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Wednesday, Jul 07, 2004

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Commodity exchanges seek MF, FII participation

Dhimant Bhatt

Mumbai , July 6

THE Common Minimum Programme (CMP) has already made it clear that there is need to go back to agriculture, as this is the focal point for the economy.

In this context, commodity exchanges do see far reaching changes in the Union Budget 2004-05 relating to their operations.

The Union Budget to be presented by Mr P. Chidambaram on Thursday is expected to address the requirements of the agricultural sector and rural people, which is the need of the hour.

A definite tilt in this direction is expected in the Budget.

Major expectations from all the three multi-commodity exchanges i.e. National Multi-Commodity of India (NMCE), Multi-Commodity Exchange of India (MCX) and National Multi-Commodity and Derivatives Exchange of India (NCDEX) includes allowing mutual funds and FIIs to participate in the commodity market; widening the definition of commodities to include also commodity indices and weather derivatives; changes in the Banking Regulation Act allowing banks to operate in the commodity exchanges; allow set-offs on trading losses in the derivatives market.

Multi-commodity exchanges see certain positive moves in the attitude towards commodity derivatives with the introduction of options in this sphere.

Currently, only commodities futures are permitted while the Bill on options is still pending even though the Rajya Sabha had passed it earlier this year.

The exchanges expect some changes coming in the FCRA (Forward Contracts Regulation Act 1952), to widen the definition of commodities to include also commodity indices and weather derivatives. Weather derivatives in particular would be of immense use for farmers given the idiosyncratic nature of our monsoons and the resulting uncertainty in farm production, Mr Narendra Gupta, Chief Business Officer, NCDEX Ltd, said.

Some changes in the Banking Regulation Act expected in the current Budget, which will give banks some scope to operate in the commodity space. Currently, banks are not permitted to trade in commodities.

More institutional players such as mutual funds, foreign institutional investors should be allowed to trade in the commodity exchanges.

It is time to look forward for better integration of banking system with commodities markets, Mr Joseph Massey, Deputy Managing Director of the Multi-Commodity Exchange of India Ltd (MCX), said.

The current structure of taxes do not allow for set-offs on losses in the derivatives market from the other profits of companies as they have been viewed as speculative activities, he said.

This needs to change and such set-offs are permitted now considering that commodity exchanges provide avenues for the players to hedge price risk and are related to production activity.

"We expect the Government to lay down a policy whereby mutual funds and FIIs are allowed to participate in the commodity market," Mr Gupta said.

Portfolio diversification is necessary for the market to develop and as we do see some relationships between commodities and equities, enlarging the scope would be beneficial for all the players as well as the markets.

Current tax rule, however, does not allow for setting off or carrying forward of speculative losses against regular business income.

It does not treat losses on futures transaction as a normal business expense.

The futures trading industry has been demanding amendments in the tax law for the better development of futures trading, Mr Massey said.

More Stories on : Commodity Exchanges | Mutual Funds | Foreign Institutional Investors

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