Commodity players seek reforms, market depth

A shop attendant arranges gold jewellery inside a shop in Hyderabad in this June 2009 file photo.

MUMBAI (Reuters) - Indian commodity futures traders are seeking permission for foreign funds and banks to invest in the market and more powers to the regulator to boost trade and protect investors, industry players said.

India's six-year old commodity futures market which traded worth 52.49 trillion rupees in 2008/09, doesn't allow banks, mutual fund and foreign institutional investors, unlike equity and debt markets.

"On participation side we need participation from banks, mutual fund and foreign institutional investors," said Dilip Bhatia, director, Kotak Commodity Services Ltd.

"I expect some amendment in the Banking Regulation Act, where the commodities could be a permissible activity under section 6," he added.

More funds into the market and investor-driven activity will help curb speculation, and improve price discovery, traders say.

"This will ensure better depth and diverse participation... foreign investors and banks have immense interest in commodity trading ..they already hold stakes in many exchanges," said a senior official with a commodity exchange.

Biggest bourse Multi-Commodity Exchange (MCX), part-owned by Fid Fund (Mauritius) Ltd. -- an affiliate of Fidelity International -- and NYSE Euronext, while rival National Commodity and Derivatives Exchange (NCDEX) is part-owned by Goldman Sachs.

According to the Futures Industry Association, MCX, NCDEX are ranked 22nd and 34th respectively among top derivatives exchanges in the world.

Industry players are also hoping that proposed trade curb in the form of commodity transaction tax (CTT), in last year's budget, may be repealed. Regulator Forwards Markets Commission has appealed against it, an official said.

Former Finance Minister P. Chidambaram, in the 2008/09 budget proposed to introduce a transaction tax for commodities futures trades, called the CTT, similar to a securities transaction tax levied on equity trades.

He had proposed a CTT to the extent of 0.017 percent payable by sellers on any sale transaction in futures and options, while the buyer will pay 0.125 percent for any sale transaction in options.

At present a 0.125 percent tax is levied on all transactions of securities traded on stock exchanges and for derivatives, STT stands at 0.017 percent.

Industry participants also hope the Forward Contracts (Regulation) Amendment Bill 2006, which strengthens the regulator's powers may be considered in the budget session.

It has provisions for strengthening the regulator and introducing options trading.

Analysts said a strong regulator on the lines of the Securities and Exchange Board of India, which regulates India's equity markets, is required to facilitate banks and foreign funds participation in the commodity futures trade.

Another expectation among commodity traders are measures to strengthen the spot market to facilitate futures trade.

"The future market without a strong underlying spot is bound to attract speculation... Agricultural Produce Marketing Committee Act should go in an orderly manner," Sudip Bandyopadhyay, managing director of Reliance Money, a unit of Reliance Capital.