This project lists the numerous bottlenecks and hurdles in the way of a smoothly operating commodity markets. It covers Forward Contracts (Regulations) Act and its amendments in recent years, the role of Forward Market Commission in the market, various legal, regulatory, infrastructural challenges along with major initiatives taken in 2010-11

2. Acknowledgment
A project is never the sole product of a person whose name has appeared on the cover. Even
the best effort may not prove successful without proper guidance. For a best project one
needs proper time, energy, efforts, patience, and knowledge and how to use all
these things. But without any guidance it remains unsuccessful. I have done this
project with the best of my ability and hope that it will serve its purpose.
At the onset I would like to express my deepest gratitude to Mr.Sushil Sinha,
Country Head, Karvy Comtrade Ltd. for giving me the opportunity of conducting out my
summer internship project in Karvy Comtrade Ltd.
It was really a great learning experience and I would really express my special and profound
gratitude to my guide Ms. Priya Chaudhary who not only helped me in the successful
completion of this report but also spread his precious and valuable time in expanding my
knowledge base, I take immense pleasure in thanking them for supporting at all stages of this
project. After the completion of this Project I feel myself as a well aware person
about the procedure and the complexities that can arose during the process. Also I get an
insight of the commodity markets and its working. Finally, I am also grateful to all those
personalities who have helped me directly or indirectly in bringing up this project report, my
colleagues.
- Abha Mahapatra

3. Mr. Sushil Sinha
VP & Country Head
Karvy Comtrade Ltd.
Certificate
This is to certify that the project report entitled “Challenges to Commodity Markets in India” prepared
by Ms. Abha Mahapatra (Roll no. 75003),student at Shaheed Sukhdev College of Business Studies, Delhi
University, in fulfillment of summer internship project at Karvy Comtrade Ltd., Hyderabad, Andhra
Pradesh is a record of work done under my guidance and supervision.She has successfully completed
her summer internship project of one and half months starting from 28 May 2012 to 8 July 2012.
As an intern she has successfully completed all assigned task during the period of internship. An
overview of tasks :
• Worked in a software driven trading environment.
• Dishcharged customer relation management functions.
Banjara Hills, Hyderabad (Mr. Sushil Sinha)
Andhra Pradesh Supervisor
8th
July 2012

4. Executive Summary
Commodity exchanges in Indian are still at a nascent stage, and there are numerous
bottlenecks in the growth of the commodity futures market. The challenges facing the Indian
Commodity markets are very serious in nature and cannot be ignored as they can paralyze the
agricultural futures markets, much against the objective of agricultural liberalization. The main
problem is that the commodity markets are under the control of Government.
Commodity derivatives have achieved one of the fastest growth rates, probably the highest
among any other developmental initiatives undertaken either in agricultural sector or in
financial sector of a developing economy like India. But certainly this achievement is not just
erecting a castle in air. Reasons are deep-rooted. Indian traders have century old experiences in
trading commodity derivatives. Permitting commodity exchanges to set up an anonymous
electronic trading platform accessible across the nation has given all the required mileage for
commodity trading to scale new heights.
Compared to the 130 years old stock market, the commodity market is in its nascent stage. It is
very much in consensus that by the advent of commodity derivatives trading, a silent revolution
is building up in the economy. Though trading volumes in this new market is gradually catching
up that in the stock market, yet commodity exchanges are facing challenges that need to be
addressed now. There are certain set of challenges where commodity exchanges require
regulatory amendments to make this market vibrant and some other set of challenges, where
commodity exchanges have to take up the initiatives.
This project is focused on highlighting those challenges which create bottlenecks in the smooth
operations of commodity markets and can slow down its growth. At the end it suggests
measures for creating a free and well regulated market.

5. Table of Contents
Serial
No.
Topic Page No.
1. Introduction to Commodity Markets
Spot Markets
Future Markets
Commodity as Asset Class
Commodities: Unique Points of Diversification
2. History of Commodity Markets in India
Brief History
Change in government policy
3. Performance of Commodity Markets
4. Evolution of Forward Market Commission
Forward Contracts (Regulation) Act
Regulatory tools
Major initiatives taken by the GOVT/Commission since liberalization of the
markets
Major initiatives taken by FMC during 2010-11
Collaboration with international regulators
Developmental initiatives taken by FMC
Current Scenario
5. Challenges faced by Commodity Markets Currently
Legal Challenges
Regulatory Challenges
Infrastructural Challenges
Awareness among investors and producers
Other Challenges
Introduction to Commodity Markets

6. India, a commodity based economy where two-third of the one billion population depends on
agricultural commodities, surprisingly has an underdeveloped commodity market. Unlike the
physical market, futures markets trades in commodity are largely used as risk management
(hedging) mechanism on either physical commodity itself or open positions in commodity stock.
A commodity is any physical substance, such as food, grains, and metals, which is
interchangeable with another product of the same type, and which investors buy or sell, usually
through futures contracts. The term is sometimes used more generally to include any product
which trades on a commodity exchange; this would also include foreign currencies and financial
instruments and indexes. The price of the commodity is subject to supply and demand factors.
Risk is actually the reason exchange trading of the basic agricultural products began. For
example, a farmer risks the cost of producing a product ready for market at sometime in the
future because he doesn't know what the selling price will be. A speculator can pay the farmer
or anyone else producing commodities because the speculator wants to make a profit. This is
called trading in futures.
The following is a list of commodities available for futures trading:
• Agricultural: grains, oils, livestock, wood, textiles, food products
• Metallurgical: metals, petroleum,
chemicals
• Interest Bearing Assets: T-bills, bonds,
notes
• Stock Indices
• Currencies
Most of these contracts are used by corporations to hedge positions taken elsewhere. Some
futures contracts, notably those for stock indices, are settled in cash because they are not
deliverable goods. The contracts also vary in terms of the transaction date and the quality level
of goods to be bought and sold. New futures contracts are created continuously, but many are
not liquid enough to trade regularly and are used only as hedges.
SPOT MARKETS
Spot markets are organized exchanges where commodity products can daily be traded (by
large amounts, even). Typical examples are the CME (Chicago Mercantile Exchange), the MCE
(Mid America Commodity Exchange).

7. FUTURES MARKETS
At their very early stage, commodity markets futures trading exchanges, served the purpose of
hedging against price fluctuations in agricultural commodities. Sellers (farmers) and buyers
would commit themselves to future exchanges of grain for a certain amount of cash. Nowadays,
the rationale for trading futures is threefold:
Hedging against price fluctuations. Both producers, refiners (in the case of oil) and consumers
would look to it. For example, a producer, that is a participant who wants to sell the physical
commodity, will hedge by selling futures. On the
other hand, a consumer will try to be long futures,
once she decided to buy the commodity in
question.
Speculation: trading futures, as compared to spot
assets, presents many advantages, as futures
are more leveraged than the spot instruments
because of the low margin requirement, are cheaper in term of transaction costs and finally do
not require storage during the lifetime of the contract.
Arbitrage between spot and futures markets: for commodities, the cash and carry arbitrage is
more difficult to realize because of storage and delivery costs.
Commodity as Asset Class
A group of securities that exhibit similar characteristics, behave similarly in the marketplace,
and are subject to the same laws and regulations. The three main asset classes are equities
(stocks), fixed-income (bonds) and cash equivalents (money market instruments).
While the 1980s and the 1990s witnessed above-average returns on the equity and bond
markets, the 2000s (until 2008) were clearly the decade of the forgotten asset class.
Commodities have experienced a renaissance, with several driving forces at work. The strong
demand for commodities from the developing countries, as well as from emerging countries
(especially from China), has pulled prices
significantly higher. At the same time, supply was
limited by nature and bottlenecks in the production
appeared due to negligence of investments.
Additionally, investors also rediscovered the
forgotten asset class. Investments in commodities
not only offer the possibility of expected price

8. increases but also reduce the risk in a portfolio since commodity returns have historically
shown a very low or a negative correlation with the traditional asset classes of equities and
bonds, although the correlation between asset classes increased in 2008. This diversification
effect can be amplified by investments in different commodities since the price of each
commodity reacts differently to economic forces and commodity returns appear to display a
low correlation to each other.
Against the background of the financial turmoil in 2008, commodity prices have corrected
sharply. One of the biggest corrections has been observed in the oil price. After reaching a
record high in July 2008 at $147, the price of the "black gold" dropped to $32, a fall of almost
80% within just five months. On a broader basis, the CRB Commodity Index, one of the most
recognized indices to track commodity prices, has also shown a significant loss of 58% after
reaching a record high in July 2008 as well.
The main reasons for the sharp correction were global recession, a stronger dollar and rising
risk aversion among financial investors. As everyone
was discussing the sharp fall in equities, commodities
slumped even more. Considering the recent strong
equity rally, some people have started to look at
equities again. It might also make sense to rethink
commodities, as after reaching the bottom late in
2008 most of them could recover from their multi-
year lows.
In financial parlance, assets are economic resources that are capable of being owned or
controlled to produce value. Commodity too has gained importance currently as independent
asset class. Commodities, being the natural goods are independent of other asset classes
Assets Classes
Equities: Performer during economic expansion & an
out performer over very long term.
Fixed Income: Performs at the later stage of recession.
Real Estate: Performs during early expansion.
Commodities: Performance spread evenly over the
economic cycle.

9. Commodities: Unique points of Diversification
Seasonality A major force in the commodities
markets
Correlation Unlike other asset class, commodities
are positively and negatively correlated within &
outside the group which is unique to commodities
only
Weather No other asset class are so much influenced by weather
patterns
Hedge Provides natural hedge against war, inflation, other asset
portfolios, recession etc. example -GOLD
Below is a guide to various macro-economic or fundamental
factors affecting commodity price.
• Inflation: Commodities has long been viewed as a hedge against inflation, some more
than others.
• Supply & Demand: Learn what all online commodity traders should know about the
commodity markets balance of supply and demand.
• Exchange rates: Do you know the most important exchange rates to keep track on and
why and when you should do it?
• Business cycle: Most commodities follow a cyclical behavior.
• Interest Rates: See the current interest rates for the major countries and currencies, and
learn why it impacts commodity prices.
History of Commodity Markets in India

10. The commodity futures market in India dates back to more than a century. The first organized
futures market was established in 1875, under the name and style of 'Bombay Cotton Trade
Association' to trade in cotton derivative contracts. This was followed by institutions for futures
trading in oilseeds, food grains, etc. The futures market in India underwent rapid growth
between the period of First and Second World
Wars. As a result, before the outbreak of the
Second World War, a large number of
commodity exchanges trading futures contracts
in several commodities like cotton, groundnut,
groundnut oil, raw jute, jute goods, Castor seed,
wheat, rice, sugar, precious metals like gold and
silver were flourishing throughout the country.
In view of the delicate supply situation of major
commodities in the backdrop of war efforts mobilization, futures trading came to be prohibited
during the Second World War under the Defence of India Act. After independence, especially in
the second half of the 1950s and first half of 1960s, the commodity futures trading again picked
up and there were thriving commodity markets. However, in mid-1960s, commodity futures
trading in most of the commodities came to be banned and futures trading continued only in
two minor commodities, viz, pepper and turmeric. In the 1980s, the futures trading in some
commodities like potato, Castor seed, and gur (jaggery) was permitted. In 1992, futures trading
in hessian were permitted; in April 1999 futures trading in various edible oilseed complexes
were permitted and in May 2001 futures trading in Sugar were permitted. The National
Agricultural Policy announced in July 2000 recognized the positive role of forward and futures
market in price discovery and price risk management. In pursuance thereof, Government of
India, by a notification dated 1.4.2003, permitted additional 54 commodities for futures
trading. With the issue of this notification, prohibition on futures trading has been completely
withdrawn. The mechanism of forward trading has actually developed and advanced
considerably in the major trading nations of the world, like USA, UK, France, Japan, etc. In
these countries, forward trading has been permitted in
many new items/services including financial futures,
shipping freights and interest rates etc. In comparison,
commodity futures markets in India are much simpler and
are at present dealing in single futures contracts in
commodities.
Change in Government Policy

11. After the Indian economy embarked upon the process of
liberalization and globalization in 1990, the Government
set up a Committee in 1993 to examine the role of
futures trading. The Committee (headed by Prof. K.N.
Kabra) recommended allowing futures trading in 17
commodity groups. It also recommended strengthening
of the Forward Markets Commission, and certain
amendments to Forward Contracts (Regulation) Act
1952, particularly allowing options trading in goods and
registration of brokers with Forward Markets
Commission. The Government accepted most of these
recommendations and futures’ trading was permitted in all recommended commodities.
Commodity futures trading in India remained in a state of hibernation for nearly four decades,
mainly due to doubts about the benefits of derivatives. Finally a realization that derivatives do
perform a role in risk management led the government to change its stance. The policy changes
favoring commodity derivatives were also facilitated by the enhanced role assigned to free
market forces under the new liberalization policy of the Government. Indeed, it was a timely
decision too, since internationally the commodity cycle is on the upswing and the next decade
is being touted as the decade of commodities.
Performance of Commodity Markets in

12. The Indian Commodity Futures Markets continued to grow, despite the suspension of futures
trading in a few agricultural commodities. During the year, 113 commodities were regulated
under the auspices of the recognized Exchanges. During 2010-11, 21 recognized exchanges
were functioning. Out of the 113 commodities, regulated by the FMC, in terms of value of
trade, Silver, Gold, Copper, Nickel, Zinc, Lead, Soy Oil, Guarseed, Chana, Pepper, and Jeera were
the prominently traded commodities.
The table below indicates the commodity wise/group wise volume and value of trade in the
commodity market during the year.
Volume of Trading and Value of Trade during the year 2010-11
in Major Commodities
Volume of Trading – In lakh tonne
Value - In ` Crore
Sr.No Name of the
Commodity
2010-11
Volume Value
A Bullion
i Gold 0.14 2700607.00
ii Silver 7.24 2793280.23
iii Platinum 0.0000002 4.89
Total for A 7.38 5493892.12
B Metals other than
Bullion
i Aluminum 110.17 114081.70
ii Copper 335.36 1239261.20
iii Lead 356.88 366422.24
iv Nickel 44.83 478789.31
v Steel 86.66 22759.03
Vi Tin 0.002 18.35
Vii Zinc 463.25 465375.27
viii Iron 12.56 965.89
Total for B 1409.72 2687672.99
C Agricultural
commodities
i Chana/Gram 523.59 126158.29
ii Wheat 26.78 3316.88
iii Maize 16.36 1730.06
iv Soy Oil 617.15 345286.26

13. Volume of Trading and Value of Trade during the year 2010-11
in Major Commodities
Volume of Trading – In lakh tonne
Value - In ` Crore
Sr.No Name of the
Commodity
2010-11
Volume Value
v Mentha Oil 6.21 60527.10
vi Guarseed 1056.04 254690.88
vii Guar Gum 83.15 49942.57
viii Potato 269.22 14428.17
ix Chilies 11.31 8493.79
x Jeera(Cumin seed) 42.53 60864.48
xi Cardamom 0.77 10882.04
xii Pepper 42.25 84786.09
xiii Rubber 11.78 23846.92
xiv other agri 1461.21 411436i.10
Total for C 4168.35 1456389.62
D Energy 7220.12 2310958.58
E Other 0.00 29.04
Grand Total (A+B+C+D+E) 12805.57 11948942.35
Note: Natural Gas, Heating Oil & Gasoline Volumes are not
included in the Total Volume.
The share of various Exchanges in the total value of trade in 2010-11.
Value of the recognized Exchanges during 2010-11
Name of the Exchanges Value in ` Cr. % share to the total
value of the
commodities traded
during 2010-11.
MCX 98,41,502.90 82.36
NCDEX, Mumbai 14,10,602.21 11.81
NMCE, Ahmadabad 2,18,410.90 1.83
ICEX, Gurgaon 3,77,729.88 3.16

14. ACE, Ahmadabad @ 30,059.63 0.25
NBOT, Indore 51,662.06 0.43
Total of six Exchanges 1,19,29,967.58 99.84
Others 18,974.77 0.16
Grand Total 1,19,48,942.35 100
% share of the commodity exchanges to the
total value of trade during the year 2010-11
(April-March)NBOT
0.43%
ACE
0.25%ICEX
3.16%
MCX
82.36%
Others
0.16%NMCE
1.83%
NCDEX
11.81%
MCX NCDEX NMCE ICEX ACE NBOT Others
Source: Annual Report of FMC, 2010-11
Source: Report of the UNCTAD Study Group on Emerging Commodity Exchanges
MCX and warehousing expansion
“It is in the warehousing sector that India is witnessing another boom these days. Warehouse companies in India
are increasing capacity thanks to huge demand for various agricultural products because of the increasing
delivery system in futures market and the retail boom that is taking place across the country.
“The Indian farmer will get a much better price for his produce, if he is able to store them well,” says Managing
Director Anil Choudhary of National Bulk Handling Corp Ltd (NBHC). He said with over 40 commodities
being traded and more additions likely, greater investment in warehousing facilities is needed from the farm
gate to the delivery point. Choudhary said NBHC, a subsidiary of the leading commodity bourse—the Multi
Commodity Exchange of India—will add 5 million tonnes of warehousing capacity in 3-5 years.”
Source: Commodity Online. “India to witness warehousing boom” (Monday, 9 July 2007).

15. Evolution of Forward Market Commission
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;
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 The Central
Government.
c) Forward Contracts (Regulation) Rules were notified by the Central Government in July,
1954

16. 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 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 and
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 liberalized 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.

17. The National Agriculture Policy announced in July 2000 and the announcements of Hon'ble
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 on 1.4.2003 permitting futures trading in the commodities, with the issue of
these notifications futures trading is not prohibited in any commodity. Options’ trading in
commodity is, however presently prohibited.
Regulation of forward trading is done through a three tier regulatory structure, viz., the Central
Government, Forward Markets Commission and the Recognized Commodity Exchanges /
Associations.
• The Central Government has the powers to legislate on the subject of forward
trading in commodities. Presently, the subject is dealt with by the Ministry of
Consumer Affairs, Food and public Distribution in the Central Government. The
Central Government broadly determines the policy relating to areas such as
identification of commodities as well as the territorial area in which futures / forward
trading can be permitted and giving
recognition to the Exchange /
Association through which such
trading is to be permitted.
• The Forward Markets Commission
performs the role of approving the
Rules and Regulations of the
Exchange accordance to which
trading is to be conducted, accords
permission for commencement of
trading in different contracts,
monitors market conditions
continuously and takes remedial measures wherever necessary.
• The Recognized Exchange / Associations provide the framework of Rules and
Regulations for conduct of trading, indicate the place where the trading can be
conducted, report, record, execute & settle contracts, provide forum for exchange of
documents and payments, etc.

18. Forward Contracts (Regulation) Act
The Commodity Future Markets are regulated according to the provisions of Forward Contracts
(Regulation) Act 1952. The Act broadly divides commodities into 3 categories, i.e. commodities
in which forward trading is prohibited, commodities in which forward trading is regulated and
residuary commodities. Under Section 17 of the FC(R) Act, 1952, the Government has powers
to notify commodities, in which forward trading is prohibited in whole or part of India. Any
forward trading in such commodities in the notified area is illegal and any person who
contravenes the provisions of section 17 shall be liable to penal action. Under Section 15,
Government has powers to notify commodities in which forward trading is regulated as also the
area in which such regulation will be in force. Once a commodity is notified under section 15,
the forward trading in such contracts (other than Non-transferable Specific Delivery Contracts)
can be entered into only between members of the recognized association or through or with

19. any such member. Contracts other than these are illegal. Section 6 of the Act provides powers
to the Central Government to grant recognition to an association for organizing forward
contracts in the commodity which is notified under Section 15. Such recognition may be for a
specified period or may remain in force till revoked under Section 7 of the Act. Section 18(1)
exempts the Non-Transferable Specific Delivery Contracts from the purview of regulation.
However, under Section 18(3) of the Act, the Government has powers to prohibit or regulate
the non-transferable specific delivery contracts in commodities also by issue of a notification.
Such notifications may apply for the whole of the country or the specified part of the country.
Trading in commodities where non-transferable specific delivery contracts are prohibited is
illegal and any person who does such illegal trading shall be liable to penal action. Trading in
non-transferable specific delivery contracts in respect of regulated commodities has to be
through recognized associations just as in the case of other forward contracts. The
commodities that are notified neither under section 15 nor under section 17 of the Act are in
common parlance referred to as free commodities. For organized forward trading in such
commodities, the concerned Association or Exchange has
to get a certificate of registration under Section 14B of
the Act from the Forward Markets Commission.
• The Act defines three types of contracts i.e. ready
delivery contracts, forward contracts and options
in goods.
• Ready delivery contracts are contracts for
delivery of goods and payment of price therefore
where both the delivery and payment are completed within 11 days from the date of
the contract. Such contracts are outside the purview of the Act.
• Forward Contracts, on the other hand, are contracts for delivery of goods where
delivery or payment or both takes place after 11 days from the date of contract or
where the contract is performed by any other means as a result of which actual
tendering of goods for the payment of the full price therefore is dispensed with.
• The forward contracts are further of two types, viz., specific delivery contracts and
'other than specific delivery contracts'. The specific delivery contracts are those where
delivery of goods is mandatory though delivery takes place after a period longer than 11
days. Specific delivery contracts are essentially merchandising contracts entered into by
the parties for actual transactions in the underlying commodity and terms of contract

20. may be drawn to meet specific needs of
parties as against standardized contracts
like terms in futures contracts.
• The specific delivery contracts are again of
two sub-types viz., the transferable variety
where rights and obligations under the
contracts are capable of being transferred
and the non-transferable variety where
rights and obligations are not transferable.
• Forward contracts other than specific delivery contracts are what are generally known
as 'futures contracts' though the Act does not specifically define the futures contracts.
Such contracts can be performed either by delivery of goods and payment thereof or by
entering into offsetting contracts resulting into payment or receipt of amount based on
the difference between the rate of entering into contract and the rate of offsetting
contract. Futures contracts are usually standardized contracts where the quantity,
quality, date of maturity, place of delivery are
all standardized and the parties to the
contract only decide on the price and the
number of units to be traded. Futures
contracts are entered into through the
Commodity Exchanges.
• ‘Options’ in goods means an agreement, by
whatever name called, for the purchase or
sale of a right to buy or sell, or a right to buy
and sell, goods in future and includes a put, a
call, or a put and call in goods. Options in goods are prohibited under the present Act.
An option contract is the right (but not the obligation) to purchase or sell a certain
commodity at a pre-arranged price (the "strike price") on or before a specified date. For
this contract, the buyer or seller of the option has to pay a price to his counterpart at
the time of contracting, which is called the "premium; if the option is not used, the
premium is the maximum cost involved. When prices move unfavorably, this right will
not be exercised, and therefore, the purchase of options provides protection against
unfavorable price movements, while permitting to profit from favorable ones. Option
can give the right to buy or sell a certain amount of physical commodity, or, more
commonly, they can give the right to buy or sell a futures contract.
Working of Forward Markets Commission:

21. Forward Markets Commission is a statutory body set up under Forward Contracts (Regulation)
Act, 1952. The Commission functions under the administrative control of the Ministry of
Consumer Affairs, Food & Public Distribution, Department of Consumer Affairs, and
Government of India. The functions of the FMC are dealt with in section 4 of the Forward
Contracts (Regulation) Act, 1952 [F.C(R) Act, 1952] which is given below:
i. to advise the Central Government in respect of the recognition of, or the withdrawal of
recognition from any association or in respect of any other matter arising out of the
administration of the FC(R) Act, 1952.
ii. 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
FC(R) Act, 1952.
iii. to collect and whenever the Commission thinks it necessary, publish information
regarding the trading conditions in respect of goods to which any of the provisions of
this Act is made applicable, including information regarding supply, demand and prices
and to submit to the Central Government periodical reports on the operation of the Act,
and the working of forward markets relating to such goods.
iv. to make recommendations generally, with a view to improving the organization and the
working of forward markets.
v. 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 and
vi. to perform such other duties and exercise such other powers as may be assigned to the
Commission by or under the FC(R) Act, 1952 or as may be prescribed.
Section 4A of the FC (R) Act, 1952 deals with the powers of
the Commission which are as follows:
The Commission have all the powers of a civil court
under the Code of Civil Procedure 1908 (5 of 1908)
while trying a suit in respect of the following
matters:
● Summoning and enforcing the attendance of
any person and examining him on oath;
● Requiring the discovery and production of any documents;
● Receiving evidence on affidavits;
● Requisitioning any public record or copy thereof from any office;
● Any other matter which may be prescribed.

22. The Commission, thus, is a statutory authority entrusted with regulatory functions under the
Act. The Commission consists of a Chairman and two members. Presently, Shri. Ramesh
Abhishek, IAS is officiating as the Chairman of the Commission. Shri. D. S. Kolamkar, IES is the
Member of the Commission. It has its headquarters at Mumbai and a Regional Office at
Kolkata. Forward Markets Commission has 5 Divisions to carry out various tasks. These Divisions
were formed on 1st August 2005 in order to streamline the work on a functional basis.
i) Markets, Trading and Development (Market Division)
ii) Market Intelligence, Monitoring & Surveillance ( M & S Division )
iii) Awareness, Training and Intermediary Registration and IT
(IR Division)
iv) Investigation, Vigilance and Legal Affairs (Legal Affairs Division)
v) Commission Secretariat including HR, Administration and Finance, Grievances
(Administration Division)
Each Division is headed by a Director, assisted by Deputy Directors, Assistant Directors,
Economic Officers and Junior Research Assistants.
Regulatory Tools
1.10 Futures trading has the risk of being misused by unscrupulous elements. In order to
safeguard the market against such elements, regulatory measures as under are prescribed by
the Forward Markets Commission:-
(a) Limit on open position of an individual operator as well as member, to prevent over
trading;
(b) Limit on daily price fluctuation, to prevent abrupt upswing or downswing in prices;
(c) Additional Margins payable on outstanding purchases and sales to contain high
volatility in prices;
(d) Special margin deposits to be collected on outstanding purchases or sales, to curb
excessive concentration of position;
(e) During times of shortages, the Commission
may even take more stringent 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.
COMMISSION

23. Major Initiatives taken by the Government / Commission since liberalization of the market
• Prohibition on futures trading lifted in all the commodities on 1st April 2003.
• Three Multi-Commodity electronic Exchanges, i.e., National Multi Commodity Exchange,
Ahmedabad (10.1.2003), Multi Commodity Exchange, Mumbai (26.9.2003) and National
Commodity and Derivative Exchange, Mumbai (20.11.2003) were granted recognition as
'National' Exchanges during 2003.
• Fourth National Exchange viz. Indian Commodity Exchange Limited (ICEX) was granted
recognition on the 9th October 2009 on permanent basis.
• On 14th
May 2008, the Commission issued guidelines on setting up of new National
Multi Commodity Exchanges to further strengthen the infrastructure in Commodity
Derivative Market. Inter alia, it prescribed the framework for share holding pattern of a
new National Multi Commodity Exchang e. A
fifth National Exchanges namely, ACE
Commodity and Derivative Exchanges was
granted recognition on 10.8.2010. ACE
became a National Exchange by upgrading
itself from a Regional Exchange.
• Improvement of Regulatory Framework and
Re-structuring of Forward Markets
Commission. The F.C (R) Act enacted in 1952
does not fully meet the regulatory needs of a modern electronic market. Hence, the
regulatory framework needs to be overhauled to bring it on par with those of similar
regulators like SEBI, etc. and also to restructure and strengthen the Forward Markets
Commission to meet the regulatory challenges. Hence, a Bill proposing amendments to
F.C (R) Act has been introduced in the Parliament which, inter alia, provides for –
• Defining forward contract so as to include other commodity
derivatives, and defining of intermediaries, etc.
• Revised composition and mandate of FMC.
• Financial and administrative autonomy of the Commission so as to
provide for recruitment of its officers and its employees, management of the
affairs to vest with the Chairman, accounts and audits, and creation of an ‘FMC
General Fund’ to which all receivables except penalties will be credited. The
FMC General Fund shall be used for the management of the affairs of the
Commission and to enforce the provisions of the F.C(R) Act, 1952.
• Levying of fees on intermediaries to finance the Commission’s
activities.
Division – I
Division of
Markets,
Trading and
Developmen
t
(Market
Division )
Division – II
Market
Intelligence,
Monitoring &
Surveillance
(M& S
Division)
Division-IV
Investigation
, Vigilance
and Legal
Affairs
Division
(Legal
Affairs
Division)
Division V
Commission
Secretariat
including
HR,
Administrati
on & Finance
Grievances
(ADM
Division)
Division – III
Awareness,
Training and
Intermediary
Registration
and IT

24. • Allowing trading of options and other derivatives in goods.
• Provide for corporatization and demutualization of commodity
exchanges.
• Strengthening the penal provisions.
• Constitution of Forward Markets Appellate Tribunal.
• Provision for grant by the Central Government to meet
transitional financial needs of FMC.
Major Initiatives taken by Forward Markets Commission during 2010-11
• The Commodity Futures Market has witnessed rapid growth since the opening of
the market in 2002. National Commodity Exchanges have completed 7 years of
their operation in Commodity Derivatives market. The Commission from time to
time reviewed the market and suggested some amendments to the bye-laws of
the Exchanges; issued guidelines and directives to these Exchanges for better
governance, transparency and investor confidence.
• Notified ‘Iron Ore’ u/s 15 of the Forward
Contracts (Regulation) Act, 1952 vide
notification dated 29th
September, 2010.
• The Government amended the guidelines
on the equity structure of Multi
Commodity Exchanges to be adopted
after completing five years of their
operation. With this amendment, any
single Stock Exchange along with the
persons acting in concert shall not hold
more than 5% of the subscribed and paid
up equity capital of the said National Exchange.
• Amended guidelines for granting recognition to new Commodity Exchanges
under the Forward Contracts (Regulation) Act, 1952 putting restriction on
sharholding of single stock exchange to 5% of the subscribed and paid up equity
capital of national commodity exchange. The cumulative shareholding of Stock
Exchanges in the relevant National Commodity Exchange shall not be more than
10%.
• Issued guidelines for members of the Commodity Exchanges on 21st
June 2010
for setting up Joint Ventures/ wholly owned subsidiaries abroad.
• In order to streamline regulation of intermediaries, the Commission issued
directives to the Exchanges to discontinue the system of sub-brokers and switch
over to the system of Authorised Person (AP), for giving market access to clients
trading in these markets through APs.
• To ensure market and financial integrity, the Commission issued directives to the
National Exchanges not to allow execution of trades without uploading the
Unique Client Code (UCC) details.

25. • Issued revised directives to the exchanges exempting delivery margins for the
market participants who have moved their goods to the Exchange warehouse.
• Issued revised directives to the National Exchanges for fixing the price limit on
the first day of the contract.
• Issued Directives on fixing Price limit on the first day of new contracts.
• Issued guidelines on fixation of Due Date Rates.
• On the recommendations of the Forward Markets Commission, the Ministry of
Consumer Affairs, Food and Public Distribution, Government of India, vide
Notification dated 10th August 2010, granted recognition to the Ahmedabad
Commodity Exchange, now rechristened as ACE Derivatives & Commodity
Exchange Limited (ACE) as a Nationwide Multi Commodity Exchange on
permanent basis in respect of forward contracts in all the commodities to which
Section 15 of the Forward Contracts (Regulation) Act, is applicable. With the
grant of recognition to this exchange the total number of national exchanges has
become Five. These exchanges can offer futures contracts in all the commodities
subject to the approval of the Commission. Besides these, 16 other exchanges
generally referred to as
Regional Exchanges, are
recognized for futures trading
in specific commodities.
• The Central Government
granted in-principle approval to
the Universal Commodity
Exchange Limited (UCX),
Mumbai, on 25th August 2010
as a Nationwide Multi
Commodity Exchange, subject
to the fulfilling of commitments
made / undertakings given to the Commission within the stipulated time.
Collaboration with International Regulators:
In order to strengthen co-operation with international regulators, the FMC took 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) and the China Securities Regulatory Commission (CSRC). The
Commission, in January 2010, had signed MOU with the Commissao de Valores Mobiliarios –
CVM (Securities and Exchange Commission of Brazil), Brazil.

26. Developmental Initiatives taken by Forward Markets Commission
The Commission has taken the following steps in recent years to ensure that the markets are
broad based and its benefits reach all the stakeholders of the Commodity Markets.
• Increasing the awareness level of different categories of stakeholders especially
farmers to make them aware of the existence of as well as benefits from the
futures markets, sensitization of policy makers and capacity building in the
commodity sector.
• Working on various models of “Aggregation” to enable the farmers to take the
benefit of actual hedging on the Commodity Exchanges to manage their price
risks.
• Working on a project of Price Dissemination through APMCs and other centers to
empower the farmers with price information.
• Meeting with various stakeholders to understand their difficulties, problems and
felt needs so as to align/ design policies to feasible/ desirable objectives.
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 by the
Commission under the Forward Contracts (Regulation) Act, 1952.
The commodities traded at these exchanges comprise the following:
• Edible oilseeds complexes like Groundnut, Mustard seed, Cottonseed, Sunflower, Rice
bran oil, Soy oil etc.
• Food grains – Wheat, Gram, Dals, Bajra, Maize etc.
• Metals – Gold, Silver, Copper, Zinc etc.
• Spices – Turmeric, Pepper, Jeera etc.
• Fibres – Cotton, Jute etc.
• Others – Gur, Rubber, Natural Gas, Crude Oil etc.
• Out of 21 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 2011-12. 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 2011-12 was 14,025.74 lakh MT at a value of Rs.181,26,103.78
Crores.The total of deliveries of all commodities on Commodity Exchange platform is
8,88,250 MT during the year 2010-11.

27. • The different intermediaries and clients registered at these recognized national
exchanges are,
• Members - 4081,
• Other intermediary - 234,
• Warehouse service provider / warehouse - 35 and
• Clients - 33, 75,123 as on 31.1.2012.

28. Challenges faced by Commodity Markets currently
Despite a long history of commodity markets, the Indian commodity markets remained
underdeveloped, partially due to intermediate ban on commodity trading and more due to the
policy interventions by the government. Being agriculture-based economy, commodity markets
play a vital role in the economic development of the country. While the agricultural
liberalization has paved way for commodity trading, India has to still go a long way in achieving
the benefits of commodity markets. Towards the development of the commodity markets, it is
important to understand the growth constraints and address these issues in the right
perspective.
Commodity markets play an important role in the development of an economy, especially those
economies that are dependent to a large extent on the agriculture sector. Owing to its
dependence on agriculture sector, Indian economy to a large extent would benefit from
commodity markets. Despite the fact, that Indian economy has witnessed robust growth in the
last decade on account of services sector; agricultural sector still remains the backbone of
Indian economy. Roughly around 60% of the Indian population is dependent on agriculture.
Vibrant commodity markets in India will not only benefit the farmers but also the
manufacturing sector that is dependent on it to gain significant price gains.
The following are the challenges faced by Indian Commodity Markets currently. These are
explained and also the conclusion is provided at the end of it:
• Legal challenges
• Regulatory challenges
• Infrastructural challenges
• Awareness among investors and producers
• Other challenges regarding trading
Legal Challenges
Right from the beginning of commodity markets there has been several bottlenecks regarding
the products being in the essential commodities list because of which they often get banned.
Also there were times when because of hoarding and black marketing there were famines for a
very long time, so the market needed an efficient regulator which lead to the formation of FMC.
Moreover, many efficient institutions like banks and mutual funds are not allowed to
participate in commodity markets. Also weather and rainfall indexes are also banned from
trading on the commodity exchanges because of the clauses of the Banking regulations act,
which defines that anything that could be obtained in physical form only can be traded at the
exchanges. These inefficiencies must be eradicated by amending these cats. Several
amendments have been introduced in these acts and also accepted by the government but only
some of them have been passed. Rests are in the queue. Let’s have a look at those
amendments:

29. Forwards contracts (Regulation) Amendment Act, 2010
Under the existing FCRA, hedging products like options, indices and weather derivatives, which
can be tailored to the risk appetite of hedgers, are currently not permissible. This leaves less
scope for innovation. On the regulatory front, the current law leaves the market regulator,
FMC, dependent on the government — financially and for day-to-day operations. This lack of
autonomy does not render enough teeth to the regulator of the commodity derivatives markets
— a phenomenon quite unlike than that of the regulators of the equity markets (Sebi) or
insurance (IRDA).
As is evident in the rapid growth and overall size of the commodity derivatives market in India,
participants use sophisticated trading systems and world-class technology. In this context, the
regulatory system too needs a major upgrade to keep up with its regulated entities. Thus, a
stronger and autonomous regulatory body is required to properly to develop strong monitoring
systems to oversee the regulated entities on a real-time basis. FMC is short on human and
technological resources, and needs to ramp up its capacity. It needs powers and autonomy
equivalent to its capital market counterpart, the Sebi, to fulfill this role.
Such empowerment of the regulator is provided for in the FCRA Amendment Bill, placing
powers and resources at the disposal of FMC. The FCRA Amendment Bill was first placed on the
floor of Parliament in 2006.
The need for regulatory empowerment and new derivative products has increased manifold
since then. Thus, there is an immediate need for the government to ensure passage of the Bill.
The FMC needs to operate under a regulatory framework that enables it to:
 Protect market integrity.
 To preserve the economic functions of the commodity markets to shift commercial price
risk and aid in price discovery.
 Ensure market fairness.
 Ensure financial safety and soundness by guarding against systemic risk.
 key component required for the development of commodities market in India is the
infrastructure. Though there are number of exchanges in India, they lack in
infrastructure exception to a few large exchanges like National Commodity Derivatives
Exchange (NCDEX) and Multi Commodity Exchange (MCX). Infrastructure requirements
like warehousing facilities, clearing house and modern trading ring are absent in
majority of the exchanges. As a result, majority of the exchanges have to depend on a
few commodities and consequently, the turnover is low.

30. The Standing Committee on Food, Consumer Affairs and Public Distribution, chaired by Vilas
Muttemwar, had on December 22 last year, submitted its report on FCRA Bill, which was
introduced in the Lok Sabha in December 2010.
Objectives of the FC(R) Amendment Bill 2010
The main objectives of the FC(R) Amendment Bill 2010 are as follows:
I. Strengthening of the regulatory framework including enforcement and penal provisions for
the commodity derivatives markets.
II. Functional and Financial Autonomy for the market regulator, the Forward Markets
Commission (FMC) to better regulate the commodity derivatives market.
III. Permitting new products, viz., options in the commodity derivative market which are more
suitable for participants like farmers to cover their price-risks.
G. Important Amendments Proposed to the FC(R) Act 1952:
The Forward Contracts (Regulation) Amendment Bill, 2010, inter alia, seeks to make
amendments to the Forward Contracts (Regulation) Act, 1952, in respect of the following:–
(a) to redefine the expression ―forward contract so as to include therein ―commodity
derivative and also to define new expressions such as ―commodity derivative,
―corporatization, ―demutualization and ―intermediary which have been used in the Bill;
(b) To increase the maximum number of members of the Forward Markets Commission from
four, as at present, to nine out of which at least three would be whole-time members besides
the Chairman;
(c) To confer power upon the Commission to levy fees;
(d) to provide for constitution of a fund called the ―Forward Markets Commission General
Fund‖ to which all grants, fees and all sums received by the Commission except penalty shall be
credited, and apply the funds for meeting its expenses;
(e) To confer power upon the Central Government to issue directions to the Commission on
matters of policy and to supersede it in certain extreme circumstances;
(f) To make provisions for corporatization and demutualization of recognized associations in
accordance with the scheme to be approved by the Commission;
(g) To make provisions for registration of members and intermediaries;
(h) To allow trading in options in goods and commodity derivatives;

31. (i) To make provision for investigation, enforcement and penalty in case of contravention of the
provisions of the Act;
(j) To make provision for transfer of the duties and functions of a clearing house of an exchange
to a clearing corporation;
(k) To make provisions for exemption from payment of tax on wealth, income and profits or
gains of the Commission; and
(l) to make provision for appeals from the orders of the Forward Markets Commission and
Adjudicating Officer to the Securities Appellate Tribunal for the purposes of the Act and from
the order of the Securities Appellate Tribunal under the Forward Contracts (Regulation) Act,
1952 to the Supreme Court;
(m) To make consequential changes in the Securities and Exchange Board of India Act, 1992.
Essential Commodities Act, 1955
The Essential Commodities Act, 1955 was enacted to ensure easy availability of essential
commodities to the consumers and to protect them from exploitation by unscrupulous traders.
The Act provides for regulation and control of production, distribution and pricing of
commodities, which are declared as essential for maintaining or increasing supplies or for
securing their equitable distribution and availability at fair prices. Most of the powers under the
Act have been delegated to the State Governments.
Using the powers under the Act, various Ministries/Departments of the Central
Governments have issued Control Orders for regulating production/distribution/quality
aspects/movement etc. pertaining to the commodities which are essential and administered by
them.
The Essential Commodities Act is being implemented by the State Governments/UT
Administrations by availing of the delegated powers under the Act. The State Governments/UT
Administrations have issued various Control Orders to regulate various aspects of trading in
Essential Commodities such as food grains, edible oils, pulses kerosene, sugar etc. The Central
Government regularly monitors the action taken by State Governments/UT Administrations to
implement the provisions of the Essential Commodities Act, 1955. The items declared as
essential commodities under the Essential Commodities Act, 1955 are reviewed from time to
time in the light of liberalized economic policies in consultation with the
Ministries/Departments administering the essential commodities and particularly with regard
to their production, demand, and supply. From 15 February 2002, the Government removed 11
classes of commodities in full and one in part from the list of essential commodities declared
earlier. In order to accelerate economic growth and to benefit consumers, two more

32. commodities have been deleted from the list from 31 March 2004. At present the list of
essential commodities contains 15 items.
List of commodities declared essential under the Essential Commodities Act, 1955:
Declared under Clause (a) of Section 2 of the Act
1. Cattle fodder, including oilcakes and other concentrates.
2. Coal, including coke and other derivatives.
3. Component parts and accessories of automobiles.
4. Cotton and woolen textiles.
5. Drugs.
6. Foodstuffs, including edible oilseeds and oils.
7. Iron and Steel, including manufactured products of Iron & Steel. 8. Paper, including
newsprint, paperboard and strawboard.
9. Petroleum and Petroleum products.
10 Raw Cotton either ginned or unginned and cotton seed.
11. Raw Jute.
12. Jute textiles.
13. Fertilizer, whether inorganic, organic or mixed.
14. Yarn made wholly from cotton.
15. (i) seeds of food crops and seeds of fruits and vegetables,
(ii) seeds of cattle fodder and
(iii) jute seeds
In the context of liberalization of Indian economy, it was decided that the Essential
Commodities Act, 1944 might continue as umbrella legislation for the Centre and the
States to use when warranted allowing, however, a progressive dismantling of the
control and restrictions. Accordingly, the Central Government issued the Removal of
Licensing requirements, Stock limits and Movement Restrictions on Specified Foodstuffs
Order, 2002 on 15 February 2002 under the Essential Commodities Act, 1955 allowing
dealers to freely buy, stock, sell, transport, distribute, dispose, etc., any quantity in
respect of wheat, paddy/rice, coarse grains, sugar, edible oilseeds and edible oils
without requiring any license or permit therefore under any order issued under the Act. In
2006, considering the shortage of wheat, this order of removal of licensing requirements,
stock limits and movement restrictions has been kept in abeyance for wheat and pulses
for 6 months starting from 29th August 2006.

33. ESSENTIAL COMMODITIES ACT, 1980
In order to prevent unethical trade practices like hoarding and black-marketing etc., the
Prevention of Black-marketing of Supplies of Essential Commodities, Act, 1980 is being
Implemented by the State Governments to detain persons whose activities are found to be
prejudicial to the maintenance of supplies of commodities essential to the community.
Banking Regulations Act
Amendment in Banking Regulations Act. According to the Banking Regulations Act, banks are
not allowed to trade in the commodity derivatives. But contradictorily, banks have a big role to
play in the development of the commodity market. As they have exposure to agriculture, they
would be better off in case they were able to hedge their positions. Since banks have a strong
rural reach and financial expertise, they can become aggregators and take an aggregative
position on behalf of farmers.
There is stark contrast between capital markets and commodity markets. In the commodity
market, statutes today keep out a huge section of the financial players, like, banks, insurance
companies, mutual funds, and pension funds. There is therefore an urgent need to change the
regulations relating to mutual fund, insurance and pension funds. Hedge funds should also be
allowed in the commodity futures market with the same tax benefits that the mutual fund
industry has in the securities market. Also banks are quintessential financial intermediaries and
derivatives can play an important part in the risk-management strategies employed by banks
and financial institutions and their customers. The Banking Regulation Act prohibits banks from
dealing in goods. RBI has interpreted this to imply that banks are prohibited from dealing in
derivatives on goods. This prevents banks from fully engaging in the agricultural economy. For
example, a bank could give a loan to a farmer, and hedge itself against price fluctuations, so as
to deliver a loan with a variable rate of interest - whereby lower interest rates are charged in
the event that output prices are higher. However, such sophisticated product development is
prohibited by the existing regulatory regime. In the spirit of convergence, we need to find
solutions through which the banking system can embrace commodity derivatives exactly as is
the case with derivatives on currency, equity or debt. Also, market making is necessary to
ensure initial liquidity. Banks and financial institutions are historically considered stable
institutions to provide market-making services, all over the world. In India, when NSE launched
these in 2000, for nearly two years, ICICI Ltd acted as the market maker and provided up to 60
per cent of the volumes on both sell and buy sides; once the market5s took off in 2002, ICICI
Ltd, scaled down its support. A similar role was played in corporate debt paper market. Market
makers add to depth, liquidity and stability of markets. Of course, there is a need to develop

34. supervisory guidance to ensure that these activities are conducted safely and soundly. The RBI
could assemble a talented staff with outstanding expertise, who understand this business and
take a risk-focused approach to applying that guidance to the banks they supervise. Banks could
be required to demonstrate that they have established appropriate risk measurement and
management processes – including board supervision, managerial and staff expertise,
comprehensive policies and operating procedures, risk identification and measurement, and
management information systems as well as an effective risk control function. Currently
Banking Regulation Act does not permit banks to participate in the commodity markets.
The restrictions on participation of banking institutions in commodities markets, at least for
hedging purpose, for a start, should be removed by amending section 6 of the Banking
Regulation Act.
Even though the commodity derivatives market has made good progress in the last few years,
the real issues facing the future of the market have not been resolved. Agreed, the number of
commodities allowed for derivative trading have increased, the volume and the value of
business has zoomed, but the objectives of setting up commodity derivative exchanges may not
be achieved and the growth rates witnessed may not be sustainable unless these real issues are
sorted out as soon as possible. Some of the main unresolved issues are discussed below.
Regulatory Challenges:
The Regulator
As the market activity pick-up and the volumes rise, the market will definitely need a strong and
independent regular; similar to the Securities and Exchange Board of India (SEBI) that regulates
the securities markets. Unlike SEBI which is an independent body, the Forwards Markets
Commission (FMC) is under the Department of Consumer Affairs (Ministry of Consumer Affairs,
Food and Public Distribution) and depends on it for funds. It is imperative that the Government
should grant more powers to the FMC to ensure an orderly development of the commodity
markets. The SEBI and FMC also need to work closely with each other due to the inter-
relationship between the two markets.
Infrastructural Challenges:
(a) The Warehousing and Standardization:
For commodity derivatives market to work efficiently, it is necessary to have a sophisticated,
cost-effective, reliable and convenient warehousing system in the country. The Habibullah
(2003) task force admitted, “A sophisticated warehousing industry has yet to come about”.
Further, independent labs or quality testing centers should be set up in each region to certify
the quality, grade and quantity of commodities so that they are appropriately standardized and
there are no shocks waiting for the ultimate buyer who takes the physical delivery. Warehouses
also need to be conveniently located.
Central Warehousing Corporation of India (CWC: www.fieo.com) is operating 500Warehouses
across the country with a storage capacity of 10.4 million tonnes. This is obviously not adequate

35. for a vast country. To resolve the problem, a Gramin Bhandaran Yojana (Rural Warehousing
Plan) has been introduced to construct new and expand the existing rural godowns. Large scale
privatization of state warehouses is also being examined.iii.
(b) Cash versus Physical Settlement:
It is probably due to the inefficiencies in the present warehousing system that only about 1% to
5% of the total commodity derivatives trade in the country is settled in physical delivery.
Therefore the warehousing problem obviously has to be handled on a war footing, as a good
delivery system is the backbone of any commodity trade. A particularly difficult problem in cash
settlement of commodity derivative contracts is that at present, under the Forward Contracts
(Regulation) Act 1952, cash settlement of outstanding contracts at maturity is not allowed. In
other words, all outstanding contracts at maturity should be settled in physical delivery. To
avoid this, participants square off their positions before maturity. So, in practice, most
contracts are settled in cash but before maturity. There is a need to modify the law to bring it
closer to the widespread practice and save the participants from unnecessary hassles.
(c)Lack of Economy of Scale:
There are too many (3 national level and 21regional) commodity exchanges. Though over 80
commodities are allowed for derivatives trading, in practice derivatives are popular for only a
few commodities. Again, most of the trade takes place only on a few exchanges. All this splits
volumes and makes some exchanges unviable. This problem can possibly be addressed by
consolidating some exchanges. Also, the question of convergence of securities and
commodities derivatives markets has been debated for a long time now. The Government of
India has announced its intention to integrate the two markets. It is felt that convergence of
these derivative markets would bring in economies of scale and scope without having to
duplicate the efforts, thereby giving a boost to the growth of commodity derivatives market. It
would also help in resolving some of the issues concerning regulation of the derivative markets.
However, this would necessitate complete coordination among various regulating authorities
such as Reserve Bank of India, Forward Markets commission, the Securities and Exchange Board
of India, and the Department of Company affairsetc.vi.
(d)Tax and Legal bottlenecks:
There are at present restrictions on the movement of certain goods from one state to another.
These need to be removed so that a truly national market could develop for commodities and
derivatives. Also, regulatory changes are required to bring about uniformity in octroi and sales
taxes etc. VAT has been introduced in the country in 2005, but has not yet been uniformly
implemented by all states.
With the gradual withdrawal of the Govt. from various sectors in the post liberalization era, the
need has been left that various operators in the commodities market be provided with a
mechanism to hedge and transfer their risk. India’s obligation under WTO to open agriculture
sector to world trade require future trade in a wide variety of primary commodities and their

36. product to enable divers market functionaries to cope with the price volatility prevailing n the
world markets. Following are some of applications, which can utilize the power of the
commodity market and create a win-win situation for all the involved parties.
Awareness among investors and producers:
Creation of Awareness:
Creation of awareness amongst the farmers, related bodies and organizations including the
ones which could be potential hedgers / aggregators and other market constituents has been
one of the major activities of the Commission. During 2010-11, 829 awareness programmes
were organized for various stakeholders of the commodity futures market. Of this, 486
programmes were held exclusively for farmers. In the previous year, (2009-10) 515 awareness
programmes were held, of which 423 were exclusively for the farmers. The programmes were
conducted at different locations all over the country. These awareness programmes were
attended by different category of market participants ranging from farmers, traders and
members of Commodity exchanges to bankers, cooperative personnel staff and students of
Universities, Government functionaries, warehouse professionals, agricultural extension
workers, makers etc. These awareness programmes have resulted in creating awareness among
the various constituents about commodity futures trading and the benefits thereof. The
programmes were organized in association with various organizations/universities having
connectivity with the farmers, viz. agricultural universities, NABCONS , farmer cooperatives and
federations, GSKs, National & Regional Base Commodity Exchanges, etc.
Other challenges regarding trading in Commodity Markets:
(a) Size of contracts too big for small traders and producers:
Towards the growth of any market, the trading conditions or the terms and conditions of
contracts play a crucial role. The contracts should be market friendly in terms of attracting both
the big and small traders alike. In majority of the contract specifications, it was found that the
size is too big for small traders and producers to trade. Unless such finer aspects are dealt with
proper attention at the regulatory level and the exchange level, attracting small traders and
farmers into commodity futures trading becomes impossible. Especially in a country like India,
where corporate farming is absent and predominant section of the farmers own small
agricultural lands, meeting the specifications of the contract becomes difficult. Such farmers

37. prefer spot markets rather than commodity markets for trading. Even the small traders refrain
from trading owing to the capital constraints.
(b)Mutual funds and FIIs should be allowed to trade on exchanges
Indian commodity market players are seeking entry of banks, funds and foreign brokers in the
futures market in the forthcoming budget, but analysts fear spiralling food prices may hinder
policy moves. Banks and fund's entry will push volumes up exponentially giving them increased
opportunity as an asset class.India which opened commodity futures trade seven years ago has
not allowed foreigners, banks and funds to trade. It also doesn't allow options and indices
trading which are volume generators across the world's bourses.
(c) Lack of economies of scale
There are too many (3 national level and 21 regional) commodity exchanges. Though over 80
commodities are allowed for derivatives trading, in practice derivatives are popular for only a
few commodities. Again, most of the trade takes place only on a few exchanges. All this splits
volumes and makes some exchanges unviable. This problem can possibly be addressed by
consolidating some exchanges. Also, the question of convergence of securities and
commodities derivatives markets has been debated for a long time now. The Government of
India has announced its intention to integrate the two markets. It is felt that convergence of
these derivative markets would bring in economies of scale and scope without having to
duplicate the efforts, thereby giving a boost to the growth of commodity derivatives market. It
would also help in resolving some of the issues concerning regulation of the derivative
markets. However, this would necessitate complete coordination among various regulating
authorities such as Reserve Bank of India, Forward Markets commission, the Securities and
Exchange Board of India, and the Department of Company affairs etc.
(d) Issues on warehouse receipts
Currently, WR is not an instrument, against which banks lend comfortably. There are number
of risks associated with it. Some of them are like fraud WR, credit risk with the warehouse
owner, and financial strength of the warehouse, quality of the warehouse and of course the
credibility of the goods valuation. Closely analyzing the problem, NCDEX in particular has
taken some initiatives to bring banks closer to the farmer in the field of structured finance.
Farmers can get finance through a pledged dematerialized warehouse receipt of an accredited
warehouse of the Exchange. This instrument is pledged by borrowers against the loan. Since
they sell forward the underlying on the Exchange's platform, the value of the collateral is fixed
in a futuristic perspective, which mitigates the default risk for the banks. This value addition
can boost up agri-lending, thereby strengthening the agricultural development process. At the
same time, it will mean a better business for the banks too which are lending around Rs 9000

38. cr as lending against commodities. The potential can be seen to be in the region of at least Rs
150,000 cr. But there are certain issues which need to be resolved. If dematerialized WRs
issued by the commodity exchanges are recognized by the Depository Act, it will give
credibility to the receipt and will provide an ease for banks to lend against WRs. At the same
time, WR should be allowed to become negotiable under the Negotiable Instrument Act.
(e) Cash versus physical settlement
It is probably due to the inefficiencies in the present warehousing system that only about 1% to
5% of the total commodity derivatives trade in the country are settled in physical delivery.
Therefore the warehousing problem obviously has to be handled on a war footing, as a good
delivery system is the backbone of any commodity trade. A particularly difficult problem in cash
settlement of commodity derivative contracts is that at present, under the Forward Contracts
(Regulation) Act 1952, cash settlement of outstanding contracts at maturity is not allowed. In
other words, all outstanding contracts at maturity should be settled in physical delivery. To
avoid this, participants square off their positions before maturity. So, in practice, most
contracts are settled in cash but before maturity. There is a need to modify the law to bring it
closer to the widespread practice and save the participants from unnecessary hassles.
(f)The Warehousing and Standardization:
For commodity derivatives market to work efficiently, it is necessary to have a sophisticated,
cost-effective, reliable and convenient warehousing system in the country. The Habibullah
(2003) task force admitted, “A sophisticated warehousing industry has yet to come about”.
Further, independent labs or quality testing centers should be set up in each region to certify
the quality, grade and quantity of commodities so that they are appropriately standardized and
there are no shocks waiting for the ultimate buyer who takes the physical delivery. Warehouses
also need to be conveniently located. Central Warehousing Corporation of India (CWC:
www.fieo.com) is operating 500 Warehouses across the country with a storage capacity of 10.4
million tonnes. This is obviously not adequate for a vast country. To resolve the problem, a
Gramin Bhandaran Yojana (Rural Warehousing Plan) has been introduced to construct new and
expand the existing rural godowns. Large scale privatization of state warehouses is also being
examined.
(g)Commodity Options:
Trading in commodity options contracts has been banned since 1952. The market for
commodity derivatives cannot be called complete without the presence of this important
derivative. Both futures and options are necessary for the healthy growth of the market. While
futures contracts help a participant (say a farmer) to hedge against downside price movements,
it does not allow him to reap the benefits of an increase in prices. No doubt there is an
immediate need to bring about the necessary legal and regulatory changes to introduce
commodity options trading in the country. The matter is said to be under the active
consideration of the Government and the options trading may be introduced in the near future.

39. There are at present restrictions on the movement of certain goods from one state to another.
These need to be removed so that a truly national market could develop for commodities and
derivatives. Also, regulatory changes are required to bring about uniformity in octroi and sales
taxes etc. VAT has been introduced in the country in 2005, but has not yet been uniformly
implemented by all states.
Conclusion
India is one of the top producers of a large number of commodities, and also has a long history
of trading in commodities and related derivatives. The commodities derivatives market has
seen ups and downs, but seem to have finally arrived now. The market has made enormous
progress 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.
The management of price risk is going to assume even greater importance in future with the
promotion of free trade and removal of trade barriers in the world. All this augurs well for the
commodities.