Bill to amend FCRA will strengthen Forward Mkts Commission

An elite panel of experts assembled to discuss the roadmap for Commodity Futures in India. They opined that the bill to amend the Forward Contracts Regulation Act (FCRA) is pending in the parliament, and if passed, will strengthen the Forward Markets Commission (FMC), the main regulatory body. It will also permit Options in Commodity Futures, and institutional players, banks and even foreign institutional players to trade.

They discussed, among other things, the negative repercussions of the introduction of Commodity Transaction Tax (CTT) in this Budget. Apart from being a roadblock, there will be serious repercussions as the trade and commodity exchanges will wither away, and FMC will be ruling over the dead empire of commodity exchanges.

The panel consists of Harish Damodaran, Opinion Editor, Hindu Business Line, Anjani Sinha, MD & CEO, National Spot Exchange,  Ashok Mittal, CEO, Emkay Commotrade,  Anil Mishra, MD National Multi Commodity Exchange from Ahmedabad Dr Madhoo Pavaskar , Naveen Mathur, Associate Director, Angel Broking, Mayank Khemka, MD, Khemka Group of Companies.

Here is the edited transcript of the discussion

Q: Your first reaction to this whole proposal by the finance ministry to impose Commodity Transaction Tax (CTT) in this Budget. What is your immediate reaction?

Pavaskar: Since this particular panel discussion is on the future of Commodity Futures, let me say that the bill to amend the Forward Contracts Regulation Act (FCRA) is pending in the parliament. This will strengthen the Forward Markets Commission (FMC), the main regulatory body. This will also allow Options in Commodity Futures, permit institutional players, banks and even foreign institutional players to trade in Commodity Futures, and also allow the Index Futures.

But the CTT bogey, which has been already raised by some vested interests, will be a roadblock. That means the entire trade and commodity exchanges will be killed and FMC will be ruling over the dead empire of commodity exchanges.

Q: There is a fear it will kill the trade. Currently, what is the transaction cost? It is anywhere between Rs 1-2? After CTT, it will go up to Rs 17.25. What is your reading of the whole sector and the finance ministry's move?

Mishra: When the commodity transaction started on the commodity exchanges, transaction charges were very high. They were like Rs 12, then they came down to Rs 6 and today many exchanges are having Rs 1 on Rs 1 lakh worth of transaction. The exchanges earn though transaction charges only. If there was any possibility to retain these and still sustain volumes, they would not have reduced it to this extent.

This reduction on transaction charges was needed for the expansion of the market. If you levy anything on top of that, you know that this will not work.

Q: What is the real basis of the whole commodity exchange being setup?

Mishra: There are two reasons when the commodity exchanges were setup. One was price discovery and the other was price risk management.

Q: Once CTT comes in, do you expect both of these to go away? Will will drive away people from the market?

Mishra: Yes. You are discovering fair price, which is otherwise not possible given in the opacity which exists in the spot market today. The market is fragmented, so this is one instrument which is giving you a national price indication. Once you put CTT on top of this, you are giving distorted prices, because the underlying asset value plus, plus, plus, plus is giving the price on the Futures market which is incorrect.

Q: There is an argument that because Securities Transaction Tax (STT) was levied on the stock market we should do that in commodities market also. Do you think that argument holds water?

Mathur: The rationales are different for both the markets. The security markets are predominantly investment markets. You put your money there for some capital appreciation to earn some returns. The entire purpose of the commodity market is price discovery and price risk management. Commodity markets particularly serve these two functions. STT was levied for some reasons, for revenue generation and all, but if you see the data when it was levied initially, the exchequer was earning around Rs 8,000 crore worth of money in a year.

Today it has come down drastically. For the period from April to November it is approximately Rs 3,000 crore of the money which has come from the STT. So the rationale behind saying that both the asset classes are the same is definitely different.

One is an investment class, the other one is a hedging and price discovery. So, both the markets are different, the rationales therefore have to be different.

Mishra: You have this as an investment instrument. For people to invest their money there are various avenues already existing, but for the commodity price risk management there is no institution in this country which is transparent and regulated, we do not have any. Commodity exchange is the one which is the regulated transparent entity and you want to kill it. Where will they go?

Khemka: I would like to add that one is the point of price risk discovery and price risk management, the other is we need to see the differences between the two exchanges. One exchange has just come for 10 years. One is a 135 year old exchange. In your stock exchanges Foreign Institutional Investors (FII), mutual funds, banks all are permitted to trade. Options are allowed in stock markets. In the commodity markets you have a long-term capital gain and a short-term capital gain.

Q: If the investor is making money you should tax it, that is the thinking of the finance ministry I think.

Khemka: No, there are certain amount of concessions which are given in the stock market, wherein long-term capital gain is not taxed and then the short-term capital gain is taxed under concessional rate. In commodities, whatever money you make out of it is taxed as a speculative income. It is not even adjustable against your business income or business loss.