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Unit 13: Commodity Market

13.3.1 Policy Liberalisation Notes

Forward trading was banned in 1960 except for pepper, turmeric, castor seed and linseed. Futures
trading in castor seed and linseed were suspended in 1977. Apparently, on the basis of the
recommendations made by Khusro Committee, forward trading in Potato and Gur was allowed
in the early 1980s and in castor seed in 1985. After the process of liberalization of the economy
began in 1990, the government set up a committee under the chairmanship of Prof. K. N. Kabra
in 1993 to examine the role of futures trading in the context of liberalisation and globalization.
The Kabra Committee recommended allowing futures trading in 17 commodity groups. It also
recommended strengthening of Forward Markets Commission and amendments to Forward
Contracts (Regulation) Act, 1952. The major amendments include allowing options in goods,
increase in the outer limit for delivery, payment from 11 days to 30 days for the contract to
remain ready delivery contract and registration of brokers with the Forward Markets
Commission. The government accepted most of these recommendations and futures trading
have been permitted in all recommended commodities except bullion and basmati rice. Additional
staff was provided to the FMC and the post of Chairman was upgraded to the level of Additional
Secretary to the Government of India. The recommendations to set up Regional office at Lucknow,
Delhi and Kochi were kept in abeyance for the time being. In the para 44 of the National
Agricultural Policy announced by the government in the year 1999, it was stated that the
government would enlarge the coverage of futures market to minimize the wide fluctuations in
commodity prices, as also for hedging their risk. It was mentioned that an endeavour would be
to cover all important agricultural products under futures trading in the course of time. An
expert committee on agricultural marketing headed by Shankerlal Guru recommended linkage
of spot and forward markets, introduction of electronic warehouse receipt system, inclusion of
more and more commodities under futures trading and promotion of national system of
warehouse receipt. The sub-group on forward and futures markets formed under the
chairmanship of Dr. Kalyan Raipuria, Economic Adviser, and Department of Consumer Affairs
to examine the feasibility of implementing the recommendations made by the Expert Committee
chaired by Shankerlal Guru recommended that the commodity specific approach to the grant of
recognition should be given up. Those exchanges, which meet the criteria to be stipulated by the
Government, should be able to trade contracts in any permitted commodity. In his budget
speech of 28th February 2002, the Finance Minister announced expansion of futures and forward
trading to cover all agricultural commodities. The economic survey for the year 2000-2001
indicated the government’s intention to allow futures trading in bullion. The policy statements
of the government indicate its resolve to introduce reforms in commodity sector. A number of
initiatives were also taken to decontrol the spot markets in commodities. The number of
commodities listed as essential commodities has been pruned down to 17.
Accordingly, the FMC imposed some of the regulatory measures being implemented in the
developed markets like:
Daily mark-to-market margining;
Time stamping of trades;
Notation of contracts and creation of trade guarantee fund;

Back-office computerization for the existing single commodity Exchange and online trading
for the new Exchanges;
Demutualization for the new exchanges;

One-third representation of independent directors on the boards of existing exchanges.

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