The Hindu Business Line : `Caution needed for small investors to enter market'

Having set up a pilot project in Gujarat for dissemination of daily futures and spot prices, the Forward Markets Commission (FMC) wants to extend this scheme to other States.

"We are going to work with more State governments during the current financial year so that this service is extended elsewhere. We have to work out the scheme with some financial help from the Central Government,"

Mr S. Sundareshan, Chairman, FMC, said in an interview. Following are the excerpts:

What steps have the regulators taken for the protection of small investor's interest in the current year?

First of all, my warning to small investors is that they should not come into the market without some understanding. The commodities market is very different from other markets. Investors should gain some knowledge of commodities trading and should not enter the market just because of some volatility in a particular commodity.

Domain knowledge about the commodity is very essential before entering the market. Can you tell us about the broad regulatory mechanism?

In terms of specific investors' protection, I think this is largely assured by protecting market integrity and financial integrity. We have put in place a fairly efficient system of margining, strict limits on daily fluctuations in prices and very stringent limits on positions, which individuals or members can hold.

What steps are you taking for the orderly growth of commodities exchanges?

We are constantly addressing this issue and have taken various steps in the past. In 24 commodities, we have imposed across-the-board uniform margin, uniform daily fluctuation limits and uniform positions limits in the three exchanges. FMC has given strict instructions that during pendency of contracts, contract specifications cannot be changed.

We have introduced a system of circuit filters. If the day's limits are breached either at the upper or lower end trading comes to halt for 15 minutes; thereafter it resumes with 50 per cent extra limit and once that is breached trading stops for the day.

Which are the key issues the regulator would need to address in the current year?

During this year, orderly growth of the exchanges, process of collection of spot prices and final settlement price are important issues that need to be addressed.

We have received some complaints relating to spot and final settlement prices. This needs to be tackled. Another important issue is illiquid contracts. There are several contracts in various exchanges in which trading is not taking place.

Another issue is that some exchanges have taken permission for trading in certain commodities but have not started trading. We will take decision on what is to be done.

What measures is the FMC taking for dissemination of spot and futures price information?

The Government wants to have a mechanism to disseminate daily prices of futures and spot across the country. In Gujarat, we have started a pilot project under which three national exchanges have set up their monitors in all districts, talukas and Agricultural Marketing Produce Committee markets to display futures and spot prices on real-time basis. It is just a free dissemination of prices so that people can take decision on the basis of the information they have.

We are going to work with more State Governments during the current financial year so that this service is extended elsewhere. So far, we have yet to get responses from the States.

We will have to work out a scheme with some financial help from the Union Government. We want to initiate this scheme in the current year. It is a mammoth task, which requires technology and connectivity.

Could you throw light on the FMC's autonomy issue?

Last year the Government took the decision that the FMC will remain an independent regulator. Currently, it is a department of the Government. We have worked out major amendments to the Forward Contract Regulation Act and the bill to make this amendment has been introduced in Parliament last month.

Once the bill is passed, hopefully in the next monsoon session of Parliament, the FMC will become an independent autonomous regulator with functional and financial autonomy. This will involve certain major changes. First, we will be able to access trained manpower in the market for our needs.

Second, it will be possible to have option trading for the first time, as we will have the power to introduce option trading in the futures markets.

The FMC will have the financial autonomy to levy transaction fees. Depending upon our needs, we may levy small fees. What has happened to the plan to allow banks participation in commodities futures trading? Also when will mutual funds and FIIs be allowed to trade in bullion and crude oil?

Banks' involvement in the commodity futures market is not only for trading purpose but a broader involvement in commodities trading was examined by a committee of the RBI. The report has been considered by the FMC. The participation of banks is a much wider activity, including providing credit to farmers for trading in commodities futures.

They could perhaps act as an aggregator of farmers' participation in the commodities futures market.

The internal committee of the FMC examined the issue of participation of mutual fund and FIIs in the commodities futures market. We have recommended to the Government that in the first instance, mutual funds and FIIs be permitted to participate in bullion and crude oil alone. So there is no decision yet on this.

Is there any move to introduce turnover base fees on commodity brokers during the current FY 2006-07?

There is no move to levy turnover fee at this juncture.

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`Caution needed for small investors to enter market'