Highlights of the Bill

  • The Forward Contracts (Regulation) Amendment Bill, 2006 amends the Forward Contracts (Regulation) Act, 1952 to transform the role of the Forward Markets Commission (FMC) from a government department to an independent regulator.
  • The powers and responsibilities of FMC with regard to regulating commodity forward and derivatives market is similar to that of SEBI in the securities markets.
  • The main objective of this Bill is to permit and regulate financial instruments that enable buyers and sellers of commodities to effectively manage risk from price fluctuation.
  • Commodity derivatives are contracts that derive their value from differences in prices of goods or services, activities or events. The Bill permits trading in these derivatives.
  • Options on commodities were explicitly prohibited earlier. This Bill allows options trading.
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    The Bill requires all exchanges to be set up as corporations and separates trading rights from ownership in an exchange.

Key Issues and Analysis

  • International experience shows that futures markets tend to reduce price volatility in the underlying cash markets.
  • This Bill proposes separate regulators and exchanges for securities markets and commodity markets. This is different from the structure in most countries.
  • While FMC will regulate all commodity derivatives, the markets for the underlying goods will be regulated by state governments. This could lead to divergence in regulation.
  • Though the trading system for commodity derivatives uses depositories established under the Depositories Act, 1996, these entities are regulated only by SEBI, and not by FMC.
  • The lack of Value Added Tax facility for inter-state sales, and limitations of Cenvat facility could deter delivery-based trading in commodity derivatives.
  • The penalties applicable for various offences are significantly lower than that under the SEBI Act, 1992 for similar offences in the securities market.

Read the complete analysis here

 

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