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Sharad Mistry
MUMBAI, JAN 3: If 1998 is termed as the year of commodities for India, will 1999 witness wider acceptance of futures trading as a risk management tool? Will the year see the emergence of a unified domestic comex before the start of the next millennium for trading in futures of more than one permitted commodities? Answers to these and other related questions will decide the course of futures trading in the country during 1999 and thereafter in the new millennium.
The case of commodity futures and hedging in India is a unique one where the government is willing and proactive, but both the corporate sector and the trading community are dragging their feet. In 1998 the government played its part by removing almost all the shackles that made commodity futures and hedging unattractive since the past three decades.
Worldover, commodities market is more vibrant than the equities where volume of trading is said to be three times over than in the equities. With increased freeing of the global trade, hedging ofcommodity and price related risks have become inevitable.
Understanding this need, from September 28 the government allowed the Indian corporates to hedge their commodity related risks on the international exchanges. But with just one corporate (Birla Copper) coming forward to take the advantage, the government is worried for the lack of wider participation from the private sector.
On the domestic front too, futures trading in some 12 commodities on 20 odd comexes has proved to be relatively unattractive proposition among concerned entities. In 1998, three more commodities (hessian, cotton, and coffee) were added to the list of nine earlier. By mid-1999, two more will be added (castoroil and soyabean) against 17 odd commodities, including gold, that have been recommended by KN Kabra committee way back in 1994.
All this points to the extremely slow pace of acceptance in a period of fast change and freer global trade all that has risks inbuilt.
"Given the absence and knowledge of futures trading sincelast three decades, wider acceptance of the concept would pick up slowly," feels Bombay Oilseeds and Oils Exchange (BOOE) president, Navinchandra Shah. "But the process could be hastened if a cult figure like Dhirubhai Ambani makes it into a proposition for mass following".
Reintroduction of trading in cotton futures (on December 5, after a gap of 32 years) on The East India Cotton Association, coffee futures in Bangalore (since June 1998), the experience of the pepper traders in Kochi (in international pepper futures since September 1997), all point to poor acceptance level of futures trading.
"We are waiting for such a person to make futures trading a success not just for the castoroil international futures (permitted since September 1997, and expected to be kicked off only by March 1999) but for the whole range of oilseeds that we expect to be allowed to be traded on BOOE", says Shah.
Shah has been advocating futures trading in oilseeds since more than past five years. "Despite our enthusiasm, we arenot confident of immediate success in international castoroil futures."
But even after a year's nod from the concerned authorities, the domestic commodity exchanges do not seem to muster up enough courage or support from their own members to make the futures trading in permitted commodities a reasonable success.
NN Mookerjee, secretary, consumer affairs (civil supplies ministry) is so much worked up with the subject of making commodities futures trading a reasonable success in the country, that he suffered last month a mild heart attack. After spending almost a month at one of the prestigious hospitals in Mumbai, Mookerjee could return to New Delhi on Wednesday last (December 30).
It was only after repeated requests, Mookerjee had agreed to inaugurate the re-launch of the futures trading in cotton at the EICA. But his health did not permit him and had to be hospitalised just one hour before the scheduled time on December 5.
Mookerjee is said to be behind all major changes that are being incorporatedto strengthen the Forward Markets Commission (FMC), widen the scope of the decades-old Forward Contracts (Regulations) Act, 1952 which will now include options trading and all other related changes. Backed by the government, Mookerjee is keen to see wider acceptance of commodity futures trading in the country.
In order to make a successful commodity futures market in India, at least three most important issues need to be sorted out at the earliest by the concerned authorities.
First, the administrative aspects concerning domestic comexes, the second, improving and providing the necessary infrastructure and lastly, the marketing of India as the new emerging commodity market on the global commodity arena.
The FMC chairman VK Aggarwal, whose three-year term was extended (in December last) by two more years till 2002, has tough business cut out for him in improving the overall conditions at the domestic comexes (more administrative than financial).
Aggarwal's efforts in improving the comexes resulted, forthe first time, in suspension of trading (and near-closure) of turmeric futures at the Sangli Commodity Exchange in Maharashtra in May last year. Merger if not outright closure of poorly functioning comexes, therefore, cannot be ruled out in 1999.
This brings us to the subject of a unified comex, independent or with the National Stock Exchange, which has been troubling the policy makers.Mookerjee has already mooted the idea of the possibility of merger of domestic comexes in line with the trends in the global comexes. BOOE has shown its willingness to pursue the issue with four other comexes at least for a common on-line trading platform. This therefore, will pave the way in 1999 for a unified and a relatively stronger comex in the country.
But before this, it would be necessary if the government channelises more funds -- institutional or otherwise -- for the creation of infrastructure like handling facilities, cold storages, silos, rail connectivity, power and irrigation all of which needs to be providedalongwith efficient grading system.
Lastly, all these efforts would see more commodities being permitted for futures trading as was indicated by Mookerjee in an interview to The Financial Express in February 1998. Mookerjee had maintained that the government is considering to permit futures trading in groundnut and its oil, cottonseed and its oil, copra, linseed, sesame and even onion among others. The finance minister Yashwant Sinha announced in the last budget that futures trading will be permitted in the entire range of oilseed complex -- oilseeds, oils and de-oiled cakes.
But is the private sector willing to come forward in improving the overall conditions of the comexes and take advantage of the hedging facilities given by the government in 1998?
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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This story was printed from Net Express located at http://www.expressindia.com. Net Express provides a portal to India, with news from The Indian Express and The Financial Express along with sites on travel and tourism, the entertainment industry, the power sector, the environment and much more.
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