The country remains one of the largest producers in the world for most of the agricultural commodities and there is an urgent need to safeguard the interests of the various stakeholders including farmers by providing them adequate hedging facilities through development of commodity derivatives market, Confederation of Indian Industry (CII) said.
Highlighting the importance of commodity markets in the economy Chandrajit Banerjee, Director General, CII, said, “The move to bring the regulatory control under Securities and Exchange Board of India (SEBI) has paved the way for next level of reforms in Indian commodity markets that aim not only at deepening and widening of the market but also make it safer for every stakeholder including farmers to transact efficiently.”
After witnessing an exponential growth since its inception till FY 2011-12, the commodities Futures market has seen contraction due to various reasons such as suspension in trading of few commodities, enforcement of stock limits in certain commodities from time to time and introduction of Commodities Transaction Tax (CTT).
SEBI has allowed options contracts and has also allowed hedge funds to invest in commodities market. The objectives behind these measures are to deepen the Indian commodity derivatives market by allowing the entry of financial institutions and to widen it by allowing options with commodity futures contracts as underlying securities, CII observed.
To further support the initiative of SEBI, CII has recommended various measures which it feels, if implemented, would go a long way in helping the commodities market grow and become more vibrant and allow them to further benefit the entire commodities value chain and its participants starting from the farmer.
CII has recommended that Commodity Transaction Tax (CTT) be removed on agri-processed commodities and for delivery based non-agri commodity derivatives contracts. While the agricultural commodities have been kept out of the ambit of CTT, the levy of CTT on agri-processed commodities has created an anomaly and has drastically reduced the hedgers participation in such commodities on account of increased impact cost. It is therefore recommended to abolish CTT on Agri processed commodities which may help in establishing a more stable price regime in these commodities.
1. SEBI to allow the agri-commodity derivative markets to stay open till 8 pm on weekdays and to remain open on Saturdays as well to match the timings of Mandis.
2. The Daily Price Limits (DPL) on commodity futures contract must be relaxed. Restricting price movement on daily basis may jeopardize the very purpose of future price discovery.
3. Permit banks to trade on commodity exchanges.
4. Re-launch the Forwards segment which will provide farmers with an alternative tool to get the best price for their produce and manage price risk more efficiently.
5. Align the contract specifications with the quality traded in physical markets.
6. Develop weather derivative indices along with other sectoral indices. Market participants, especially farmers, can use these instruments as a hedging tool against weather risk.
7. Continuous contracts should be launched throughout the year. As exports and imports of commodities goes on throughout the year such a move would greatly benefit the various market participants who could use these contracts to meet their specific requirements.
8. All e-Negotiable Warehouse Receipt (eNWR) based financing provided to farmers should be considered as priority sector lending and banks should be mandated to provide credit to the agriculture sector compulsorily through eNWR. A default guarantee structure under Warehousing Development and Regulatory Authority (WDRA) can give further confidence to banks and boost agri-financing.
9. In order to increase liquidity and depth in the commodity markets there is a need to allow institutional participation such as banks, insurance companies, mutual funds, portfolio management schemes, AIFs, etc. that can act as risk transfer agents for farmers.