Group 2 commodity- fmc & warehouse reforms

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Chapter 2 Reforms in Indian Commodity Derivatives market

Presented by:Bhantraj MeenaChandan Kumar

Harvinder SingariaHemant Arya

Irfan K S Srinadh Choudary

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History

• 1875-Bombay Cotton Trade Association Ltd.-First organized futures market

• 1893-Bombay Cotton Exchange Ltd.• 1900-Establishment of Gujarati Vyapari Mandali, carries out

futures trading in oilseeds• Futures trading in wheat was existent at several places in

Punjab and Uttar Pradesh• 1913-Establishment of Futures exchange for wheat, Chamber

of commerce at Hapur• 1920-Futures trading in bullion began in Mumbai• 1919-Calcutta Hessian Exchange Ltd. was established for

futures trading in raw Jute and Jute goods

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• 1927-Organised futures trading in raw jute began only with the establishment of East Indian Jute Association Ltd.

• 1945-Two associations amalgamated in 1945 to form the East India Jute & Hessian Ltd. to conduct organized trading in both Raw Jute and Jute goods.

• 1952-Forward Contracts (Regulation) Act was enacted • 1953-Forwards Markets Commission (FMC) was established

under the Ministry of Consumer Affairs and Public Distribution which oversees forward trading

• Several other exchanges were created in the country to trade in diverse commodities

• Trading remained banned for a long period of time since 1966 and it was reintroduced in the early 2000s

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• A few selected commodities saw a reintroduction of futures in 1980 following the Khusro Committee report

• 1993-Kabra Committee was appointed to look into forward markets-The committee recommended in 1994 that all futures banned in 1966 be reintroduced as well as many others added

• 2000-National Agricultural Policy 2000 envisioned the removal of price controls in agricultural markets and widespread use of futures contracts

• The commodity futures market made the true restart in early 2000s with establishment of a number of nationwide multi commodity exchanges

• Commodity futures market has developed significantly in terms of both network and volume throughout the last decade

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• At present, there is a two-tier structure for Commodity Exchanges in India: Regional and Country-Wide

• Regional exchanges are permitted to have only a limited number of contracts whose membership is local.

• Countywide national exchanges are multi-commodity electronic exchanges with a demutualized ownership pattern

• Currently, there are three such exchanges, viz., MCX (Multi Commodity Exchange), NMCE (National Multi Commodity Exchange) and NCDEX (National Commodities and Derivatives Exchange).

http://www.bombaychamber.com/uploads/Analytique%20APR-JUNE%202011%20-%20WEB.pdf

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Future of Futures Market• Derivative market serves two basic purposes in an economy• It provides hedging opportunities to those who suffer from

uncertainties in market prices• It applies particularly to agricultural and primary articles for

which supply depends highly on natural conditions such as weather

• Commodity futures evolved as a means of hedging, although latter on it was used more for speculation purposes

• In India, for instance, over 95 per cent of the trading volume in futures today comprises speculative trades

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• Share of Commodity Groups in Trade Volume

• The volume of trade has increased from Rs. 34, 84,485 crore in 2006 to Rs. 94, 94,725 crore in 2011

• It all shows that the market has strong growth potential

http://www.bombaychamber.com/uploads/Analytique%20APR-JUNE%202011%20-%20WEB.pdf

Commodity trading provides:-

1) Liquidity - the ability to buy or sell a commodity at a posted price 2) Price Discovery - the ability to observe instantaneous market price 3) Price Transparency - ability to know instantaneous price is "fair" in contrast with a bilaterally negotiated price. 

Why do we need Commodity market

Technological reforms in Commodity Markets

Emerging technologies can add to the “customer delight "through:

• Faster enablement of trading of newer & innovative products – adding flexibility to the system to meet new requirements

• Faster go-to-market from the conceptualization state – reducing time between conceptualization and actual trading

• Improved user experience – availability of information of major requirement for commodity plate farms

• Integrated system – seamless integration of all stakeholders including clearing house, banks, warehouse, assayers, spot markets, etc

• Proactive decision support system – easy modification of contracts, management of risks, etc

• Value added services - futuristic customer service on an integrated voice, mail and internet platform. A stream of innovations in products

New Technological System in Commodity Markets

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FDI & FII in commodity marketOn 10 April, 2012 government announced new policy regarding FDI and FII. These policies are-

• Foreign Institutional Investors (FII) can now to invest up to 23 per cent in commodity exchanges without the prior approval of the Government.

• Companies will have to take prior permission from RBI if the overall FII holding goes beyond 24 per cent.

• FDI scheme is limited to 26 per cent in commodity exchanges,• but will still require approval from the Foreign Investment

Promotion Board.• The policy allows 100% FDI in business to business e-commerce

ventures (B2B), but not in retail trading ventures (B2C).

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• B2B e-commerce now falls under the purview of Wholesale Trading which has been defined as sales for the purpose of trade, business and profession, as opposed to sales for the purpose of personal consumption.

• Govt. allows 100% FDI in selected agri- sectors like production of seeds and planting material, floriculture, horticulture, and cultivation of vegetables & mushrooms under controlled conditions.

• Chief regulator of the forwards and futures markets in India• Established in 1953 and headquartered at Mumbai• Statutory body setup under Forward Contracts (Regulation) Act,

1952• Functions under the administrative control of the Ministry of

Consumer Affairs, Food & Public Distribution, Department of Consumer Affairs, Government of India

• Consists of 2to 4 members, all appointed by the Government of India

• Currently, it allows commodity trading in 22 exchanges in India, of which 3 are national

• 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

Forward Market Commission (FMC)

• Functions: To advise the central govt. in respect of recognition or withdrawal

of recognition from any association 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 publish information regarding the trading conditions in respect of goods to which provisions of the act are applicable

To make recommendations generally with a view to improve 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

Forward Market Commission (FMC)

• Need of reforms in warehousing: Problem of covered storage capacity lack of sustained investment in the warehousing sector private sector initiatives were small and sporadic most of the private sector warehousing capacities available in the

country were of poor quality, small, fragmented and do not meet the requisite infrastructure standards

Capital intensive sector and without availing finance from banks and other financial institutions, warehousing facilities cannot be created by the entrepreneurs

About 80% handling and warehousing facilities are not mechanized

Reforms in Warehousing in India

• Some of the major reforms: The Warehousing (Development and Regulation) Act, 2007 had

been made effective from 25th October, 2010 Warehousing Development and Regulatory Authority has been set

up by the Government from 26th October, 2010 Negotiable Warehouse Receipt System (NWR), 2010 Electronic Warehouse Receipt System (EWR), 2010 Private Entrepreneurs Godown (PEG) Scheme, 2008 Gramin Bhandaran Yojana or Rural Godown Scheme (RGS),

2001 Scheme for Financing Warehousing Infrastructure under Rural

Infrastructure Development Fund (RIDF)

Reforms in Warehousing in India