Commodity Futures Market in India: The Legal Aspect and its Rationale

Transcription

1 International Journal of Research in Management & ISSN : (Online) Commodity Futures Market in India: The Legal Aspect and its Rationale Sagar Suresh Dhole PhD Scholar (LLB, MBA), Nagpur University, India Abstract The history of commodity Futures market in India dates back to the ancient times citied in Kautialya s Arthasastra, Words like, Teji, Mandi, Gali, and Phatak have been commonly heard in Indian markets for centuries which seems to be coined in 320 BC and also referred in Forward Contracts (Regulation) Act, 1952 ;The first organized futures market in India was however established in 1875 under the aegis of the Bombay Cotton Trade Association to trade in cotton contracts. This was followed by establishment of futures markets in edible oilseeds complex, raw jute and jute goods and bullion. Post-independence, in the 1950s, India continued to struggle with feeding its population and the government increasingly restricting trading in food commodities. Just at the time the FMC Forward Markets Commission was established in 1953 under the provisions of the Forward Contracts (Regulation) Act, 1952, the government felt that derivative markets increased speculation which led to increased costs and price instabilities. However, by mid 1960s government took a drastic step by banning derivatives trade altogether. The commodity derivative market remained virtually absent in next four decades and it made the restart only in early 2000s. The market has made gargantuan evolvement in terms of technology, transparency and the trading activity. Intriguingly, this has transpired only after the Government prohibition was removed from a number of commodities, and market forces were allowed to play their role. This should act as a major lesson for the policy makers in developing countries, that pricing and price risk management should be left to the market forces rather than trying to achieve these through administered price mechanisms. An elite effort have been made in this paper to explain, the growth, the legal aspect and rationale of Commodity Futures Trading Market in India along with typical structure of commodity futures markets in India. Key Words Commodity Futures market, Forward Contracts, Commodity Trading, and legal aspect. I. Overview of Commodity Market A commodity market is a market that trades in primary rather than manufactured products. Soft commodities are agricultural products such as wheat, coffee, cocoa, sugar etc. Hard commodities are mined, such as (Precious metal, rubber, oil,etc). Investors access about 50 major commodity markets worldwide with purely financial transactions increasingly outnumbering physical trades in which goods are delivered. Futures contracts are the hoariest way of investing in commodities. Futures are secured by physical assets. Commodity markets can include physical trading and derivatives trading using spot prices, forwards, futures, and options on futures. Farmers have used a simple form of derivative trading in the commodity market for centuries for price risk management. A financial derivative is a financial instrument whose value is derived from a commodity termed an underlier. Derivatives are either exchange-traded or over-the-counter (OTC). An increasing number of derivatives are traded via clearing houses some with Central Counterparty Clearing, which provide clearing and settlement services on a futures exchange, as well as off-exchange in the OTC market. Derivatives such as futures contracts, Swaps, Exchange-traded Commodities (ETC), forward contracts have become the primary trading instruments in commodity markets. Futures are traded on regulated commodities exchanges. Overthe-counter (OTC) contracts are "privately negotiated bilateral contracts entered into between the contracting parties directly". Exchange-traded funds (ETFs) began to feature commodities in ETF s is a security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold. Gold ETFs are based on "electronic gold" that does not entail the ownership of physical bullion, with its added costs of insurance and storage in repositories such as the London bullion market. According to the World Gold Council, ETFs allow investors to be exposed to the gold market without the risk of price volatility associated with gold as a physical commodity. II. Development of the Commodity Market in India Commodity trading in India has a long history. The Indian experience in commodity futures market dates back to thousands of years. References to such markets in India appear in Kautialya s Arthasastra. The words, Teji, Mandi, Gali, and Phatak have been commonly heard in Indian markets for centuries which seem to be coined in 320 BC. The Arthashastra is an ancient Indian treatise on statecraft, economic policy and military strategy, written in Sanskrit whereby it is found that Commodity Futures did existed in ancient times related to agricultural produce, Precious metals and Animals. India has an elongated history of trading commodities and considered the pioneer in some forms of derivatives trading. In fact, commodity trading in India started much before it started in many other countries. The first organized futures market was however established in 1875 under the aegis of the Bombay Cotton Trade Association to trade in cotton contracts. This was followed by establishment of futures markets in edible oilseeds complex, raw jute and jute goods and bullion. This became an active industry with volumes reported to be large. Futures trading in oilseeds were organized 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 2014 IJRMBS, All Rights Reserved 38

2 ISSN : (Online) International Journal of Research in Management & Calcutta with the establishment of the Calcutta Hessian Exchange Ltd., in Later East Indian Jute Association Ltd. was set up in 1927 for organizing futures trading in Raw Jute. These two associations amalgamated in 1945 to form the present East India Jute & Hessian Ltd., to conduct organized trading in both Raw Jute and Jute goods. In case of wheat, futures markets were in existence at several centres at Punjab and U.P. The most notable amongst them was the Chamber of Commerce at Hapur, which was established in 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 U.P. Futures market in Bullion began at Mumbai in 1920 and later similar markets came up at Rajkot, Jaipur, Jamnagar, Kanpur, Delhi and Calcutta. 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 (jaggory). The derivatives trading in India however did not have uninterrupted legal approval. By the Second World War, i.e., between the 1920 s &1940 s, futures trading in organized form had commenced in a number of commodities such as cotton, groundnut, groundnut oil, raw jute, jute goods, castor seed, wheat, rice, sugar, precious metals like gold and silver. During the Second World War futures trading was prohibited under Defence of India Rules. However, in 1935 a law was passed allowing the government to in part restrict and directly control food production (Defence of India Act, 1935). This included the ability to restrict or ban the trading in derivatives on those food commodities. Post-independence, in the 1950s, India continued to struggle with feeding its population and the government increasingly restricting trading in food commodities. Just at the time the FMC Forward Markets Commission was established, the government felt that derivative markets increased speculation which led to increased costs and price instabilities. However, years of foreign rule, droughts and periods of scarcity and Government policies caused the commodity trading in India to diminish. Commodity trading was, however, restarted in India recently. FMC, Established in 1953 under the provisions of the Forward Contracts (Regulation) Act, 1952, it consists of two to four members, all appointed by the Indian Government. Currently, the Commission allows commodity trading in 22 exchanges in India, of which 6 are national. Futures trading in commodities particularly, cotton, oilseeds and bullion, was at its peak during this period. However following the scarcity in various commodities, futures trading in most commodities was prohibited in mid-sixties. There was a time when trading was permitted only two minor commodities, viz., pepper and turmeric. The long spell of prohibition had stunted growth and modernization of the surviving traditional commodity exchanges. Therefore, along with liberalization of commodity futures, the Government initiated steps to cajole and incentives the existing Exchanges to modernize their systems and structures. Faced with the grudging reluctance to modernize and slow pace of introduction of fair and transparent structures by the existing Exchanges, Government allowed setting up of new modern, demutualised Nation-wide Multi-commodity Exchanges with investment support by public and private institutions. National Multi Commodity Exchange of India Ltd. (NMCE) was the first such exchange to be granted permanent recognition by the Government Deregulation and liberalization following the forex crisis in early 1990s, also triggered policy changes leading to re-introduction of futures trading in commodities in India. The growing realization of imminent globalization under the WTO regime and non-sustainability of the Government support to commodity sector led the Government to explore the alternative of market-based mechanism, viz., futures markets, to protect the commodity sector from price-volatility. In April, 1999 the Government took a landmark decision to remove all the commodities from the restrictive list. Food-grains, pulses and bullion were not exceptions. III. The Forward Markets Commission The Forward Markets Commission (FMC) is the chief regulator of forwards and futures markets in India. As of March 2009, it regulated Rs 52 trillion worth of commodity trades in India. It is headquartered in Mumbai and this financial regulatory agency is overseen by the Ministry of Finance. The industry was pushed underground and the prohibition meant that development and expansion came to a halt. In the 1970 as futures and options markets began to develop in the rest of the world, Indian derivatives markets were left behind. The apprehensions about the role of speculation, particularly in the conditions of scarcity, prompted the Government to continue the prohibition well into the 1980s.The result of the period of prohibition left India with a large number of small and isolated regional futures markets. The futures markets were dispersed and fragmented, with separate trading communities in different regions with little contact with one another. The exchanges had not yet embrace modern technology or modern business practices.next to the officially approved exchanges, there were also many havala markets. Most of these unofficial commodity exchanges have operated for many decades. Some unofficial markets trade times the volume Organization Structure of Forward Markets Commission 39 All Rights Reserved, IJRMBS 2014

3 International Journal of Research in Management & ISSN : (Online) of the "official" futures exchanges. They offer not only futures, but also option contracts. Transaction costs are low, and they attract many speculators and the smaller hedgers. Absence of regulation and proper clearing arrangements, however, meant that these markets were mostly "regulated" by the reputation of the main players. A. Responsibilities and functions of Forward Markets Commission: The functions of the Forward Markets Commission are as follows: To advise the Central Government in respect of the recognition or the withdrawal of recognition from any association or in respect of any other matter arising out of the administration of the Forward Contracts (Regulation) Act To keep forward markets under observation and to take such action in relation to them, as it may consider necessary, in exercise of the powers assigned to it by or under the Act. To collect and whenever the Commission thinks it necessary, to publish information regarding the trading conditions in respect of goods to which any of the provisions of the act is made applicable, including information regarding supply, demand and prices, and to submit to the Central Government, periodical reports on the working of forward markets relating to such goods; To make recommendations generally with a view to improving the organization and working of forward markets; To undertake the inspection of the accounts and other documents of any recognized association or registered association or any member of such association whenever it considers it necessary. It allows futures trading in 23 Fibers and Manufacturers,15 spices, 44 edible oils, 6 pulses, 4 energy products, single vegetable,20 metal futures,33 others Futures. The commission appeared in the news in March 2012 for their controversial ban on guar gum futures trading after it said the price quadrupled due to its use in fracking causing food inflation. B. Initiatives taken by the Commission It may be mentioned that in the Commodity Futures Market, the only product traded currently is futures contract. Options have not been permitted. In order to ensure that the stakeholders have a proper understanding of the functioning of commodity markets, the Commission has undertaken various initiatives such as awareness programmes, capacity building programmes, internships and other activities for raising awareness about the commodity futures market build capacities among the stakeholders. The details of the initiatives during the past five years are indicated below : Details of The Initiatives During The Past Five Years Collaboration with International Regulators In order to strengthen co-operation with international regulators, the FMC has taken steps for collaborating with regulators in other countries. FMC is also an associate member of IOSCO, an international organization of Security and Commodities Market Regulators. In addition, FMC has also signed Memorandum of Understanding with the United States Commodity Futures Trading Commission (USCFTC) in October 2006, the China Securities Regulatory Commission (CSRC) in November 2006 and the Commissao de Valores Mobiliarios CVM (Securities and Exchange Commission of Brazil), in January C. Overview of Enactment and the Committee Recommendations Today, apart from numerous regional exchanges, India has six national commodity exchanges namely, Multi Commodity Exchange (MCX), National Commodity and Derivatives Exchange (NCDEX), National Multi-Commodity Exchange (NMCE) and Indian Commodity Exchange (ICEX), the ACE Derivatives exchange ( ACE )and the Universal commodity exchange (UCX). The regulatory body is Forward Markets Commission (FMC) which was set up in Forward Contracts (Regulation) Act, 1952, provided for 3-tier regulatory system; (a) An association recognized by the Government of India on the recommendation of Forward Markets Commission, (b) The Forward Markets Commission (it was set up in September 1953) and (c) The Central Government. Forward Contracts (Regulation) Rules were notified by the Central Government in July The Act divides the commodities into 3 categories with reference to extent of regulation, viz: (a) The commodities in which futures trading can be organized under the auspices of recognized association. (b) The Commodities in which futures trading is prohibited. (c) Those commodities, which have neither been regulated for being traded under the recognized association nor prohibited, are referred as Free Commodities and the association organized 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 Chairmanship of Prof. K.N. Kabra. The Committee submitted its report in September The majority report of the Committee recommended that futures trading be introduced in: 2014 IJRMBS, All Rights Reserved 40

4 ISSN : (Online) International Journal of Research in Management & 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 were indicative of the Government s resolve to put in place a mechanism of futures trade/market. As a follow up the Government issued notifications on 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.from 2013 September 09, the commission is overseen by the Ministry of Finance. Since futures traded in India are traditionally on food commodities, earlier it was overseen by Ministry of Consumer Affairs, Food and Public Distribution (India). IV. Regulatory Tools The Commission has been keeping the commodity futures markets well regulated. In order to protect market integrity, the Commission has prescribed the following measures 1) Limit on open position of an individual members as well as client to prevent over trading; 2) Limit on price fluctuation (daily/weekly) to prevent abrupt upswing or downswing in prices; 3) Special margin deposits to be collected on outstanding purchases or sales to curb excessive speculative activity through financial restraints; During shortages, extreme steps like skipping trading in certain deliveries of the contract, closing the markets for a specified period and even closing out the contract to overcome emergency situations are taken. In addition to the above measures, the regulator calls for daily reports from the Exchanges and takes other pro-active steps to ensure that there is no misuse of the market and that the prices reflected on the Exchange platform are governed by the demand and supply factors in the physical markets. Thus, to check excessive speculation and price volatility, the futures market in commodities is kept under constant watch and surveillance. 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 a few markets in Punjab and Uttar Pradesh. Futures trading were also resumed in castorseed, and gur (jaggery), and in 1992, extended to Hessian (Jute). After the introduction of economic reforms in June 1991 and the consequent trade and industry liberalization in both the domestic and external sectors, the Govt. of India appointed in June 1993, a committee on Forward Markets under the Chairmanship of Prof. K.N. Kabra. The Committee submitted its report in September The majority view of the Committee was that futures trading be introduced in Basmati Rice, Cotton and Kapas, Raw Jute and Jute Goods, Groundnut, rapeseed/mustard seed, cottonseed, sesame seed, sunflower seed, safflower seed, copra and soybean oilseeds, oils and their oilcakes, Rice bran oil, Castor oil and its oilcake, Linseed, Silver and Onion. The Committee also recommended that some of the existing commodity exchanges particularly those with futures trading in pepper and castor seed, may be upgraded to the level of international futures markets. In April 1999, futures trading was permitted in various edible oilseed complexes. The National Agriculture Policy announced in July 2000 and the announcements of Hon ble Finance Minister in the Budget Speech for indicated the Government s resolve to put in place a mechanism of futures trade/market. Futures trading in sugar was permitted in May 2001 and the Government issued notifications on permitting futures trading in all the commodities. With the issue of these notifications, futures trading is not prohibited in any commodity. Options trading in commodity is, however, presently prohibited. A. Characteristics of Futures Trading : Futures Contract is a highly standardized contract with certain distinct features. Some of the important features are as under : a) Futures trading is necessarily organized under the auspices of a market association so that such trading is confined to or conducted through members of the association in accordance with the procedure laid down in the Rules & Bye-laws of the association. b) It is invariably entered into for a standard variety known as the "basis variety" with permission to deliver other identified varieties known as "tenderable varieties". c) The units of price quotation and trading are fixed in these contracts, parties to the contracts not being capable of altering these units. d) The delivery periods are specified. e) The seller in a futures market has the choice to decide whether to deliver goods against outstanding sale contracts. In case he decides to deliver goods, he can do so not only at the location of the Association through which trading is organized but also at a number of other pre-specified delivery centres. f) In futures market actual delivery of goods takes place only in a very few cases. Transactions are mostly squared up before the due date of the contract and contracts are settled by payment of differences without any physical delivery of goods taking place. B. Commodities exchange: A commodities exchange is an exchange where various commodities and derivatives are traded. Most commodity markets across the world trade in agricultural products and other raw materials (like wheat, barley, sugar, maize, cotton, Cocoa bean/ cocoa, coffee, milk products, pork bellies, oil, metals, etc.) and contracts based on them. These contracts can include spot prices, forwards, futures and options on futures. Other sophisticated 41 All Rights Reserved, IJRMBS 2014

5 International Journal of Research in Management & ISSN : (Online) products may include interest rates, environmental instruments, swaps, or freight contracts. C. Exchange-Traded Commodity Exchange-traded commodity is a term used for commodity exchange-traded funds (which are funds) or commodity exchangetraded notes (which are notes). These track the performance of an underlying commodity index including total return indices based on a single commodity. They are similar to ETFs and traded and settled exactly like stock funds. ETCs have market maker support with guaranteed liquidity, enabling investors to easily invest in commodities. They were introduced in At first only professional institutional investors had access, but online exchanges opened some ETC markets to almost anyone. ETCs were introduced partly in response to the tight supply of commodities in 2000, combined with record low inventories and increasing demand from emerging markets such as China and India Exchange-traded commodity is a term used for commodity exchange-traded funds (which are funds) or commodity exchange-traded notes (which are notes). These track the performance of an underlying commodity index including total return indices based on a single commodity. They are similar to ETFs and traded and settled exactly like stock funds. ETCs have market maker support with guaranteed liquidity, enabling investors to easily invest in commodities. They were introduced in Derivatives are financial evolved from simple commodity future contracts into a diverse group of financial instruments that apply to every kind of asset, including mortgages, insurance and many more. Futures contracts, Swaps (1970s-), Exchange-traded Commodities (ETC), forward contracts, etc. are examples. They can be traded through formal exchanges or through Over-the-counter (OTC). Commodity market derivatives unlike credit default derivatives for example, are secured by the physical assets or commodities. D. Over-the-counter (OTC) commodities derivatives Over-the-counter (OTC) commodities derivatives trading originally involved two parties, without an exchange. Exchange trading offers greater transparency and regulatory protections. In an OTC trade, the price is not generally made public. OTC are higher risk but may also lead to higher profits. Between 2007 and 2010, global physical exports of commodities fell by 2%, while the outstanding value of OTC commodities derivatives declined by two-thirds as investors reduced risk following a five-fold increase in the previous three years. Money under management more than doubled between 2008 and 2010 to nearly $380 billion. Inflows into the sector totaled over $60 billion in 2010, the second highest year on record, down from $72bn the previous year. The bulk of funds went into precious metals and energy products. The growth in prices of many commodities in 2010 contributed to the increase in the value of commodities funds under management. Let us discuss few vital terminologies associated with the Commodity Futures market: Forward contract A Forward contract is an agreement between two parties to exchange at some fixed future date a given quantity of a commodity for a price defined when the contract is finalized. The fixed price is known as the forward price. Such forward contracts began as a way of reducing pricing risk in food and agricultural product markets, because farmers knew what price they would receive for their output. Forward contracts for example, were used for rice in seventeenth century Japan. Futures contracts Futures contracts are standardized forward contracts that are transacted through an exchange. In futures contracts the buyer and the seller stipulate product, grade, quantity and location and leaving price as the only variable. Agricultural futures contracts are the oldest, in use in the United States for more than 170 years. Modern futures agreements, began in Chicago in the 1840s, with the appearance of the railroads. Chicago, centrally located, emerged as the hub between Midwestern farmers and east coast consumer population centers. Swaps A Swaps is a derivative in which counterparties exchange the cash flows of one party's financial instrument for those of the other party's financial instrument. They were introduced in the 1970s. Source: International Trade Centre V. Futures Trading and Inflation The price of any commodity is determined by the actual demand and supply position in the market. In an open market situation, prices are bound to fluctuate either way, depending on the additional information/data which influences expectations of market participants, relating to future demand and supply conditions. The futures market does not alter the basic condition of demand and supply but merely estimates the prices based on the actual and expected demand and supply factors. The demand and supply conditions also influence prices of commodities in which there is no futures trading. The demand supply gap causes price rise in such commodities too. Therefore, futures trading is not responsible for increase in the prices of commodities. The RBI conducted a detailed study (Annual Report ) of the futures market since the start of the electronic commodity trading. The 2014 IJRMBS, All Rights Reserved 42

6 ISSN : (Online) International Journal of Research in Management & empirical analysis using the monthly data for the period 2004 to 2009 revealed that several commodities which are not traded in the commodities exchange, such as vegetables, fruits and milk, exhibited significant price increases during the year Moreover, certain commodities that were suspended for trading in 2007, such as rice, wheat, tur and urad, also exhibited significant price increases subsequently. In conclusion, the report stated that commodity prices in India seem to be influenced more by other drivers of price changes, particularly demand-supply gap in specific commodities, the degree of dependence on imports and international price movements in these commodities. The Committee set up by the Government under the Chairmanship of Prof. AbhijitSen (report submitted in April 2008) also could not find any conclusive causal relationship between futures trading & inflation. VI. Structure, Conduct & Current Status Broadly, the commodities market exists in two distinct forms the over-the-counter (OTC) market and the exchange based market. Further, as in equities, there exists the spot and the derivatives segments. Spot markets are essentially OTC markets and participation is restricted to people who are involved with that commodity, such as the farmer, processor, wholesaler, etc. A majority of the derivatives trading takes place through the exchangebased markets with standardized contracts, settlements, etc. The exchange-based markets are essentially derivative markets and are similar to equity derivatives in their working, that is, everything is standardized and a person can purchase a contract by paying only a percentage of the contract value. A person can also go short on these exchanges. Moreover, even though there is a provision for delivery, most contracts are squared-off before expiry and are settled in cash. As a result, one can see an active participation by people who are not associated with the commodity. The typical structure of commodity futures markets in India is as follows: Typical Structure Of Commodity Futures Markets In India At present, there are 26 exchanges operating in India and carrying out futures trading activities in as many as 146 commodity items. As per the recommendation of the FMC, the Government of India recognized the National Multi Commodity Exchange (NMCE), Ahmadabad; Multi Commodity Exchange (MCX), National Commodity and Derivative Exchange (NCDEX), Mumbai and Indian Commodity Exchange ( ICEX) as nation-wide multicommodity exchanges. As compared to 59 commodities in January 2005, 94 commodities were traded in December 2006 in the commodity futures market. These commodities included major agricultural commodities such as rice, wheat, jute, cotton, coffee, major pulses (such as urad, arahar and chana), edible oilseeds (such as mustard seed, coconut oil, groundnut oil and sunflower), spices (pepper, chillies, cumin seed and turmeric), metals (aluminium, tin, nickel and copper), bullion (gold and silver), crude oil, natural gas and polymers, among others. Gold accounted for the largest share of trade in terms of value. A temporary ban was imposed on futures trading in urad and tur dal in January 2007 to ensure orderly market conditions. An efficient and well-organised commodities futures market is generally acknowledged to be helpful in price discovery for traded commodities. Today, apart from numerous regional exchanges, India has six national commodity exchanges namely as below: National Exchanges 1) Multi Commodity Exchange of India Ltd., Mumbai 2) National Commodity & Derivatives Exchange Ltd., Mumbai 3) National Multi Commodity Exchange of India Limited., Ahmedabad 4) Indian Commodity Exchange Limited, New Delhi 5) Ace Derivatives and Commodity Exchange Limited,Mumbai 6) Universal Commodity Exchange Ltd., Navi Mumbai Regional Exchanges 1 Bikaner Commodity Exchange Ltd., Bikaner 2 Bombay Commodity Exchange Ltd., Vashi 3 Chamber Of Commerce, Hapur 4 Central India Commercial Exchange Ltd., Gwalior 5 Cotton Association of India, Mumbai 6 East India Jute & Hessian Exchange Ltd., Kolkata 7 First Commodities Exchange of India Ltd., Kochi 8 India Pepper & Spice Trade Association., Kochi 9 Haryana Commodities Ltd., Sirsa MCX NCDEX NMCE ICEX ACE UCX 10 Meerut Agro Commodities Exchange Co. Ltd., Meerut 11 National Board of Trade, Indore 12 Rajkot Commodity Exchange Ltd., Rajkot 13 Rajdhani Oils and Oilseeds Exchange Ltd., Delhi 14 Surendranagar Cotton oil & Oilseeds Association Ltd., Surendranagar 15 Spices and Oilseeds Exchange Ltd. Sangli 16 Vijay Beopar Chamber Ltd., Muzaffarnagar VII. Current Scenario Currently 5 national exchanges, viz. Multi Commodity Exchange, Mumbai; National Commodity and Derivatives Exchange, Mumbai and National Multi Commodity Exchange, Ahmedabad, Indian Commodity Exchange Ltd., Mumbai (ICEX) and ACE Derivatives and Commodity Exchange, regulate forward trading in 113 commodities. Besides, there are 16 Commodity specific exchanges recognized for regulating trading in various commodities approved 43 All Rights Reserved, IJRMBS 2014

7 International Journal of Research in Management & ISSN : (Online) by the Commission under the Forward Contracts (Regulation) Act, The commodities traded at these exchanges are mentioned in Annex I. As of March 2012, futures trading in urad, tur and rice remain suspended. Out of recognized exchanges, Multi Commodity Exchange (MCX), Mumbai, National Commodity and Derivatives Exchange (NCDEX), Mumbai, National Board of Trade (NBOT), Indore, National Multi Commodities Exchange, (NMCE), Ahmedabad, and the ACE Derivatives & Commodity Exchange Ltd., contributed 99% of the total value of the commodities traded during the year Out of the 113 commodities, regulated by the FMC, in terms of value of trade, Gold, Silver, Copper, Zinc, Guarseed, Soy Oil, Jeera, Pepper and Chana are the prominently traded commodities. The total volume of trade across all Exchanges in was 14, lakh MT at a value of Rs.181,26, Crores.The total of deliveries of all commodities on Commodity Exchange platform is 8,88,250 MT during the year The different intermediaries and clients registered at these recognized national exchanges are, Members , Other intermediary - 234, Warehouse service provider / warehouse - 35 and Clients - 33,75,123 as on Rationale for Commodity Futures Markets: Forward/ Futures trading in a commodity is a mechanism for price discovery and price risk management and is useful to all sectors of the economy including the farmers and consumers. The prices of agricultural commodities are generally at their lowest at the harvest time as the supply far exceeds the immediate, short term demand by the consumers, processors and other stakeholders associated with the commodity markets and increase substantially in the lean season when the demand by the consumers, processors etc exceeds the supply. This adversely affects the farmers (as they realize lower prices of their produce in the harvest season) and consumers (as they have to pay higher prices in the lean season to meet their requirements). Forward/ futures markets provide a market mechanism to balance this imbalance of the supply demand pattern of agricultural commodities. Futures trading provides a means of appraising the supply-and-demand conditions and dealing with price risks, over time and distance. Trading in futures not only provides price signals to the market of today, but also of months ahead, and affords guidance to sellers (farmers/ growers/ processors) and buyers (consumers) of agricultural commodities in planning ahead and, in financing and marketing commodities from one season to the another. Futures markets therefore are beneficial to both the consumers and farmers. VIII. Benefits of Commodity Futures Markets to farmers and other stakeholders Farmers and growers benefit through the price signals emitted by the futures markets even though they may not directly participate in the futures market. The futures markets lead to reduction in the amplitude of seasonal price variation and help the farmer realize a better price at the time of harvest. This also helps the farmer in planning his cultivation in advance as well as to determine the kind of crop which he would prefer to raise, by taking advantage of the advance information of the future price trends, and probable supply and demand of various commodities in advance. By providing the manufacturers and the bulk consumers a mechanism for covering price-risks, the futures market induces them to pay higher price to the producers, as the need to pass on the price-risk to farmers is obviated. The manufacturers are able to hedge their requirement of the raw materials and as also their finished products. This results in greater competition in the market and ensure viability of the manufacturing units. Benefits of Commodity Futures Markets The primary objectives of any futures exchange are authentic price discovery and an efficient price risk management. The beneficiaries include those who trade in the commodities being offered in the exchange as well as those who have nothing to do with futures trading. It is because of price discovery and risk management through the existence of futures exchanges that a lot of businesses and services are able to function smoothly. 1. Price Discovery:-Based on inputs regarding specific market information, the demand and supply equilibrium, weather forecasts, expert views and comments, inflation rates, Government policies, market dynamics, hopes and fears, buyers and sellers conduct trading at futures exchanges. This transforms in to continuous price discovery mechanism. The execution of trade between buyers and sellers leads to assessment of fair value of a particular commodity that is immediately disseminated on the trading terminal. 2. Price Risk Management: - Hedging is the most common method of price risk management. It is strategy of offering price risk that is inherent in spot market by taking an equal but opposite position in the futures market. Futures markets are used as a mode by hedgers to protect their business from adverse price change. This could dent the profitability of their business. Hedging benefits who are involved in trading of commodities like farmers, processors, merchandisers, manufacturers, exporters, importers etc. 3. Import- Export competitiveness: - The exporters can hedge their price risk and improve their competitiveness by making use of futures market. A majority of traders which are involved in physical trade internationally intend to buy forwards. The purchases made from the physical market might expose them to the risk of price risk resulting to losses. The existence of futures market would allow the exporters to hedge their proposed purchase by temporarily substituting for actual purchase till the time is ripe to buy in physical market. In the absence of futures market it will be meticulous, time consuming and costly physical transactions. 4. Predictable Pricing: - The demand for certain commodities is highly price elastic. The manufacturers have to ensure that the prices should be stable in order to protect their market share with the free entry of imports. Futures contracts will enable predictability in domestic prices. The manufacturers can, as a result, smooth out the influence of changes in their input prices very easily. With no futures market, the manufacturer can be caught between severe short-term price movements of oils and necessity to maintain price stability, which could only be possible through sufficient financial reserves that could otherwise be utilized for making other profitable investments. 5. Benefits for farmers/agriculturalists: - Price instability has a direct bearing on farmers in the absence of futures market. There would be no need to have large reserves to cover against unfavorable price fluctuations. This would reduce the risk premiums associated with the marketing or processing 2014 IJRMBS, All Rights Reserved 44

8 ISSN : (Online) International Journal of Research in Management & margins enabling more returns on produce. Storing more and being more active in the markets. The price information accessible to the farmers determines the extent to which traders/processors increase price to them. Since one of the objectives of futures exchange is to make available these prices as far as possible, it is very likely to benefit the farmers. Also, due to the time lag between planning and production, the market-determined price information disseminated by futures exchanges would be crucial for their production decisions. 6. Credit accessibility: - The absence of proper risk management tools would attract the marketing and processing of commodities to high-risk exposure making it risky business activity to fund. Even a small movement in prices can eat up a huge proportion of capital owned by traders, at times making it virtually impossible to pay back the loan. There is a high degree of reluctance among banks to fund commodity traders, especially those who do not manage price risks. If in case they do, the interest rate is likely to be high and terms and conditions very stringent. This possesses a huge obstacle in the smooth functioning and competition of commodities market. Hedging, which is possible through futures markets, would cut down the discount rate in commodity lending. 7. Improved product quality: - The existence of warehouses for facilitating delivery with grading facilities along with other related benefits provides a very strong reason to upgrade and enhance the quality of the commodity to grade that is acceptable by the exchange. It ensures uniform standardization of commodity trade, including the terms of quality standard: the quality certificates that are issued by the exchange-certified warehouses have the potential to become the norm for physical trade. IX. Conclusion The antiquity of commodity Futures market in India epochs back to the ancient times citied in Kautialya s Arthasastra, and have been commonly heard in Indian markets for centuries,seems to be coined in 320 BC, referred in Forward Contracts (Regulation) Act, India being one of the top producers of a large number of commodities, and also has an extended history of trading in commodities and related derivatives. The Indian commodities Futures market has seen ups and downs, but seem to have finally arrived now. The market has made enormous advancement in terms of technology, transparency and the trading activity. Interestingly, this has happened only after the Government protection was removed from a number of commodities, and market forces were allowed to play their role. This should act as a major lesson for the policy makers in developing countries, that pricing and price risk management should be left to the market forces rather than trying to achieve these through administered price mechanisms. No doubt the role of Khusro Committee (June 1980); National Agriculture Policy announced in July 2000 and Forward Contracts (Regulation) Act, 1952 was immense and incredible but since the Forward Markets Commission (FMC) is the chief regulator of forwards and futures markets in India, it pertains the most vital responsibilities which impacts not only Indian Markets but also at global arena.broadly, the commodities market exists in two distinct forms the over-the-counter (OTC) market and the exchange based market. Further, as in equities, there exists the spot and the derivatives segments. Spot markets are essentially OTC markets and participation is restricted to people who are involved with that commodity, such as the farmer, processor, wholesaler, etc. A majority of the derivatives trading takes place through the exchange-based markets with standardized contracts, settlements, etc.at present, there are 26 exchanges operating in India and carrying out futures trading activities in as many as 146 commodity items. As per the recommendation of the FMC, the Government of India recognized the National Multi Commodity Exchange (NMCE), Ahmadabad; Multi Commodity Exchange (MCX), National Commodity and Derivative Exchange (NCDEX), Mumbai and Indian Commodity Exchange ( ICEX) as nation-wide multi-commodity exchanges. Rational Government policies and the plinth of effective laws have benefited in many ways like Credit accessibility, improved product quality, Predictable Pricing, Import-Export competitiveness, Price Risk Management & Price Discovery. Still at the outset even in 20th century the benefits to the real producers of primary sector is remote. The government needs to concentrate upon the farmers/animal husbandries personal/ Gardeners and orchard personal/etc. The Rural population which is ultimately responsible for the Primary sector needs to be benefited. Justice to the enactment and the all the rich endeavors which government had made could be achieved in real essence only when the real benefits would reach to the actual producers, Farmers and Stakeholders which shall not only motivate them but also attract new generation to enter into the primary sector and give enhancement to Indian Economy. Bibliography [1]. India needs to develop its own doctrine for strategic autonomy: NSA; Economic Times (NEW DELHI). PTI. 18 October Retrieved 18 October [2]. Indicators for Trading in Government Bond ETFs". Tradingmarkets.com. Retrieved [3]. Ministry of Consumer Affairs, Food and Public Distribution (2008) Report of the Expert Committee to study the impact of future trading on agricultural commodity price, Government of India. [4]. Bose, S. (2006), The Indian Derivatives Market Revisited, Money & Finance, Vol. 2. [5]. [6]. Ministry of Consumer Affairs, Food and Public Distribution (2008) Report of the Expert Committee to study the impact of future trading on agricultural commodity price, Government of India. [7]. DevajitMahanta; IOSR Journal of Business and Management (IOSRJBM); ISSN: X Volume 1, Issue 6 (July-Aug. 2012), PP [8]. Dennis W. Carlton (1984). "Futures Markets: Their Purpose, Their History, Their Growth, Their Successes and Failures". Journal of Futures Markets 4 (3): [9]. Ferri, Richard A. (2008). The ETF Book, John Wiley and Sons, 191 ISBN [10]. Dennis W. Carlton (1984). "Futures Markets: Their Purpose, Their History, Their Growth, Their Successes and Failures". Journal of Futures Markets 4 (3): [11]. Michael Sackheim, Michael Schmidtberger& James Munsell, DB Commodity Index Tracking Fund: An Innovative Exchange-Traded Fund, Futures Industry (May/ June 2006). [12]. Stacy L. Fuller, The Evolution of Actively Managed Exchange-Traded Funds, Review of Securities & 45 All Rights Reserved, IJRMBS 2014

9 International Journal of Research in Management & ISSN : (Online) Commodities Regulation (April 16, 2008). [13]. Gastineau, Gary (2002). The Exchange-Traded Funds Manual. John Wiley and Sons. p. 32. ISBN [14]. Debate/Did_agri_futures_have_a_premature_start/ articleshow/ cms Accessed on [15]. Dennis W. Carlton (1984). "Futures Markets: Their Purpose, Their History, Their Growth, Their Successes and Failures". Journal of Futures Markets 4 (3): [16]. Ram Narayan (August 8, 2012). "From Food to Fracking: Guar Gum and International Regulation". RegBlog. University of Pennsylvania Law School. Retrieved 15 August 2012 [17]. &linkid=18. [18]. GargiParsai (10 September 2013). "Forward Markets Commission comes under Finance Ministry". The Hindu. [19]. Fabozzi, Frank (2003). The Handbook of Financial Instruments. John Wiley and Sons. p ISBN [20]. Introduction To Exchange-Traded Funds ", Investopedia. [21]. Gastineau, Gary (2002). The Exchange-Traded Funds Manual. John Wiley and Sons. p. 32. ISBN [22]. India needs to develop its own doctrine for strategic autonomy: NSA; Economic Times (NEW DELHI). PTI. 18 October Retrieved 18 October [23]. [24]. [25]. India needs to develop its own doctrine for strategic autonomy: NSA; Economic Times (NEW DELHI). PTI. 18 October Retrieved 18 October Encyclopedia of Commodity and Financial Prices: Grains and Oilseeds" (PDF). Commodity Research Bureau (CRB). Encyclopedia of Commodity and Financial Prices: Grains and Oilseeds" (PDF). Commodity Research Bureau (CRB). pp Annexure I LISTOFCOMMODITIESNOTIFIEDUNDERSECTION15OFTHEF.C.(R.)ACT1952 Sl.No. Commodity Sr.No. Commodity I Food Grains and Pulses II Oil seeds and Oils 1 ArharChuni 29 Cottonseed 2 Bajra 30 Cottonseed Oil 3 Barley 31 Cottonseed Oilcake 4 Gram 32 CPO Refined 5 GramDal 33 Crude Palm Oil 6 Guar 34 Crude Palm Olive 7 Jowar 35 Groundnut 8 Kulthi 36 Groundnut Oil 9 Lakh(Khesari) 37 Groundnut Oilcake 10 Maize 38 Linseed 11 Masur 39 Linseedoil 12 Moth 40 LinseedOilcake 13 Mung 41 RapeseedOil/MustardOil 14 MungChuni 42 RapeseedOilcake/Mustard seedoilcake 15 MungDal 43 Rapeseed/Mustardseed 16 Peas 44 RBDPalmolein 17 Ragi 45 RiceBran 18 RiceorPaddy 46 RiceBranOil 19 SmallMillets(KodanKulti, Kodra,Korra,Vargu, Sawan, 47 RiceBranOilcake Rala, Kakun, Samai,Vari&Banti) 20 TurDal(ArharDal) 48 Safflower 21 Tur(Arhar) 49 SafflowerOil 22 Urad(Mash) 50 SafflowerOilcake 23 Uraddal 51 Sesame(Til) 24 Wheat 52 SesameOil II Oilseeds and Oils 53 SesameOilcake 2014 IJRMBS, All Rights Reserved 46

10 ISSN : (Online) International Journal of Research in Management & 25 Celeryseed 54 Soymeal 26 CopraOil/CoconutOil 55 SoyOil, 27 CopraOilcake/Coconut Oilcake 56 Soybean 28 Copra/Coconut 57 SunflowerOil 58 SunflowerOilcake (VI) Others 59 SunflowerSeed 88 Camphor III Spices 89 Castorseed 60 Aniseed 90 CharaorBerseem (including charaseedorberseemseed) 61 Betelnuts 91 CrudeOil 62 Cardamom 92 GramHusk(GramChilka) 63 Chillies 93 Gur Sl.No. Commodity Sr.No. Commodity 64 Cinnamon 94 KhandsariSugar 65 Cloves 95 Polymer 66 Corianderseed 96 Potato 67 Ginger 97 Rubber 68 Methi 98 Seedlac 69 Nutmegs 99 Shellac 70 Pepper 100 Sugar 71 Turmeric 101 FurnaceOil IV Metals 102 Ethanol 72 Copper 103 CookingCoal 73 Zinc 104 Electricity 74 Lead 105 NaturalGas 75 Tin 106 Onion 76 Gold 107 Carbon Credit 77 Silver 108 Thermalcoal 78 SilverCoins 109 Methanol (V) Fibres and Manufactures 110 Melted Menthol Flakes 79 ArtSilkYarn 111 MenthaOil 80 CottonCloth 112 MentholCrystals 81 Cottonpods 113 IronOre 82 CottonYarn 83 Indian Cotton (Full pressed, halfpressedor loose) 84 Jutegoods(Hessian and Sacking sand cloth and /or bags,twines and/or yarns mfd. by any of the mill sand/or any other manufacturers of what ever nature made from jute) 85 Kapas 86 Raw Jute Including Mesta 87 Staple Fiber Yarn 47 All Rights Reserved, IJRMBS 2014