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A derivative contract is an enforceable agreement whose value is derived from the value of an underlying asset and the underlying asset can be a commodity, precious metal, currency, bond, stock, or, indices of commodities, stocks etc. There are four most common examples of derivative instruments are forwards, futures, options and swaps/spreads.1The exchange is based on derivatives in India which was a kind of forward trading in securities in the form of call options , put options and straddles etc. The Securities Contracts Regulation Act, 1956 was enacted to prevent undesirable speculation in securities. Through a notification was issued on June 1969 in exercise of the powers conferred under Section 16 of the SCRA the contracts for clearing commonly known as forward trading were banned by the Central Government. This led to a decline of traded volumes on stock markets, the stock exchange, Mumbai which were evolved in 1972 an informal system of forward trading which allowed carry forward between two settlement periods and which resulted in substantial increase in the turnover of the exchange due to prohibition of forward trading in securities. In addition, there were payment crises from time to time and frequent closure of the market. Section 10 of the SCRA amended the bye-laws of stock exchanges to facilitate performance of contracts in specified securities during December 1982 - January 1983 where the government reviewed the position and in exercise of its powers. With this policy the stock exchanges at Bombay, Calcutta and Ahmedabad introduced a system of trading in specified shares with carry forward facility after amending their bye-laws and regulations2. The Joint Parliamentary Committee on Irregularities in Securities and Banking Transactions, 1992 discussed the issue of carry forward of deals and observed that this system was not functioning. There were lot of irregularities in the stock exchanges in the form of nonenforcement of margins, non-reporting of transactions and illegal trading outside the stock exchange. Therefore, SEBI was of the view that carry forward transactions should be disallowed and transactions conducted strictly on delivery basis and trading in futures and options should be permitted in separate markets in order to overcome the irregularities.. As a

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Available at http://www.fmc.gov.in/htmldocs/faq/faq1.HTML#1,last visited on 23rd November 2012. Available at http://kannanpersonal.com/content/derivatives/badla.html, last visited on 23rd November 2012.

result, SEBI issued a directive in December 1993 prohibiting the carry forward of transactions3. Legal Aspects of Derivatives Trading in India Later this, it was reviewed by SEBI and on the recommendations of the G.S. Patel

Committee concern was made to review the system and the carry forward transactions in securities were permitted in 1995 in relation to certain safeguards. By the review of J.R. Varma Committee Report in 1997 and the system was further modified subject to a number of safeguards such as segregation of carry forward transactions at the time of execution of trade, daily margin of 10 percent, 50 percent of which would be collected upfront, overall carry forward limit of Rs.20 crore per broker per settlement and other prudential safeguards4. Whereas, repo transactions in government securities and public sector bonds were developed during 1980s. The discussion of JPC of 1992 depicted that some banks were found to have entered into transactions in violation of RBI circulars. RBI banned all repos except treasury bills since June 1992. The Special Court declared such transactions null and void in December 1993 as being violative of the provisions of SCRA and Banking Regulation Act, 1949. The Supreme Court decided in March 1997 that the ready forward contracts (Repo) were severable into two parts, viz. ready lag and the forward lag. The ready lag of transactions having been completed, the forward lag, which alone was illegal, had to be ignored5. Such as banks, co-operative banks and other RBI registered dealers were permitted to undertake ready forward transactions in government securities through amendment notifications from time to time during second half of 1990s as repo transactions violated the government notification of June 1969 under SCRA. The objective was to enhance liquidity market for government securities and to further develop it. There were problems with such kind of facility such as no standard documentation, master agreement, non-use of clearing houses to undertake counter party risk and opacity of the regulatory validity in view of the pronouncements of the Special Court and the Supreme Court. As a result, the repo market was neither deep nor liquid.

3 4

Available at http://www.iief.com/Research/CHAP14.PDF, last visited on 23rd November 2012. Available at http://www.cics.northwestern.edu/documents/nilr/v2n1MishraBhatnagar.pdf, last visited on 23rd November 2012. 5 Supra note 3.

There was a notification which prohibited forward trading, while some form of forward trading such as carry forward/ ready forward was prevalent. There was need to develop derivatives market the repeal of 1969 notification was considered desirable not only to remove the existing anomaly, but also as a measure of market reforms. The issue was that the notification derivatives markets in India were to be repealed only after amendment of the SCRA so that the powers could be appropriately delegated to RBI in addition to SEBI. There were complex regulatory issues relating to repeal of the said notification and delegation of powers to RBI and SEBI. The issue was what powers in respect of which transactions in which securities should be delegated to RBI, since SEBI was already exercising delegated powers under SCRA, irrespective of type of transactions/securities. The Securities Laws (Amendment) Bill, 1999 was passed before the legislation sufficient ground work was done as would be discussed later by the Parliament permitting a legal framework for derivatives trading in India in December1999. Moreover, the Central Government lifted a three decade old prohibition on forward trading in securities on 1st March 2000. In addition, in order to promote an orderly development of the market, the Government issued another notification on 1st March 2000 delineating the area of responsibility between RBI and SEBI. In terms of this notification, the contracts for sale and purchase of Government securities, gold related securities, money market securities and securities derived from these securities and ready forward contracts in debt securities were to be regulated by RBI. Thereafter, such contracts if executed on stock exchanges would be regulated by SEBI in a manner that this consistent with the guidelines issued by RBI. On the same date, both RBI and SEBI issued notifications specifying the regulatory framework in their respective areas. Then after this RBIs notification while retaining the general prohibition on forward trading, permitted ready forward contracts by the specified entities subject to certain conditions, such as, maintenance of subsidiary ledger account and a current account and such other conditions, as may be prescribed. Subsequently, SEBI also retained the general prohibition on forward trading but permitted derivatives contracts, as permissible under the securities law. Since both the regulators have been made responsible for regulation of debt markets, of course, with some demarcation, issues of coordination become important to prevent the emergence of regulatory gaps or overlaps6.

Available at http://www.oocities.org/kstability/content/derivatives/history.html, last visited on 24th November 2012.

FORWARD CONTRACT A forward contract is an agreement which is between two parties who specify today the terms price, underlying asset, quantity, etc. of an exchange that is to take place at a known future date. Forward contracts can be traced to Greek and Roman times, and may have occurred earlier still; they have been widely traded in Europe since the Middle Ages. 7It is contract wherein two parties agree to deliver a certain amount of foreign exchange at rate previously agreed upon, either at a fixed future date or during future period in context of forward exchange contract8. Accordance with finance, a forward contract or simply a forward is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed upon today. This is in contrast to a spot contract where an agreement to buy or sell an asset today. The party agreeing to buy the underlying asset in the future assumes a long position, and the party agreeing to sell the asset in the future assumes a short position. So, the price agreed upon is called the delivery price and which is equal to the forward price at the time the contract is entered into. The forward price of such a contract is commonly contrasted with the spot price, which is the price at which the asset changes hands on the spot date. The difference between the spot and the forward price is the forward premium or forward discount, generally considered in the form of a profit, or loss, by the purchasing party. Forwards like other derivative securities can be used to hedge risk such as currency or exchange rate risk as a means of speculation or to allow a party to take advantage of a quality of the underlying instrument which is time-sensitive. Therefore, forward contracts are very similar to futures contracts except when they are not exchange-traded or defined on standardized assets. Forwards also concern to have no interim partial settlements or true-ups in margin requirements like futures such that the parties do not exchange additional property securing the party at gain and the entire unrealized gain or loss builds up while the contract is open. However, being traded over the counter, forward contracts specification can be customized and it may also include mark-to-market and daily margining. Hence, a forward contract arrangement might call for the loss party to pledge collateral or additional collateral to better secure the party at gain9.

Available at http://www.dictionaryofeconomics.com/article?id=pde2009_H000192 ,last visited on 24th November 2012. 8 H. LTannan, Tannans Banking Law and Practice in India ,Wadhwa Nagpur, New Delhi,,21st ed. ,2005,p.907. 9 Available at http://en.wikipedia.org/wiki/Forward_contract, last visited on 24th November 2012.

Difference between forward contract and future contract and other contracts Forward contracts are primarily merchandising vehicles, both parties expect to make or take delivery of the commodity on the agreed upon date. It is difficult to get out of a forward contract unless you can get your counterparty to agree to extinguish the contract. To enter into a forward contract, so it is also necessary to find someone who wants to buy exactly what you want to sell when and where you want to sell it. As such, forward contracts are commonly used as merchandising vehicles in a variety of commodity and currency markets; however, forward contracts lack certain features that make futures contracts especially useful for hedging. Futures contracts are very similar to forward contracts, but futures contracts have certain features that make them more useful for hedging and less useful for merchandising than forward contracts. These include the ability to extinguish positions through offset, rather than actual delivery of the commodity, and standardization of contract terms. Futures contracts are traded on organized exchanges in a wide variety of physical commodities including grains, metals, and petroleum products and financial instruments such as stocks, bonds, and currencies. Before around 1970, most futures trading was in agricultural commodities, such as corn and wheat. Today, successful futures markets exist in a variety of non-agricultural commodities, including metals such as gold, silver, and copper and fossil fuels such as crude oil and natural gas. The most widely traded futures contracts are in financial instruments, such as interest rates, foreign currencies, and stock indexes. Single-stock futures, banned in the United States for many years, began trading in November 2002. Traditionally, futures contracts were traded in an open outcry environment where traders and brokers in brightly colored jackets shout bids and offers in a trading pit or ring. While open outcry is still the primary method of trading agricultural and other physical commodity futures in the U.S., trading in many financial futures has been migrating to electronic trading platforms where market participants post their bids and offers on a computerized trading system. Almost all futures trading outside the U.S. is conducted on electronic platforms. Futures contracts have standardized terms that are determined by the exchange, rather than by market participants. Standardized terms include the amount of the commodity to be delivered the contract size, delivery months, the last trading day, the delivery location or locations, and

acceptable qualities or grades of the commodity.10 Under Forward Contracts (Regulation) Act, 1952, all the contracts for delivery of goods, which are settled by payment of money difference or where delivery and payment is made after a period of 11 days, are forward contracts.11 The term of the forward contract are individually agreed between counter parties , so these contract are known as customized contract. Non transferable specific contract is an enforceable bilateral agreement under which the term of the contract are customized and the performance of the contract is by giving specific delivery of goods. The rights or liabilities under the contract cannot be transferring order delivery order, railway receipt ,warehouse receipts etc. The provision of Forward Regulation, 1952 regulate or prohibit such contract in notified goods, the government have freed them from such regulation in 2003 notification No. 369.(E). Transfer Specific Delivery Contract is enforceable customised agreement like where unlike non transfer specific delivery contract ,the rights or liabilities under the

delivery order ,railway receipts, bill lading ,warehouse are transferable. The contract is performed by delivery of goods by the first seller to the last seller. The parties rather than above perform the contract merely by exchanging money difference12.

System of Regulation of Forward Trading13: 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. 1.The Central Government has the powers to legislate on forward trading in relation to commodities. At the moment it is dealt with by the Ministry of Consumer Affairs, Food and public Distribution in the Central Government. The Central Government widely determines the policy relating to areas such as identification of commodities as well as the territorial area in which futures / forward trading which can be permitted and giving recognition to the Exchange / Association through which such trading is to be permitted.

Available at http://www.cftc.gov/ConsumerProtection/EducationCenter/economicpurpose, last visited on 24th November 2012. 11 Supra note 1. 12 Ibid. 13 Available at http://consumeraffairs.nic.in/consumer/sites/default/files/userfiles/Report%20of%20the%20Parliamentary%20St anding%20Committee17threport.pdf, last visited on 24th November 2012.

2.The Forward Markets Commission performs the role of approving the Rules and Regulations of the Exchange according 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. 3. The Recognized Exchange / Associations provides the framework of Rules and Regulations for conduct of trading, indicating the place where the trading can be conducted, report, record, execute and settle contracts, provide forum for exchange of documents and payments, etc.

Forward Contracts (Regulation) Act 14: 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 commodities15. 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. Even 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. Even 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 any such member. Also, 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.


Available at http://www.fmc.gov.in/old/docs/Annual%20Report/AR%202010-11.pdf, last visited on 24th November 2012. 15 Available at http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/62932.pdf, last visited on 24th November 2012.

Although 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. Moreover, 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. As per 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 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 subtypes 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. In addition, 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. Also, 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 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 unfavourably, this right will not be exercised, and therefore, the purchase of options provides protection against unfavourable price movements, while permitting to profit from favourable 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.

Structure of Forward Market Commission16 In the Forward Market Commission Act, the structure of the commission is given as follows: The Commission shall consist of not less than two but not exceeding four members

appointed by the Central Government. It is expected that one of them should be nominated by the Central Government to be the Chairman and the other members should be either wholetime or part- time as the Central Government may direct. No member of the Commission should have undue benefits from the decisions, policies regulated by the commission. In case of any such financial or other interests the members should notify the central government when asked to do so. No member of the Commission shall hold office for a period of more than three years from the date of his appointment, and a member relinquishing his office on the expiry of his term shall be eligible for re-appointment.


Available at http://www.fmc.gov.in/htmldocs/FCRA/FCRA_ACT.htm, last visited on 25th November 2012.

Working of Forward Markets Commission: 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 prime objective is to achieve price stability by means of price discovery and risk management. The Commission also collects information regarding the trading conditions in respect of goods to which any of provisions of Act is made applicable. It also advises Central Government regarding recognition of associations. 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 below17: A ) 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. B ) 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. c) 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. d) to make recommendations generally, with a view to improving the organization and the working of forward markets. e )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 f) 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.

Available at http://consumeraffairs.nic.in/consumer/?q=node/222, last visited on 25th November 2012.


And also, Section 4A of the FC (R) Act, 1952 deals with the powers of the Commission which are as follows18: 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. The Commission is a statutory authority which entrusted with regulatory functions under the Act. 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 Tools19: In order to safeguard the market against such elements, regulatory measures as under are prescribed by the Forward Markets Commission by limiting on open position of an individual operator as well as member, to prevent over trading, limiting on daily price fluctuation, to prevent abrupt upswing or downswing in prices, additional Margins payable on outstanding

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Supra note 14 Ibid.


purchases and sales to contain high volatility in prices, special margin deposits to be collected on outstanding purchases or sales, to curb excessive concentration of position.Even, 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.

Major initiatives taken by the Government / Commission. Since liberalization of the market following are the major initiatives taken by the Government / Commission.20 such as 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 Exchange. 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


Available at http://www.fmc.gov.in/htmldocs/reports/rep03.htm, last visited on 25th November 2012.


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 Commissions activities, 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 2010-1121.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 shareholding 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


Supra note 14.


National Exchanges not to allow execution of trades without uploading the Unique Client Code (UCC) details., 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. Recently ,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 Regulators22: 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.


Supra note 14.


Developmental Initiatives taken by Forward Markets Commission23 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. For 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. By working on the various models of aggregation we enable the farmers to take the benefit of actual hedging on the Commodity Exchanges to manage their price risks. Also, by working on the project of Price Dissemination through APMCs and other centres 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.

Attending to Client Complaints/Grievances24 The Commission receives complaints from clients registered with the Exchange members alleging unauthorized trades being executed by the members in their account, contract notes/account statements not being received from the members, misutilisation of clients money etc. Moreover, the complaints are then forwarded to the respective exchanges for settling the grievances of the clients expeditiously. During the period April-June 2012, 29 complaints were received and are under process

Regulatory measures taken by FMC- Illegal contracts25 The contracts are termed as illegal contracts are: (a) Forward Contracts in the permitted commodities, i.e., commodities notified under S.15 of the Forward Contracts (Regulation) Act, 1952, which are entered into other than: (a) between the members of the recognized Association or (b) through or (c) with any such members.

23 24

Supra note 14. Available at http://fmc.gov.in/docs/fmc_Bulletin/July%202012.pdf, last visited on 24th November 2012. 25 Supra note 1.


b. Forward contracts in prohibited commodities, which are described under section 17 of forward contract act. c. Forward Contracts in the commodities in which such contracts have been prohibited.

Measures against Illegal forward trading26 The role of Forward Markets Commission is to communicate the information relating to offences under the Act to the police authorities and assist such authorities in their work such as accompanying the police in conducting searches for documents etc. The offences under the Act are technical in nature and it is difficult to prove the charges in accordance with the rules of evidence contained in the Evidence Act. So, the Forward Markets Commission periodically conducts training programs, Seminars, Workshops etc. for the benefit of Police Officers/ Prosecutors and also Judicial Magistrates First Class/Metropolitan Magistrates. Rules governing illegal forward contracts are such as owner of a place which is used for performing illegal forward contracts, with the knowledge of such owner, a person who, without permission of the Central Government organizes illegal forward contract, any person who wilfully misrepresents or induces any person to believe that he is a member of a recognized association or that forward contract can be performed through him, any person who is not a member of a recognized association canvasses, advertises or touts in any business connected with forward contracts in contravention of the Forward Contracts (Regulation) Act, 1952, any person who joins, gathers, or assists in gathering at any place other than the place of business specified in the bye-laws of the recognized associations for making bids or offers or for entering into illegal forward contracts, any person who makes publishes or circulates any statement or information, which is false and which he knows to be false, affecting or tending to affect the course of business in forward contracts in permitted commodities


Supra note 14.


Important development and regulatory steps taken by FMC27 The Forward Markets Commission is concerns toward the development of institutional capability of the commodity market. The Commission has made effort which includes sensitizing policy makers and all other co traders improving the efficiency of all the participants in the marketing chain .With the help of organizing awareness programs, workshops, subject specific consultancies, study tours, lectures. FMC solicits active collaboration with Universities, Educational Institutions and other organizations desiring to spread awareness about Futures Trading in commodities. The developmental measure includes the price dissemination among the farmers through APMCs spot market regulators.


Supra note 14.


The F C (R) Act, 1952 came into effect to provide regulation of commodity future market in India and the FMC was the commodity future market regulator which was set up under FC(R) Act provision. Before F C (R) Amendment Ordinance, 2008, FMC did not have a regulatory power and so the authority like SEBI .Even it didnt have any financial autonomy as it was based on budget allocation and was restricted in administrative manner. The general approach of the government was to ban or prohibit the commodity derivates by introduction FC(R) Act. The role of FMC get changed and from enforcing prohibition to properly managing regulating. There is need to have a strengthen FMC as well as if necessary a concern should be made on certain amendments. The FMC, in addition to regulating the commodity futures market also took steps to ensure that the commodity futures markets are broad based and its benefits reach all the stakeholders of the commodity markets. Three of the important initiatives which are made are creation of awareness among stake holders, capacity building in the commodity sector, and price Dissemination Project28.During the period under review 112 awareness programmes were conducted across the country. Out of 112 awareness programmes, 38 programmes were conducted for farmers and 74 for other stakeholders29. With F C (R) Amendment Ordinance, 2008 the concern was drawn by the government toward forward trading in commodities to regulation rather than prohibiting. There has been no change in the FCR Act but due to participants in the real sector which will be open to the price volatility caused by the market force as whole and individually. This resulted in considering FMC as working in a legal vacuum so concern was made on to strengthen the legal framework of FMC as it relate to financial and market integrity so the path of ordinance was followed. So, strengthening of FMC is to be done on the line of SEBI. But, due to political opposition the authorities are not able to take any effective efforts for its implementation. It was observed that the bill will give FMC more powers which will allow institutional participation in the segment and will also let Indian commodity bourses to launch products based on intangibles like freight index and weather. Therefore, such products are hugely

Available at consumeraffairs.nic.in/consumer/sites/.../Sub-Group_Report.doc, last visited on 25th November 2012. 29 Supra note 24.


popular in several developed countries and even Indian customers feel there is a need for such products in the country but so far the law was a hurdle according to a market player. If the amendments to the FCRA are made into a law, institutional investors like banks, insurance companies, mutual funds and FIIs would be able to enter the market. Moreover, it would also pave the way for introduction of options and forward contracts on commodities but at present only futures contracts on commodities are allowed in India30.


Available at http://timesofindia.indiatimes.com/business/india-business/FMC-may-get-moreteeth/articleshow/16677838.cms,last visited on 28 November, 2012.