a vibrant regulatory agent
Irom the current bureaucratic one. The distribution oI manpower in the oIIice oI the
Commission is skewed in terms oI the strength oI core, technical, research and analytical
manpower as compared to general and secretarial human resources available with it (ibid).
While the Commission has a sanctioned strength oI more than 80 people in secretarial and back
oIIice administration, the strength oI Iront-line oIIicers/staII including directors, deputy and
assistant directors, enIorcement oIIicer, senior and junior research assistants is only 50 out oI
which 15 are currently lying vacant.

The Commission has been Iollowing this structure right Irom its inception. With the growing
demand Irom the market and along with the increasing complexities in the Iunctioning oI the
market the regulator needs to be equipped itselI to deal regulatory obligations in the Iast
changing market environment. However, the present structure, composition and staII pattern oI
the Commission raise serious doubts about its capability and preparedness to handle market
regulation (Government oI India, 2003).

5. Regulatory Convergence

Opinion and practices diIIer among people and countries as to the nature oI institutional set-up
Ior regulation oI various markets. Broadly, there are two diIIerent systems being practiced Ior
market regulation. Recently a new system has been put in place in the UK which introduced a
single legal Iramework (Financial Services and Markets Act 2000) and a common regulatory
agency (Financial Services Authority) Ior single authorization, supervision and enIorcement oI
powers. The system which has been in place in the US Irom as early as 1974 provides Ior
multiple institutional and legal Irameworks Ior market regulation. While Securities Exchange
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Commission regulates the Iinancial markets, the Commodity Futures Trading Commission
(CFTC) stands as an independent agency with the mandate to regulate Iutures and option markets
in the US. The distinction lies in the Iact that the Commission regulating the commodity Iutures
markets in India is not an independent agency having statutory authority.

The relevance oI convergence and its beneIits are being discussed widely in the context oI
regulation. For some, convergence means the Commission merging with SEBI to Iorm a single
common regulatory agency Ior both capital markets and commodity derivatives markets. The
basis oI this argument is that the Commission has Iailed to live up to the complex regulatory
needs and SEBI which has proved to be a successIul and model regulator Ior capital markets can
extend its expertise and institutional capacities to create a similar competent regulatory
mechanism in the commodity derivatives markets as well (ibid). However, the convergence and
the beneIits oI synergy can be achieved without dismantling institutional identities. It is possible
to identiIy common areas Ior knowledge transIer and institutional tie-up. The issue oI
convergence which is interpreted as merging the Commission with SEBI should not have
become a prominent one to the government at present. However, it has been receiving attention
Ior two reasons: Iirstly, government is not suIIiciently convinced about the useIulness oI
commodity Iutures trading to the agricultural economy and hence does not want to go Ior Iull
scale derivatives markets in commodities and secondly, the government is not conIident about
the capability oI the Commission as the regulator.

Discussions have been taking place in oIIicial circles regarding the model oI regulatory set up
that the government ideally preIers to put in place. The decision on the choice between single
and multiple regulators is oI crucial importance. It is understood Irom the discussion with
oIIicials that there is an inIluential view among a section within the government that the
Commission on its own cannot manage the regulatory aIIairs oI the commodity Iutures segment.
On the basis oI a comparison between the regulatory eIIectiveness oI SEBI with that oI the
Commission, it is argued that the Iormer in a short period oI over a decade has evolved to be a
model regulator Ior capital markets while the later in spite oI its much longer existence Iailed to
develop commodity derivatives markets. This comparison does not seem to be Iair as they are
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unequal in terms oI their status and powers. ThereIore, the competency oI the regulatory agency
and the necessity oI a single regulator should be treated separately.

The characteristics and regulatory requirements oI each market need to be thoroughly evaluated
beIore making the choice. There are many justiIiable arguments which support the need Ior an
independent exclusive agency Ior regulating commodity derivatives. The Iirst and Ioremost
concern is with regard to the scale oI detrimental impacts oI any market manipulation by
unscrupulous elements. Such crises not only aIIect the players in the market but also could
trigger a cascading eIIect on the entire economy. On the contrary, the impact oI price volatility
in stock market will be narrow and mostly conIined only to the participants in the market.
Secondly, the size oI the commodity market is very large with each commodity having its own
characteristics as compared to securities which are standardized uniIorm assets. Thirdly,
commodity derivatives` trading requires diIIerent set oI inIrastructural support especially Ior
quality check, warehousing and delivery oI commodities. In case oI physical settlement,
exchanges require warehousing, grading and quality standards etc. Fourthly, the Iactors that
determine the price oI underlying assets are diIIerent between commodities and securities.
Physical commodity prices are determined by supply and demand related Iactors, geographical
area, quality and grade oI the commodity, etc. FiIthly, the government has been promoting
specialized regulatory agencies Ior each individual sector. For example, Telecom Regulatory
Authority oI India (telecom), Central Electricity Regulatory Commission (power), Insurance
Regulatory Authority oI India (insurance), SEBI (capital market), Reserve Bank oI India (banks).
Agriculture being the backbone oI India calls Ior a separate agency to regulate the trading in
commodities. Sixthly, knowledge oI the physical market is essential to deal in its derivatives.
Spot and derivatives markets in securities and currency are under the regulatory purview oI SEBI
and RBI respectively. ThereIore, it is logical to retain the regulation oI physical and derivatives
markets as well with a single agency. Seventhly, stock exchanges deal in spot as well as
derivatives. Commodity exchanges on the other hand, carry out only derivative trade and do not
engage spot deals. Finally, the successIul US model indicates the need Ior a separate
independent regulator Ior derivatives markets.



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6. Conclusion

In spite oI being one oI the pioneers in commodity Iutures trade, India still continues to be a
nascent market in terms oI physical inIrastructure Ior regulation, trading and delivery (World
Bank, 1996). With the setting up oI three national multi-commodity exchanges recently the
depth and reach oI the Iutures markets have improved dramatically in recent years. However,
the existing regulation oI the markets by the Forward Markets Commission within the outdated
legislative Iramework oI Forward Contracts (Regulation) Act, 1952 has not strengthened enough
to take care oI the complexities oI the Iast growing and technology oriented market places. The
Act has undergone amendments Iive times in the past and the latest amendment bill is pending
with the Parliament. None oI these amendments were suIIicient enough to put in place a
comprehensive legal Iramework Ior the regulation and growth oI the markets in India. Creation
oI a liquid and vibrant domestic market with adequate inIrastructure and transparent trading
practices should be the priority oI regulator. The regulation and governance oI exchanges are oI
equal importance; one without the other can never develop an orderly marketplace. ThereIore,
the time is ripe Ior a comprehensive amendment to the Act so as to tune it to the need oI the
emerging derivatives markets scenario. Creation oI a liquid and vibrant domestic market with
adequate inIrastructure and transparent trading practices should be the priority oI regulator. The
exchanges are already assumed to be selI-regulatory agencies. Their role must get strengthened
Iurther along with the Commission minimizing its role as a Iacilitator making the existing
regulation an appropriate regulation`.

7. References

Forward Markets Commission (1999), Forward Contracts (Regulation) Act, 1952, Ministry oI
Consumer AIIairs, Food and Public Distribution, Government oI India, Mumbai.

Forward Markets Commission (2001), Report oI the Internal Committee on Restructuring oI the
FMC, Ministry oI Consumer AIIairs, Food and Public Distribution, Government oI India,
Mumbai.

Forward Markets Commission (2005), Safeguarding Futures, Ministry oI Consumer AIIairs,
Food and Public Distribution, Government oI India, Mumbai.

Sahadevan, K G (2002), 'Sagging agricultural commodity exchanges: growth constraints and
revival policy options, Economic and Political Weeklv, Vol XXXVII No. 30, July 27-Aug.02,
pp.3153-60.
15

Sahadevan, K G (2004), Commoditv Derivatives and Futures Trading. A Studv of the Sources of
Market Failure and the Policv Options for its Revival, A study report submitted to Forward
Markets Commission, Mumbai.

Government oI India (2003), Report oI the Inter-ministerial Task Force on Convergence oI
Securities and Commodity Derivative Markets, Ministry oI Consumer AIIairs, Food and Public
Distribution, New Delhi.

World Bank (1996), Managing Price Risks in India`s Liberalized Agriculture: Can Futures
Markets Help?, Report No. 15453-IN, Washington.

16
Table 1: The authority provided by the Act to perform major regulatory responsibilities

Nature of powers/responsibilities The authority which
performs the responsibilities

Authority to which exchanges submit applications Ior approval Central Government
Authority granting recognition to exchanges
Approval Ior amending the rules oI exchanges
Withdrawal oI recognition oI exchanges
Calling Ior periodical returns relating to the aIIairs oI exchange
and its members

Appointing enquiry panel and examine the aIIairs oI exchange
and its members

Inspection oI accounts and documents oI exchanges and or any
oI its members
The Commission (as per
Government directions)
Exchanges to Iurnish annual reports The Commission
Deciding the panels and voting rights oI members oI the board
oI directors oI exchanges
Exchanges
Making bye-laws Ior the regulation and control oI Iutures
contracts in exchanges

Approval oI the bye-laws oI exchanges Central Government
Suspension oI persons Irom the membership oI exchanges The Commission
Prohibition oI members oI exchanges Irom entering into any
contracts

Permission/prohibition oI Iutures contracts in commodities Central Government
Superseding the powers and duties oI governing body oI any
exchange

Suspension oI the business oI recognized exchanges
Grant oI certiIicate oI registration oI exchanges The Commission