A complete regulatory framework for futures trade was drafted, including rules for trading in futures, a system for the licensing of brokers and a clearing house structure. Not only futures, but also options on a number of commodities were traded on the exchanges; for example options on cotton were traded up to one year out, until all options were banned in 1939.

In the 1940s,forward and futures contract as well as options were outlawed as part of the government's drive to contain inflation or trading in these contracts was made impossible through price controls.

This situation prevailed until 1952, when the government passed the Forward Contract (Regulation) Act, which controls all transferable forward contracts and futures up to this day. The Act again allowed futures trade in a number of commodities (but excluded some essential foods like sugar and food grains). It provided that forward and futures markets should normally be self-regulating, through governing bodies of recognised associations in which the government has the right to place representatives. It was illegal to enter into futures contracts other than between, with or through the members of these associations. The Forward Market Commission (FMC) was created to supervise and regulate markets from the point of view of public interest, but in effect gradually absorbed the exchanges' self regulatory powers.

Duringthe 1960s, the central government banned or suspended futures trading in several commodities including cotton, raw jute, edible oil seeds and their products. In 1970s futures trading in non-edible oil seeds like castorseed and linseed was forbidden. The reason for this crackdown in futures markets was that government felt that these markets helped drive up prices for commodities, by giving free reign to speculators. Restrictive measures were directed at combatting speculation which affected the activities of 31 "recognised associations", which were supposed to regulate trade and commodities futures.

The government policies softened somewhat in the late 1970s when futures trade in jaggery was allowed. Two government appointed committees - The Datwala Committee in 1966 and The Khusro Committee in 1979 - recommended the revival of futures trading in a wide range of commodities, but little action resulted. In those commodities in which futures trade is allowed - black pepper, turmeric, castor seeds, potatoes,jute and jaggery - turnover is relatively large and a wide variety of groups are active such as large farmers, domestic traders, exporters, brokers and speculators.

Contracts in most commodities are actively traded for periods up to six months out and as should be the case for mature futures markets, most contracts are used for hedging purposes and not for physical trade. This means that a large majority of positions are closed out before maturity and physical delivery is relatively rare. The Indian economy is going through a process of liberalization and is opening up to the world market. Partly, as a result, Indian exporters are increasingly confronted with highly competitive world markets in which they are forced not only to work on slimmer margins but also to sell further forwards in order not to lose markets. The rupee has become fully convertible for commercial purposes. Against this background, the role of commodity futures market is being recognised by the government, for which the Kabra Committeewas set up. Several commodity exchanges are interested in playing a more international role and have requested the government, through the Forward Market Commission (FMC) to assist them in this internationalization process.

The author is a commodity trader and operates through his Mumbai-based firm - Prophecy Investments