Commodity Market - Module V

Module - V
Module – V Regulatory Framework:
FCR Act 1952, FMC and Regulatory structure of commodities
Derivatives markets in India (Objective, Functions, Power and
responsibilities, Scope of Regulation), Essential Commodities Act
and role of central and state Governments, Intermediaries, Investor
Grievances and arbitration, Commodities Board in India – Coffee
Board of India, Tea Board of India, Spice Board of India, Rubber
Board of India, Tobacco Board of India.
Mr. Swaminath S, M.Com, PGDFM, PGDBA, PGDMM, NET & JRF, K-SET, (MBA), (Ph.D)
Research Scholar, Department of Commerce, Bangalore University, Bangalore - 560001

1. FCR Act 1952,
2. FMC and Regulatory structure of commodities
Derivatives markets in India (Objective, Functions,
Power and responsibilities, Scope of Regulation)
3. Essential Commodities Act
4. Role of central and state Governments,
Intermediaries,
5. Investor Grievances and Arbitration,
6. Commodities Board in India –
Coffee Board of India,
Tea Board of India,
Spice Board of India,
Rubber Board of India,
Tobacco Board of India.

1. The first derivative market was set up in 1875 in Mumbai, where
futures cotton was traded.
2. Followed by establishment of futures markets in edible oilseeds
complex, raw jute and jute goods and bullion.
3. In 1935 a law was passed allowing the government to in part restrict
and directly control food production (Defence of India Act, 1935) –
A Ban on derivatives on food commodities.
4. Post-independence, in the 1950s, India continued to struggle with
feeding its population and the government increasingly
restricting trading in food commodities.
5. In 1953, finally options and futures trading prohibited – even after
establishment of FMC as a regulator.
6. Because of ban most of the futures markets were dispersed and
fragmented, with separate trading communities in different regions
with little contact with one another.
7. 1970 – Futures and Options began to develop the world but india
lagged behind, however upto 1980 the prohibition continued.

FORWARD MARKETS COMMISSION (FMC):
• Forward Contracts Regulation Act: 1952
• Formed in: 1953,
• Jurisdiction: India
• Headquarters: Mumbai, India
• Parent agency: Ministry of Consumer Affairs, Food and Public
Distribution
• The Forward Markets Commission (FMC) is the chief regulator
of commodity futures markets in India.
• As of July 2014, it regulated Rs 17 trillion worth of commodity
trades in India.
• The Commission allows commodity trading in 22 exchanges in
India, of which 6 are national. On 28 September 2015 the FMC
was merged with the Securities and Exchange Board of India
(SEBI).
• Now the regulator merged with SEBI.

The Department of Consumer Affairs
in the Ministry of Consumer Affairs,
Food and Public Distribution -
Government of India, is the apex
regulatory body governing all
commodity exchanges.
The Forward Markets Commission
(FMC) was set up in 1953 to provide
regulatory advice to the Government
and have closer regulatory
interaction with the commodity
exchanges.
NMCE also plays an important role
by ensuring that the provisions in the
Articles of Association and Byelaws
etc. are followed in letter and spirit.

 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 this Act;
 To keep forward markets under observation and to take such action
in relation to them as it may consider necessary,
 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 this
Act and on the working of forward markets relating to such goods;
 To make recommendations generally with a view to improving the
organization and working of forward markets;
 To undertake the inspection of the accounts and other documents of
any recognized association or registered association or any member
of such association whenever it considers it necessary; and
 To perform such other duties and exercise such other powers as may
be assigned to the Commission by or under this Act, or as may be
prescribed.

A.Summoning and enforcing the attendance of any person and
examining him on oath.
B. Requiring the discovery and production of any document.
C. Receiving evidence of affidavits.
D.Requisitioning any public record or copy thereof from any office.
E. Any other matters which may be prescribed.
A. Limit on net open position as on the close of the trading hours. –
Limit of Intra-day Trading.
B. Circuit-filters or limit on price fluctuations to allow cooling of
market. – In case of abrupt upswing or downswing in prices.
C. Special margin deposit to be collected on outstanding purchases or
sales when price moves up or down sharply above or below the
previous day closing price. – Only on request of exchange.
D.Circuit Breakers or minimum/maximum prices. – Where the
demand and supply of commodities are uncertain.
E. Skipping trading in certain derivatives of the contract – Emergency
Situations (closing the trade or contract before the maturity.

In the Indian context the Securities Contracts (Regulation) Act, 1956 (SCRA)
defines “Derivative” as follows: - “A security derived from a debt instrument,
share, loan whether secured or unsecured, risk instrument or contract for
differences or any other form of security”. Trading of securities is governed by the
regulatory framework under the SCRA. Derivative contracts include forwards,
futures, options and swaps broadly.
THE FORWARD MARKETS COMMISSION WAS FORMALLY MERGED
WITH SEBI (28 September 2015) - Mr. Sinha said the first priority would be to
develop trust in the commodities market and then the focus would be on
developing the market. – FPIs will be allowed.
Mr. Sinha said SEBI would focus on how prices and benchmark rates are fixed in
commodity markets as well as look at the possibility of having products like
options and futures.
RBI replied that the status quo should be maintained till a policy review is
undertaken by the government for allowing FPIs in commodities derivative
trading

At present six national exchanges, viz. Multi Commodity
Exchange, National Commodity and Derivatives Exchange,
National Multi Commodity Exchange, Indian Commodity
Exchange Ltd and ACE Derivatives and Commodity Exchange,
NBOT regulate forward trading in 113 commodities. Besides,
there are 16 commodity specific exchanges recognized for
regulating trade in various commodities approved by FMC under
the Forward Contracts (Regulation) Act, 1952.
COMMODITIES TRADED ON THESE EXCHANGES
COMPRISE:
Edible Oilseeds: Groundnut, mustard seed, cotton seed,
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.

No. EXCHANGES COMMODITIES TRADED
1
Multi Commodity Exchange of
India Limited, Mumbai
Gold, Silver, Copper, Crude Oil, Zinc, Lead,
Nickel, Natural gas, Aluminium, Mentha Oil,
Crude_Palm_Oil, Refined Soya Oil, Cardamom,
Guar Seeds, Kapas, Potato, ChanaGram, Melted
Menthol Flakes, Almond, Wheat, Barley, Long
Steel, Maize, Soybean Seeds, Gasoline US, Tin,
Kapaskhali, Platinum, Heating Oil
2
National Commodity and
Derivative Exchange Limited,
Mumbai
Guar Seed, Soy Bean, Soy Oil, Chana,RM Seed,
Jeera, Turmeric, Guar Gum, Pepper, Cotton Cake,
Long Steel, Gur, Kapas, Wheat, Red Chilli, Crude
Oil, Maize, Gold, Copper, Castor Seeds, Potato,
Barley, Kachhi Ghani Mustard Oil, Silver, Indian
28 Mm Cotton, Platinum
3
National Multi Commodity
Exchange of India Limited,
Ahmedabad
Rape/Mustard Seed, Guar Seeds, Nickel, Jute,
Refined
Soya Oil, Zinc, Rubber, ChanaGram, Isabgul,
Lead, Gold, Aluminium, Copper, Turmeric, Copra,
Silver, Raw Jute, Guar Gum, Pepper, Coffee

4. Indian Commodity Exchange Ltd,
Gold, Crude Oil, Copper, Silver –
(Gurgaon)
5. National Board of Trade, Indore Soybean, Soy oil
6. Chamber of Commerce, Hapur Gur, Mustard Seed
7. Ahmedabad Commodity Exchange Limited Castorseed
8. Rajkot Commodity Exchange Ltd, Rajkot Castorseed
9.
Surendranagar Cotton & Oilseeds Association
Ltd, S.nagar
Kapas
10.
The Rajdhani Oil and Oilseeds Exchange
Ltd., Delhi
Gur, Mustard Seed
11. Haryana Commodities Ltd.,Sirsa Mustard seed, Cotton seed Oil Cake

12. India Pepper & Spice Trade Association. Kochi
Pepper Domestic-
MG1,Pepper 550 G/L,
13. Vijay Beopar Chamber Ltd., Muzaffarnagar Gur
14.
The Meerut Agro Commodities Exchange Co. Ltd.,
Meerut
Gur
15. Bikaner Commodity Exchange Ltd.,Bikaner Guarseed,
16. First Commodity Exchange of India Ltd, Kochi Coconut oil
17. The Bombay Commodity Exchange Ltd. Mumbai Castor Seed
18. The Central India Commercial Exchange Ltd, Gwaliar Mustard seed
19. Bhatinda Om & Oil Exchange Ltd., Batinda. Gur
20. The Spices and Oilseeds Exchange Ltd., Sangli Turmeric
21. The East India Jute & Hessian Exchange Ltd, Kolkatta Raw Jute
22. The East India Cotton Association Mumbai. Cotton

 To keep commodity market active.
 To maintain discipline in trading.
 Ensuring the sanctity (Quality) of contracts.
 Providing the necessary legal and regulatory framework.
– over regulation should be avoided.
 Infrastructural framework for commodity exchange.
 Governments need to police the exchanges so that direct
and indirect users can rest assured, that indeed, the
exchanges serve the public rather than a particular
private interest.

ESSENTIAL COMMODITIES ACT, 1955
 The Essential Commodities Act, 1955 was enacted to ensure the
easy availability of essential commodities to consumers and to
protect them from exploitation by unscrupulous traders.
 The Act provides for the 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.
 Ministries/Departments of the Central Government and under
the delegated powers, the State Governments/UT
Administrations have issued orders for regulating production,
distribution, pricing and other aspects of trading in respect of
the commodities declared as essential.
 The enforcement/ implementation of the provisions of the
Essential Commodities Act, 1955 lies with the State
Governments and UT Administrations.

 Essential Commodities Act, 1955 should be phased out – 2001
 The restrictions like licensing requirement, stock limits and
movement restrictions have been removed from almost all
agricultural commodities.
 Wheat, pulses and edible oils, edible oilseeds and rice being
exceptions, where States have been permitted to impose some
temporary restrictions in order to contain price increase of these
commodities.
 The list of essential commodities has been reviewed from time
to time.
 The Central Government is consistently following the policy of
removing all unnecessary restrictions on movement of goods
across the State boundaries as part of the process of
globalization.
 The number of essential commodities which stood at 70 in the
year 1989 has been brought down to 7 at present through such
periodic reviews.
 Aim of Govt. – To Promote consumer interest and free trade.

 In 2005 - The Central Government to dried of the list of essential
commodities to the minimum by deleting all such commodities
which have no relevance in the context of present improved
demand and supply position and to facilitate free trade and
commerce.
 Only those commodities considered essential to protect the interest
of the farmers and the large section of the people "below the poverty
line" are proposed to be retained under the Essential Commodities
Act, 1955.
 The Prevention of Black-marketing and Maintenance of Supplies
of Essential Commodities Act, 1980 – To curb unnecessary storage
of essential goods and time money making.
 Central Government has already taken a number of steps to control
the price rise in essential commodities by trying to augment supply
including through imports by reducing the duty level on import of
both wheat and pulses to zero.
 wheat and pulses (whole or split) - it has also been decided that
there shall not be any restriction on the inter-state movement of
these items and that imports of these items would also be kept out
of the purview of any controls by the State Governments.

COMMODITY MARKET PARTICIPANTS / INTERMEDIARIES:
HEDGERS, SPECULATORS & ARBITRAGEURS:
INVESTOR GRIEVANCE & ARBITRATION
It is a form of alternative dispute resolution (ADR) is a legal technique
for the resolution of disputes outside the courts, wherein the parties to a
dispute refer it to one or more persons (the “arbitrators”, “arbiters” or
“arbitral tribunal”), by whose decision (the “award”) they agree to be
bound. Other forms of ADR include mediation (a form of settlement
negotiation facilitated by a neutral third party) and non-binding resolution
by experts.
Arbitration as a form of binding dispute resolution, equivalent to litigation
in the courts and entirely distinct from the other forms of dispute resolution,
such as negotiation, mediation or determinations by experts, which are
usually non-binding.
Arbitration is most commonly used for the resolution of commercial
disputes, particularly in the context of international commercial
transactions.

Advantages:
1. When the subject matter of the dispute is highly technical, arbitrators with
an appropriate degree of expertise can be appointed.
2. Arbitration is often faster than litigation in court.
3. Arbitration can be cheaper and more flexible for businesses.
4. Arbitral proceedings and an arbitral award are generally non-public and can
be made confidential.
5. In most legal systems. There are very limited avenues for appeal of an
arbitral award.
Disadvantages:
1. There are very limited avenues for appeal, which means that an erroneous
decision cannot be easily over tuned.
2. In some arbitration agreements, the parties are required to pay for the
arbitrators, which add an additional layer or legal cost that can be
prohibitive, especially in small consumer disputes.
3. If the arbitration is mandatory and binding, the parties waive their rights to
access the courts and have a judge or jury decide the case.
4. Most arbitration codes and agreements provide for the same relief that
could be granted in court.
5. Although usually through to speedier, when there are multiple arbitrators
on the panel, juggling their schedules for hearing dates in long cases can
lead to delays.

INTERNATIONAL COMMERCIAL ARBITRATION: The resolution
of disputes under international commercial contracts is widely conducted
under the auspices of several major international institutions and rule
making bodies. The most significant are
1. The International Chamber of Commerce (ICC),
2. The International Centre for Dispute Resolution (ICDR),
3. The International branch of the American Arbitration Association,
4. The London Court of International Arbitration (LCIA), and
5. The Singapore International Arbitration Centre (SIAC).
COMMODITY BOARDS IN INDIA: There are five statutory Commodity
Boards under the Department of Commerce. These Boards are responsible for
production, development and export of tea, coffee, rubber, spices and tobacco.
CONFLICT may be defined as a struggle or contest between people with
opposing needs, ideas, beliefs, values or goals. Conflict on team is inevitable;
however the result of conflict is not predetermined. Conflict management
involves acquiring skills related to conflict resolution, self-awareness about
conflict modes, conflict communication skills and establishing a structure for
management of conflict in your environment.

1. The Coffee Board is a statutory organization constituted under
Section (4) of the Coffee Act, 1942.
2. Ministry of Commerce and Industry, Government of India –
Authority to control
3. The Board comprises 33 Members including the Chairperson, who
is the Chief Executive and functions from Bangalore.
4. The Board is mainly focusing its activities in the areas of
research, extension, development, quality upgradation,
economic & market intelligence, external & internal promotion
and labour welfare.
5. The Board has a Central Coffee Research Institute at Balehonnur
(Karnataka) and Regional Coffee Research Stations at Chettalli
(Karnataka), Chundale (Kerala), Thandigudi (Tamil Nadu),
R.V.Nagar (Andhra Pradesh) and Diphu (Assam), and a bio-
technology centre at Mysore, apart from the extension offices
located in coffee growing regions of Karnataka, Kerala, Tamil
Nadu, Andhra Pradesh, Orissa and North Eastern Region.

1. The Rubber Board is a statutory organization constituted under
Section (4) of the Rubber Act, 1947.
Authority to control.
3. The Board is headed by a Chairman appointed by the Central
Government and has twenty seven members representing various
interests of natural rubber industry.
4. The Board is responsible for the development of the rubber industry
in the country by way of assisting and encouraging research,
development, extension and training activities related to rubber.
It also maintains statistical data of rubber, takes steps to promote
marketing of rubber and undertake labour welfare activities.
5. The Board has five Zonal Offices and 43 Regional Offices. It has a
Central Rubber Research Institute in Kottayam and 10 regional
research stations located in various rubber growing states of the
country. It also has a Rubber Training Institute located at Kottayam.

1. Tea Board was set up as a statutory body on 1st April, 1954 as per
Section (4) of the Tea Act, 1953.
3. The Board is headed by a Chairman and consists of 30 Members
appointed by the Government of India representing various
interests pertaining to tea industry.
4. The Board’s Head Office is situated in Kolkata and there are two
Zonal offices-one each in North Eastern Region at Jorhat in Assam
and in Southern Region at Coonoor in Tamil Nadu.
5. The functions and responsibilities of Tea Board include increasing
production and productivity, improving the quality of tea, market
promotion, and welfare measures for plantation workers and
supporting Research and Development. Collection, collation and
dissemination of statistical information to all stake holders is yet
another important function of the Board.

1. The Tobacco Board was constituted as a statutory body on 1st
January, 1976 under Section (4) of the Tobacco Board Act, 1975.
3. The Board is headed by a Chairman with its headquarters at
Guntur, Andhra Pradesh and is responsible for the
development of the tobacco industry.
4. The primary function of the Board is export promotion of all
varieties of tobacco and its allied products, its functions
extend to production, distribution (for domestic consumption
and exports) and export promotion of Flue Cured Virginia
(FCV) tobacco..

1. The Spices Board was constituted as a statutory body on 26th
February, 1987 under Section (3) of the Spices Board Act, 1986.
3. The Board is headed by a Chairman appointed by Central
Government and consists of 32 members. The Board’s Head
Office is at Kochi with Regional/ Zonal/ Field offices
throughout India.
4. It is responsible for the development of cardamom industry
and export promotion of the 52 spices listed in the Schedule of
the Spices Board Act, 1986.
5. The primary functions of the Board include production
development of small and large cardamom, development and
promotion of export of spices.
6. The research activities on cardamom are also done by the Board
through its Indian Cardamom Research Institute.

MINISTRY OF COMMERCE & INDUSTRY – DEPARTMENT OF
COMMERCE:
The mandate of the Department of Commerce is regulation, development
and promotion of India’s international trade and commerce through
formulation of appropriate international trade & commercial policy
and implementation of the various provisions thereof. The basic role
of the Department is to facilitate the creation of an enabling environment
and infrastructure for accelerated growth of international trade. The
Department formulates implements and monitors the Foreign Trade
Policy (FTP) which provides the basic framework of policy and strategy
to be followed for promoting exports and trade.
Conclusion: It is quite good to hear so many updates in various
commodities by State and Central Govt. as well as Boards of respected
commodities. The board must give importance to Quality as it is a main
requirement to get orders from various countries, but the Board should
also give importance towards in-house consumption by providing quality
of products at an affordable costs.

Commodity Market - Module V

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