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How commodity futures market was born in India

May 22, 2007 17:19 IST

Organised futures market evolved in India by the setting up of Bombay Cotton Trade Association Ltd in 1875.

In 1893, following widespread discontent amongst leading cotton mill owners and merchants over the functioning of the Bombay Cotton Trade Association, a separate association by the name Bombay Cotton Exchange Ltd was constituted. Futures trading in oilseeds was organised in India for the first time with the setting up of Gujarati Vyapari Mandali in 1900, which carried on futures trading in groundnut, castor seed and cotton.

Before the Second World War broke out in 1939 several futures markets in oilseeds were functioning in Gujarat and Punjab.

Futures trading in Raw Jute and Jute Goods began in Calcutta with the establishment of the Calcutta Hessian Exchange Ltd., in 1919. Later East Indian Jute Association Ltd.,was set up in 1927 for organising futures trading in Raw Jute. These two associations amalgamated in 1945 to form the present East India Jute & Hessian Ltd., to conduct organised trading in both Raw Jute and Jute goods. In case of wheat, futures markets were in existence at several centres at Punjab and Uttar Pradesh.

The most notable amongst them was the Chamber of Commerce at Hapur, which was established in 1913. Other markets were located at Amritsar, Moga, Ludhiana, Jalandhar, Fazilka, Dhuri, Barnala and Bhatinda in Punjab and Muzaffarnagar, Chandausi, Meerut, Saharanpur, Hathras, Gaziabad, Sikenderabad and Barielly in UP.

Futures market in Bullion began at Mumbai in 1920 and later similar markets came up at Rajkot, Jaipur, Jamnagar, Kanpur, Delhi and Kolkata. In due course several other exchanges were also created in the country to trade in such diverse commodities as pepper, turmeric, potato, sugar and gur (jaggery).

After independence, the Constitution of India brought the subject of "Stock Exchanges and futures markets" in the Union list. As a result, the responsibility for regulation of commodity futures markets devolved on Govt. of India. A Bill on forward contracts was referred to an expert committee headed by Prof. A D Shroff and Select Committees of two successive Parliaments and finally in December 1952 Forward Contracts (Regulation) Act, 1952, was enacted.

The Act provided for 3-tier regulatory system:

  • An association recognised by the Government of India on the recommendation of Forward Markets Commission;
  • The Forward Markets Commission (it was set up in September 1953); and
  • The Central Government.

Forward Contracts (Regulation) Rules were notified by the Central Government in July 1954.

The Act divides the commodities into 3 categories with reference to extent of regulation, viz:

  • The commodities in which futures trading can be organised under the auspices of recognised association.
  • The Commodities in which futures trading is prohibited.
  • Those commodities, which have neither been regulated for being traded under the recognised association nor prohibited, are referred as Free Commodities and the association organised in such free commodities is required to obtain the Certificate of Registration from the Forward Markets Commission.

In the seventies, most of the registered associations became inactive, as futures as well as forward trading in the commodities for which they were registered came to be either suspended or prohibited altogether.

The Khusro Committee (June 1980) had recommended reintroduction of futures trading in most of the major commodities, including cotton, kapas, raw jute and jute goods and suggested that steps may be taken for introducing futures trading in commodities, like potatoes, onions, etc. at appropriate time. The government, accordingly initiated futures trading in Potato during the latter half of 1980 in quite a few markets in Punjab and Uttar Pradesh.

After the introduction of economic reforms since June 1991 and the consequent gradual trade and industry liberalization in both the domestic and external sectors, the Govt. of India appointed in June 1993 one more committee on Forward Markets under the chairmanship of Prof K N Kabra.

The committee submitted its report in September 1994. The majority report of the committee recommended that futures trading be introduced in:

  1. Basmati Rice
  2. Cotton and Kapas
  3. Raw Jute and Jute Goods
  4. Groundnut, rapeseed/mustard seed, cottonseed, sesame seed, sunflower seed, safflower seed, copra and soybean, and oils and oilcakes of all of them.
  5. Rice bran oil
  6. Castor oil and its oilcake
  7. Linseed
  8. Silver
  9. Onions.

The committee also recommended that some of the existing commodity exchanges particularly the ones in pepper and castor seed may be upgraded to the level of international futures markets.

The liberalised policy being followed by the Government of India and the gradual withdrawal of the procurement and distribution channel necessitated setting in place a market mechanism to perform the economic functions of price discovery and risk management.

The National Agriculture Policy announced in July 2000 and the announcements of Finance Minister in the Budget Speech for 2002-2003 were indicative of the Governments resolve to put in place a mechanism of futures trade/market.

As a follow up the Government issued notifications in April 2003 permitting futures trading in the commodities, with the issue of these notifications futures trading is not prohibited in any commodity. Options trading in commodity are, however, presently prohibited.

Courtesy: Forward Markets Commission Web site (http://www.fmc.gov.in).

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